How fintech created a connected financial ecosystem
An examination of our connected financial world and where it will go from here
October 03, 2022
Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.
In today’s mostly online and mobile financial universe, consumers can seamlessly connect their bank account to any of the thousands of fintech apps available, in order to perform a multitude of functions. Over the past few years, there has been an explosion of new ways to pay, invest, budget, save, lend, and more—forming an ‘ecosystem’ of financial services from which consumers can instantly choose.
What is the connected financial ecosystem?
The connected financial ecosystem is the network of connected bank accounts and fintech apps that 88% of Americans now use. While bank accounts lie at the center of the ecosystem, fintech apps and services are what actually constitutes this nomenclature.
Before the ecosystem was formed, banks were the primary and often sole provider of financial products and services. Now, banks play a crucial role, holding the depository accounts found at the center of a multitude of connected apps and services.
This connected ecosystem is a breeding ground for innovation, as increased competition has led to the development of next-level financial products. These innovations have also forced the hand of major financial institutions to develop better digital products and customer experiences, as well as reduce fees.
For example, because fintech banks like Chime refrain from imposing non-sufficient funds fees and provide free overdraft protection, larger banks have been driven to respond. In 2022, Bank of America announced that it is eliminating non-sufficient funds fees and drastically reducing overdraft fees, bringing its fee structure closer to that of its fintech competition.
→ New to financial technology? Read our guide, 'What is fintech”, to learn more about the most popular fintech use cases and the impact fintech is having on the world.
Key players in the connected financial ecosystem
As the users of fintech and traditional financial services, consumers are in the driver's seat of the connected financial ecosystem—with their choices determining who wins and loses. Fintech companies and financial institutions are always on the hunt for the latest consumer preferences in order to fill market gaps wherever they’re detected.
Consumers’ willingness to share their financial data with third-party apps is also critical for success. It’s up to fintechs and financial institutions to prove their trustworthiness through transparent policies and high standards for privacy and security.
Increasingly, the ability to connect an account to fintech apps has become a prime motivator for consumers. According to a 2021 survey conducted by Plaid, 80% of Americans say that it’s important to be able to connect their bank account to the fintech apps they want to use and 69% would consider switching banks if the latter were unable to connect their account.
Financial institutions—and the depository accounts they provide to consumers—are at the center of the ecosystem. Given that the origins of institutional banking go back to the Roman empire, it’s doubtful that fintech apps will replace it altogether. A more likely scenario sees banking and fintech working together in unison, enabled by the connected ecosystem.
Holding core account data such as balances and transactions, as well as the primary accounts for payments and deposits, financial institutions provide the raw material for fintechs to work with. That’s why many fintech apps are built by connecting with existing banks rather than displacing them—creating new ways of budgeting, investing, lending, paying, or any other conceivable financial service.
In fact, by enabling connectivity to fintech apps, traditional banks cement their space as the consumer’s go-to for their financial needs. This is especially true for younger generations but holds weight for older ones as well. The average Gen Z bank account is connected to 4.6 fintech apps, while the average Baby Boomer is connected to 2.6 apps. Numerous connections make it harder to switch accounts and create a stronger need for a safe, reliable bank.
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In the connected financial ecosystem, fintech companies (also known as third-party providers) are defined as follows: “Non-bank providers that offer products or services which directly leverage customer data or other services consumed from account holding institutions. This may be based around APIs, bilateral connections, or through an intermediary.”
In other words, fintechs leverage bank account data—mainly through APIs, but also through other means—to make financial products and services more digital and accessible, and typically with improved user experiences. That could be anything from cryptocurrency trading to tools that help people pay off student loans. The possibilities are endless, and fintech companies are quick to fill the gap when a new consumer demand reveals itself.
Obligo, for example, is a fintech that allows users to rent apartments without security deposits by leveraging connected financial account data to assess financial standing and creditworthiness. This connected account data is used to foster trust between landlords and renters, eliminating the need for security deposits. Without the connection, that trust may not otherwise be possible.
Data networks are the lesser-known player in the financial ecosystem, but also potentially the most important. They are the ‘glue’ that holds all of these connections together.
There are thousands of fintech apps and services and tens of thousands of financial institutions, making it virtually impossible for developers to build 1:1 API connections between them all. Instead, fintech apps turn to data networks that have already built these connections. By connecting with a data network that has pre-existing APIs with financial institutions, fintech apps instantly gain secure access to the latter’s accounts once given the user’s permission.
Likewise, financial institutions can also rely on data networks to provide their customers access to fintech apps. By integrating with a reputable data network that fintech apps trust, they open up their customers’ bank accounts to any app connected to that data network—again, on the condition of user permission.
Plaid is one such open API data network, providing connections between 5,500+ fintech apps and 12,000+ financial institutions. Plaid's Core Exchange works like a data bridge between financial institutions and the API-powered financial ecosystem. It provides financial institutions with a no-cost method to give their customers access to both Plaid-powered apps and other apps—while providing greater control over their financial data.
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Expanding the ecosystem into open finance
The concept of open banking—the practice of opening up financial account data to third-party fintech apps—is at the forefront of the connected financial ecosystem. By allowing fintech companies to securely connect to financial accounts through APIs and data networks, banks have helped open up a whole new world of financial services to consumers. But that was just the beginning.
Now comes the evolution from open banking to open finance, which goes beyond linking up bank accounts and fintech apps only. Open finance takes a further step, opening up a broad spectrum of accounts for enhancement through fintech. These include investments, loans, pensions, insurance, and mortgages.
Expanding to other types of accounts means that the fintech ecosystem could reach many more facets of our everyday lives. Already, 76% of consumers say that the ability to connect their bank to apps and services is a top priority when choosing a bank. Imagine if this were also true when choosing a mortgage, insurance plan, or investment portfolio.
→ Want to build a holistic view of investment holdings? Plaid can retrieve investment data that provides insights into all of your users’ investment accounts—including crypto.
Making the ecosystem even more connected
Given that open finance can broaden financial access beyond the bank account, the future could see more seamless connectivity between the apps and accounts that comprise the fintech ecosystem.
Consider how it works currently, with separate apps performing separate functions such as investing, budgeting, peer-to-peer payments, banking, and more: While much can be automated, many parts of our financial lives are siloed between different apps. True, the digitization of these functions alone is extremely helpful, but connecting them could go the extra mile towards a holistic ‘digital transformation’ of our financial lives.
Perhaps with even more connection, extra money left over in the budget could automatically go to where it’s most impactful—things like paying off student loan debt, investing in a 401K, or saving for college tuition. If the ecosystem’s fintech apps had the ability to communicate, they could potentially work together to have an even greater impact on people’s lives.
Where the ecosystem might go from here
Official acceptance of the connected financial ecosystem through US government regulation has already begun, with more formal regulation on the way.
In November 2020, the Consumer Financial Protection Bureau (CFPB) announced that it will be making formal rules on section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to open banking—with the intention of furthering consumer safety. Additionally, a July 2021 executive order formally encouraged “the CFPB to issue rules allowing customers to download their banking data and take it with them.”
These announcements show that open banking and our connected financial ecosystem is a force to be reckoned with—and regulated. More importantly, they confirm that the government is taking consumer safety seriously while encouraging a competitive business environment.
With the mass adoption of fintech and more official rules governing the open finance landscape on the way, it seems that all financial services are destined to become interconnected—with entry into the ecosystem a prerequisite for doing business. And that means more opportunities for consumers to find a path to financial health and freedom.