Fintech enthusiasts and investors scored a major victory on June 24 when Visa Inc. (NYSE: V) announced its intention to acquire Stockholm, Sweden based open banking platform Tink for approximately $2.15 Billion USD. The news follows Visa’s highly publicized failed bid to acquire Tink’s U.S. based open banking peer Plaid earlier this year. While the story of Visa’s quest to acquire the open banking technology at the center of both companies’ offerings plays out like an old Norse saga, the story also highlights some of the very real challenges to the continuing momentum of the open banking movement in the US, and the transformative power of its core technology.
Visa’s prior attempt to acquire Plaid was a no-brainer from a strategic perspective. Plaid’s proprietary application and API connects with over 11,000 financial institutions (FI’s) and 200 million consumer accounts. From Visa’s perspective, a fintech with the magnitude of Plaid’s FI and consumer connectivity is not only unprecedented in scale, but constitutes an existential threat to Visa’s dominance in the US online debit market where Visa is believed to capture roughly 70% of all US transactions. If Plaid didn’t become a Visa Inc. holding, it would have remained – and still does – a first order competitive threat. The US Department of Justice’s endeavor to block the acquisition was understandable: the combined entity could have created in all but insurmountable barrier to entry for any other fintech seeking to compete in the US online debit market.
The core open banking technology of both Plaid and Tink is a proprietary application and API that connects financial institutions with each other, and with consumer service providers. Through the application, consumers’ financial data can be securely shared between the two. The nature of this information sharing is the very essence of open banking. Right now, this technology is predominantly used for account validation and asset confirmation (balances). But, and it’s a BIG but, it could, and presumably will, also be used for debit payment initiation and settlement, which from Visa’s perspective could deal a potentially devastating blow to its stronghold on the US debit card business segment: Plaid and Tink’s technology have the potential to truly disrupt online debit, relegating Visa-branded debit cards anachronistic, and in doing so, creating a competitive market dynamic which would inevitably drive down margins and reduce profitability. There’s no doubt that Visa recognized the power of Plaid and Tink’s innovative open banking technology, and rightfully so, aggressively pursued a course to acquire both companies.
Visualizing the threat: In the DOJ complaint opposing the Visa / Plaid merger, an un-named Visa executive likened Plaid to an undersea, island “volcano” whose current capabilities are just “the tip showing above the water” and warned that “[w]hat lies beneath, though, is a massive opportunity – one that threatens Visa.”
After conducting extensive due diligence, the acquisition was likened to an “insurance policy” as it became apparent Plaid planned to add a “meaningful money movement business by the end of 2021,” therefore competing with Visa’s online debt services.
The attempted Visa acquisition of Plaid ran into a US Department of Justice buzz-saw based on US anti-trust laws. The DOJ characterized Visa’s existing market share of the US online debit space as monopolistic, and argued that by acquiring Plaid, Visa would all but eliminate the largest, contemporary competitive threat to its US online debit business. On its face, the complaint is valid and it would seem the DOJ was right to bring it. But what does that say about the larger US regulatory framework as it pertains to fintech in general, and open banking specifically?
The attempted Visa acquisition of Plaid was not without precedent. Mastercard Inc. (NYSE: MA) pursued a similar strategy in 2020 when it acquired Salt Lake City, UT based open banking and financial data-sharing platform Finicity for $825 million USD. Yet in this instance, the DOJ cleared the deal in less than 5 months. Perhaps the DOJ’s different response to the Mastercard acquisition was a function of Mastercard’s much smaller market share of the US online debit space (less than 25%). If so, it does seem that the DOJ is being consistent in its adjudication of open banking acquisitions through the narrow prism of monopolistic threats and anti-trust concerns. But the differing DOJ decisions do evidence a broader lack of consensus in the US regarding a concrete regulatory framework within which other fintech and open banking platforms can operate.
In contrast to this, Visa’s announcement of their intention to acquire Tink has not yet received any public or political backlash in the European Union. That’s not to say (or expect) that it won’t. Visa’s Tink deal will surely garner regulatory scrutiny in the EU, if for no other reason than the optics of EU regulators not doing so after the DOJ’s very public denunciation of the Plaid deal, would look untoward. However, given the stark differences between EU’s very structured open banking regulatory regime, and the muddled, consensus-less political sentiment and rather amorphous regulatory regime of the US, it’s easy enough to see an eventual pathway forward for the deal to be cleared.
While “market forces” have been largely responsible for driving the political and regulatory changes in favor of open banking in the United States, the EU has historically focused on encouraging open banking innovation with an accommodating regulatory framework and political support for greater transparency and ease in consumer financial data-sharing. In fact, open banking and financial data sharing are not just encouraged in the EU, they’re mandated by EU law.
The origins of this political ethos can be traced back to the original EU Payment Service Providers Directive (PSD) instituted in 2007. The key pieces of which – at least those that speak directly to open banking and financial data sharing – were the Business Conduct Rules. Through these rules the EU established a regulatory framework for transparency of information sharing between payment providers and the rights and obligations of payments providers and consumers. The consequence of which laid laid the groundwork for open banking to thrive.
An amended version of PSD, implemented in 2019 – PSD2 – enhanced the primary objectives of the original directive to further improve consumer protections, bolster competition, and reinforce payments security. The most notable portion of the amended directive entailed the opening of direct access to payment service users’ online payment accounts with their consent. This involved Third Party Payment Service Providers (TPPs) to require Account Service Payment Providers (e.g., Banks) to provide access to financial data through dedicated interfaces. PSD2 provided further evidence that the EU was doubling down on the facilitation of open banking through targeted regulation.
In stark contrast, current proposed regulation in the United States lags years behind the EU. The closest the US has come to providing a regulatory framework for open banking has been a request for comment on the existing Dodd-Frank Wall Street Reform and Consumer Protection Act by the Consumer Protection Financial Bureau in November of 2020. The ANPR (Advance Notice of Proposed Rulemaking) action requested comments be submitted before February 4, 2021. The proposed amendment would constitute a major step forward in closely aligning the US with the prior EU PSD and PSD2 directives: it would require US financial institutions to make consumer financial data available to consumer’s financial products or service providers. While the pandemic may be blamed for delaying actual legislation, in no instance can it legitimately explain why the EU presently has a decade-long head start on open banking regulation.
The disparity between the cogent EU regulatory framework and the still nascent US framework will likely constitute a divergence in outcomes between Visa’s busted Plaid deal and its successful acquisition of Tink. And the saga of Visa’s foray into these highly strategic acquisition initiatives will continue to raise questions about the challenges to open banking – at least those of a regulatory nature – in the US. The lack of clarity in the US could further enhance the risk of triggering a cascade effect of stifling new fintech and open banking innovation by denying entrepreneurs a set of “rules-for-the-road” to experiment within.
But there is a silver lining here. The Visa Plaid, Tink saga has also highlighted the sheer power and momentum of the open banking movement – globally – in spite of geo-political, regulatory differences.
Open banking will force all governments to create a clear regulatory framework.
There’s no question as to “if” this will occur. The only question is “when”?
