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The Fintech
Spotlight
A look at what’s happening across the fintech ecosystem
 A word from Plaid

W elcome to the Fintech Spotlight, an annual

report that provides insights and analysis on
trends across the fintech ecosystem.

The report is divided into six sections:

• PFM: Making personal financial management actionable and automated

• Wealth: Putting customers first through diversification

• Lending: Mitigating risk in times of uncertainty

• Consumer payments: The benefits of alternative payment methods

• Crypto: The shift to real-world utility

• Banking: Leveraging data privacy to strengthen business

A WORD FROM PLAID

The global landscape has evolved remarkably since the last Fintech Spotlight.
“[Funding] continues to be
As we publish this year’s edition, several major events are impacting the macro
available for strong ideas
environment, including the war in Ukraine, rising inflation, and record-setting
that solve big problems and
stock market volatility.
deliver high consumer value.”

PAUL WILLIAMSON What does this mean for fintech? Based solely on the headlines—from drops in
Head of Revenue, Plaid venture capital funding to a crypto freefall and talk of recession—the picture is
less than rosy. But a closer look shows the strength and long-term solidity of an
industry that is permanently changing the way the world interacts with money.

First, while global funding did see an 18% quarter-over-quarter drop during the
first three months of 2022, and an even larger drop in Q2, it’s far from dried
up. What’s changed is the intentionality with which investors are placing their
money—money that continues to be available for strong ideas that solve big
problems and deliver high consumer value. Shifts to areas focused on generating
stable streams of income, like digitizing payment processing for businesses,
have become top of mind.

Second, this is not the first time that an industry like crypto has seen volatility—
and it likely won’t be the last. Booming new markets tend to attract a swarm
of players looking to get in on the action. Just think back to the dot.com boom
of the 1990s: The internet hardly disappeared with the so-called “bust” that
followed. Instead, companies that seized on opportunities to address real
consumer needs—and executed their offers well—survived and grew. Many
of those companies are pillars of the internet economy today.

// THE FINTECH SPOTLIGHT NO.3, 2022 // 01

 Indeed, history has a way of putting things in perspective. Fourteen years
ago, the global economic crisis caused many companies to flounder, while
“Downturns act as both natural
others made it through the storm—in many cases, with flying colors. At the
market correctors and creators
same time, many of today’s biggest names, from Whatsapp to Uber, made their
of new opportunities.”
fledgling debut.

PAUL WILLIAMSON
They were able to do so, in part, thanks to the economic slowdown rather than
Head of Revenue, Plaid
in spite of it: Downturns act as both natural market correctors and creators
of new opportunities. Instead of pulling back, forward-thinking enterprises
understand this and, if able, invest. Apple, for instance, is reported to be working
on a host of in-house financial services, including payments processing, while
Chase and Goldman Sachs continue to pour vast amounts of money into their
digital banking offers. That’s because they recognize fintech drives value for
consumers—and will only continue to grow.

The strength of our industry to ride out whatever is on the horizon lies in that
very principle: Fintech has become essential to the way we manage our financial
lives. No longer at the periphery, it forms the center of a more connected,
consumer-centric financial ecosystem. Our survey with the Harris Poll last year
showed that 88% of Americans were using fintech in 2021—and felt better off for
it. The result is that consumer expectations for digital, connected, and mobile-
friendly financial experiences are higher than ever. In fact, digital tools can even
help protect consumers from the effects of inflation.

Over the next few years, fintech will become the primary way people carry out
the majority of their financial tasks. The key for all of us is to continue building
ahead of the public’s needs in ways that deliver clear value. To do so, we must
hold steady and invest in our products, people, and vision for the future. We’re
still in the early stages of broad digital transformation of finance; a wealth of
opportunities await.

