Data aggregator Plaid and cross-border payments provider Wise have reached an agreement through which Wise will work directly with the 6,000 fintechs that are Plaid customers.
This means UK-based Wise’s 13 million customers can connect their Wise account directly to fintechs like Venmo, Chime, Truebill, Acorns and Betterment and move funds back and forth. You no longer need to connect to a traditional bank account or transfer money to and from a bank account to use fintech apps for things like person-to-person payments, investments, or personal finance.
It is an example of how Plaid is expanding its reach across the financial industry, how it is bringing more financial players of different types to its ranks, and how the fintech ecosystem could begin to break free from its reliance on traditional bank accounts and bank payment lanes. This kind of foray into money movement is why Visa tried to take over Plaid in early 2020. Later that year, the Justice Department tried to block that merger citing antitrust issues, and the two companies dropped the idea. That’s why Stripe has announced its own open banking initiative, which will see the payment provider work directly with fintechs.
“The Plaid deal allows Wise to offer its customers with borderless accounts much of the digital functionality of a U.S. bank account,” said Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University and executive principal
Broadmoor Advice. “This is a very attractive feature for its international customer base and a coup for Plaid.”
Wise and Plaid say their collaboration will bring greater convenience to Wise customers.
“Wise has seen a tremendous increase in user numbers, and as those users have deposited and withdrawn funds, Wise has become increasingly critical as a potential main account for a consumer to use to move and manage their money,” said Raja Chakravorti, Universal Data Access Lead at Plaid, “It’s not much different from how Venmo accounts evolved into primary checking accounts, while initially they were more geared towards peer-to-peer money transfers.”
Relationships like this help Plaid expand his network effect and his ability to move money across that network.
“We’ve always found that the more seamlessly we enable a consumer to connect their accounts so that they can use them directly in the solutions they want to use, the more efficient it has been for consumers,” said Chakravorti. “We’re trying to focus on making sure there’s as seamless a cash flow as possible.”
Wise says it gives consumers a much better deal on money transactions than the banks.
“We’ve seen in the market that more and more consumers and small businesses are realizing that they are being ripped off by their bank or cross-border money transfer provider,” said Sharon Anne Kean, senior director of expansion at Wise. “There has been a game in the market for years where providers don’t advertise fees for foreign transactions and instead hide fees in foreign exchange markups. We believe this is wrong and consumers deserve transparent pricing about their entire relationship with their financial provider.”
Wise offers transparent pricing at a mid-level exchange rate, she said.
“We also have price comparison charts and we’ll show consumers if we’re not the cheapest,” Kean said.
Wise chose Plaid as its data aggregator because of its broad app connections in the US, she said.
Plaid’s Core Exchange allows any institution to build API-level connections with other institutions. It uses the FDX specification for its APIs. About 1,000 financial institutions use Plaid’s data connectivity suite, which includes Core Exchange.
Fintechs and banks have moved towards API-based data exchange and away from the screen-scraping methods that Plaid and others use when no API is available.
A Harris survey sponsored by Plaid found that 69% of consumers would leave their primary financial institution to go to a financial services provider that could connect their information to fintechs.
“It’s dramatic and consumers have already embraced fintech,” Chakravorti said.
Smart customers have already started using Plaid connectivity, the companies said. Consumers connect their Wise accounts to peer-to-peer payment apps and investment apps. Business customers use it to send money to payroll companies and connect to neobanks, as well as pay credit card bills and pay taxes in multiple states, among other things.
Some industry observers expressed concern about the announcement, citing the fact that Wise’s own U.S. disclosure states that all funds in his Borderless account are uninsured by the Federal Deposit Insurance Corporation and are invested in accordance with money transfer laws.
“The client is relying on Wise’s continued solvency to protect their funds,” Baker said. “There is a very serious regulatory loophole here that Wise is exploiting. The money transmitter licenses that Wise holds in various US states were not designed for businesses that hold current accounts for customers. They were designed for the quick transfer of money and not for keeping current customer balances. As such, they do not provide protection for these balances in the event that Wise fails.”
According to Baker, if Wise went bankrupt, the holders of his limitless accounts would be unsecured creditors and likely lose most of their money.
“This, in turn, creates a real risk of a ‘run’ on Wise should it get into trouble, thus increasing the overall risk profile of the Wise business,” Baker said.
Regulatory issues aside, deals like this appear to be the way of the future as payment providers and fintechs look to grow and save time and money.
“What every payment and money transmitter wants is more currency through their platform because volume is key to their profits,” said Brad Leimer, co-founder of Unconventional Ventures. “So it makes perfect sense that Wise would want to connect any type of account using Plaid to facilitate the growth of new users and reduce any barriers to sending and receiving money.”
Because of this, more and more banks and networks are building their own rails to facilitate P2P payments and remittance channels, he said.
“The platforms that move the most money through the system achieve greater efficiency for their ecosystems,” Leimer said. “We’ll see a lot more of that.”