An open banking primer

This week, The Flip and Rally Cap Ventures co-hosted an event “Localizing the Plaid Playbook in Emerging Markets”, featuring Ximena Aleman from Prometeo, Abdul Hassan from Mono, and Mohammed Aziz from Dapi – three fintech founders building open banking infrastructure in LatAm, Sub-Saharan Africa, and MENA, respectively.

As open banking proliferates across fintech ecosystems worldwide – the hype largely aided by the announcement of Visa’s acquisition of Plaid for $5.3 billion1 – we’re seeing more companies on the continent founded and successfully funded to lay the pipes and build the infrastructure. In Sub-Saharan Africa, there’s OnePipe, Stitch, Pngme, Okra, Mono.

In the US, the Consumer Financial Protection Bureau is moving toward open banking regulation, with the aim to make implementation easier. And Goldman Sachs is saying they “believe developers are creating the future of finance” – those that are building the software and infrastructure to power open banking ecosystems. 

Meanwhile, MTN recently launched its API marketplace, Chenosis, while M-Pesa is explicitly taking an open and interoperable approach to mobile money, as well. Then, there are also organizations like the GSMA and Open Banking Nigeria working to collaborate around standardized API frameworks.

All that’s to say this open banking thing is a big deal. Let’s explore further. 

What is open banking?

Open banking “is the system of allowing access and control of consumer banking and financial accounts through third-party applications. It is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).” Crucially, the sharing of data to third-party applications is accurate, secure, and in real-time.

For fintechs, having the ability to easily verify and leverage consumer data opens the doors to offer a myriad of financial services to their customers. Meanwhile, it’s advantageous for consumers too – who not only are provided with a better user experience, but may also wish to have other third-parties leverage their data to offer better products and services. 

While banks themselves may have APIs that allow third parties to connect to their data sources, prior to Plaid it meant having to connect to each bank individually. Plaid, meanwhile, acts as the adapter between financial institutions and fintechs, providing a universal API that enables fintechs to connect to over 10,000 financial institutions. Many of the leading consumer finance apps in the US – Venmo, Coinbase, Robinhood – were made possible by Plaid’s API infrastructure. 

Use cases

The use cases of this technology span across financial services – from consumer payments to business banking to lending and identity – and likewise these use cases have created opportunity for the aforementioned fintechs “laying the pipes” and building the connections to financial institutions and other data sources across Africa. 

In an especially fragmented environment from a data perspective, the positive implications of a more connected financial ecosystem on the continent are without question. 

Let’s say you’re a fintech building an online brokerage. With the help of an API platform, you’re able to seamlessly integrate with all of the banks in your market, thus allowing your customers to easily and quickly connect their account to your app. In so doing, you are also able to verify their account, proof of funds, identity and KYC, and more.

Or maybe you’re a digital lender. Having instant and verified access to an applicant’s income information, account balances and history will allow you to make better, more informed and data-driven lending decisions. 

Opportunities of this nature extend beyond just integration with banks and services for the banked. Not only can and are the aforementioned API marketplaces connecting with mobile money providers and telcos, but also alternative data sources. Imagine a scenario where an Uber driver can get a loan based on verified data from their Uber driver account. 

And if everybody is a fintech, the customers these infrastructure-builders can service extends far beyond fintechs, to those offering embedded finance products and services, as well.

Localizing the Plaid playbook in emerging markets

Plaid’s entry-level pricing – that which has been adopted by many other comparable companies on the continent – is a pay as you go model, in which customers are charged per API call. For Plaid – having connected to 10,000-plus institutions and powering consumer fintechs with millions of customers – their massive volumes have allowed them to garner $100 million-plus in revenue. 

While Plaid rode on the back of massive growth of these consumer apps, an immediate question on the continent is to what degree those building the infrastructure on the continent will need to service incumbents to achieve requisite scale. To what extent are incumbents interested in cooperating or partnering? Is the opportunity unlocked by open APIs an opportunity the incumbents care about, to either grow their revenues from existing customers or acquire new customers? The same question applies to other, non-bank financial services, as well. 

And as we’ve podcasted about previously, there is a related question about market size and penetration of these markets – to what extent is there a base level of penetration and/or infrastructure needed for these services to be useful and successful?

Though as we saw in our discussion with Ximena, Abdul, and Mo, the dynamics of each respective market compelled the three companies to employ different beachhead strategies – different approaches and entry points to achieve the same overarching goals.

In connecting accounts, Plaid and others employ screen scraping or reverse engineering methods. In so doing, the login window powered by Plaid (or comparable) appears to look like the user is logging into their bank app, for example, when they in fact are not. Plaid has experienced issues, on one hand, with banks unwillingness to be connected and implementing mechanisms to block Plaid connections, which has at times created unstable connections. And, on the other hand, user data privacy concerns exist, as well. 

This makes regulatory considerations especially acute. To what extent will the private sector be able to work with the regulator to develop agreeable regulation? Certainly, the long journey of mobile money licensing and regulation may be a cause for concern.

With all of that being said, the use cases and opportunities for open banking are without question. And the demand from VCs to invest in those building the infrastructure on the continent and thus enabling other fintechs to do what they do cheaper, better, faster continues to proliferate, as well. And with Paystack – by developers, for developers – building payments infrastructure and exiting to Stripe for over $200 million, perhaps those building nascent open banking infrastructure – by developers, for developers – represent the next wave of $100-million-plus fintechs and, importantly, critical ecosystem enablers in Africa. 

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  1. Though there’s currently antitrust considerations that may hold up the sale in the US.
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