PAUL WILLIAMSON
Head of Revenue, Plaid

// THE FINTECH SPOTLIGHT NO.3, 2022 // 02

 PFM
40%
40% of customers prefer
PFM services from non-bank
providers.
“Consumers have ever higher
expectations of what a
given app can provide, as
personalization and insight-
generation have now become
table stakes.”
// THE FINTECH SPOTLIGHT NO.3, 2022
Making personal financial management
actionable and automated
Personal financial management (PFM) tools have come a long way since their
early iterations. Today’s apps do much more than just display summaries and
breakdowns of a customer’s finances and spending—they provide personalized
insights and, in the most advanced scenarios, tangible ways to help customers
more quickly reach their goals and improve their financial lives.
These services have become so widely used that banks and credit unions are
now beginning to offer their own versions. But heightened competition and an
abundance of choice mean that many customers still turn to third-party apps to
track their finances. According to a recent study, more than 40% of consumers
prefer PFM services from non-bank providers.
That’s likely because consumers have ever higher expectations of what a given
app can provide, as personalization and insight-generation have now become
table stakes. From social media feeds to online shopping and streaming services,
consumers are accustomed to seeing the things on their screen adapted to their
preferences, habits, and needs. Now, they don’t just want more–they expect it.
This explains the success of apps like Truebill or Acorns. The former finds and
tracks its customers’ subscriptions and takes care of canceling unwanted
services. It also identifies bills that can be lowered and negotiates the best
available rates on the customer’s behalf. Acorns, meanwhile, delivers tangible
savings and investment improvements the customer can see, thanks to
automated action embedded right into its product.
This also explains the ever increasing importance for an app or service to
become top of wallet. Research shows the average smartphone user has 80+
apps installed on their device. While app usage accounts for roughly 90% of
screen time, only nine mobile apps get used each day—and thirty each month.
That means 62% of these apps aren’t even used on a monthly basis.
// 03
 APP USAGE BY THE AVERAGE SMARTPHONE USER

Number of apps installed 80+

Number of apps used per day 9

Number of apps used per month 30

Percentage of apps not used 62%

Source: Buildfire

Such figures could be a sign of general app fatigue. With much of a consumer’s
financial life scattered over multiple apps, there’s growing demand to activate
that data and consolidate it all in one place. Companies able to diversify—be it
through acquisitions or expanded engineering—will likely have a leg up over the
competition.

Plaid’s take:

To stay relevant and top of mind, PFM apps will need to maximize data-driven
insights to offer action-oriented steps that can help users not only understand
their finances, but manage and improve them with ease. Think things like
subscription management assistance, reminders to change accounts for
recurring payments, alerts for upcoming billing cycles, automatic payments on a
user’s behalf, or fund transfers to cover spending.

This hyper-personalization can only come through access to the diverse data sets
that reflect a customer’s full, complex, and constantly evolving financial picture,
as well as through improved categorization of their daily transactions—for a more
detailed view of where, when, and how their money is being spent.

// THE FINTECH SPOTLIGHT NO.3, 2022 // 04

 Wealth
“More and more investment
platforms are recognizing the
need to offer crypto to retain
coin-interested customers or
those looking to diversify
their assets.”
“The industry is aiming to
be more things to existing
customers in a highly
competitive space.”
// THE FINTECH SPOTLIGHT NO.3, 2022
Putting customers first through diversification
Last year’s Fintech Spotlight shined a light on the impressive rise of robo-
advisors and the move amongst traditional wealth management firms to acquire
or create their own automated trading capabilities, driven in part by the massive
generational transfer of wealth predicted to happen over the next decade.
This year, similar evolutions are taking place around the world of crypto. While
established investment platforms remain focused on helping customers build
long-term wealth, more and more are recognizing the need to offer crypto to
retain coin-interested customers or those looking to diversify their assets.
Betterment’s acquisition of Makara, for example, and Stash’s launch of Smart
Portfolio—both earlier this year—attest to this trend. Even UBS’s purchase of
Wealthfront brings crypto under its umbrella, despite not being the acquisition’s
main driver.
It goes both ways: At the top of the year, Gemini bought out Bitria, a start-up that
provides traditional portfolio management tools for use in crypto investments.
This growing embrace of crypto by the wealth management sector, despite the
recent volatility surrounding it, is just one way in which the industry is aiming to
be more things to existing customers in a highly competitive space.
Another is the development of features that can better support—and thus
retain—these same customers through the downturn. Betterment’s Tax Loss
Harvesting+, for example, automatically sells securities that have experienced a
loss to offset taxes on both gains and income. The tool allowed the company to
harvest over $99M in tax losses for its customers on a single day this past June.
Finally, many platforms are also providing more robust education to help people
better understand their finances and the broader economic situation, as well as
make more sound decisions—both proactively and reactively. Companies such
as Stash and Moneylion, for instance, are achieving this through acquisitions:
The former purchased financial-literacy platform PayGrade, rebranding it
Stash101 and offering free educational content around investing, while the latter
acquired Malka Media, a content creation firm that will help it expand its existing
MoneyLife blog with educational articles and videos.
Plaid’s take:
As the economy retracts, ever greater diversification—whether through
innovation, partnerships, or additional acquisitions—may give an added boost
to an industry whose success is directly correlated to the health of the market.
This could mean many things, from integrated banking solutions or short-term
loan access to liquidation assistance in worst-case scenarios—along with a
360° swath of investment offerings. The key will be ensuring these features and
services act to deepen customer loyalty and retention.
// 05
 Lending
7%
Fraud may be costing
companies up to 7% of their
annual turnover.
“A key component of 360°
risk management must also
come after the borrower has
been approved.”
// THE FINTECH SPOTLIGHT NO.3, 2022
Mitigating risk in times of uncertainty
As talk of rising interest rates and macroeconomic headwinds intensifies, lenders
are asking themselves a variety of questions about how best to navigate the
shifting landscape. Ways to save money and strengthen their business’s financial
buoyancy are, understandably, top of mind. One path to doing so is through more
robust risk management and improved systems that set their borrowers up for
success.
In this context, fraud mitigation is more pertinent than ever. Generally speaking,
every $1 of fraud loss currently costs US financial services firms $4, an increase
of up to 9.9% compared with before the pandemic. Some studies suggest that
this may be costing companies as much as 7% of their annual turnover. Mortgage
lenders, in particular, have been greatly impacted, with the real financial impact
of mortgage lending fraud now 23.5% higher than just before the pandemic, at
$4.40 for every $1 of fraud.
THE REAL COST OF $1 OF FRAUD LOSS
$6
$5 $4.40
$4
$4
$3
$2
$1
US financial US mortgage
service firms lenders
Source: PR Newswire
Such costs are unsustainable at a large scale, and must be mitigated through
action at the earliest stages of the loan application process. A study by Provenir,
a risk decisioning software company, found that fraud prevention is the year’s
biggest driver in Europe for AI-enabled risk decisioning investment. In fact, more
than 90% of executives surveyed cited it as a key driver in the adoption of AI-
enabled risk detection.
// 06
 Beyond the fraud risk component, a solid credit risk assessment should also
cast a wide net when it comes to financial data. This might include an API-
powered analysis of the borrower’s bank account in conjunction with traditional
signals like credit scores. The former allows lenders to examine indicators like
cash flow and income directly at the source, significantly reducing the possibility
of falsified data.

But because a consumer’s financial situation may change many times over
the course of their life as a loan customer, a key component of 360° risk
management must also come after the borrower has been approved—and
applied to existing customers at any stage of their loan repayment process.
This might include ongoing monitoring, an automated process that signals
changes in a customer’s financial situation, as well as payment risk mitigation,
in which automated balance checks can signal if the borrower is at risk of
defaulting on an upcoming payment.

Plaid’s take:

Reducing risk at every stage of the loan process strengthens the lender's bottom
line. The implementation of a holistic suite of processes in conjunction with the
use of traditional reviews and credit signals will be key to reducing risky loans—
and will be equally important to emerging from a potential economic downturn
unscathed. At the same time, more robust protections against ever-increasing
fraud will deliver added savings and help maintain overall profit margins.

// THE FINTECH SPOTLIGHT NO.3, 2022 // 07

 Consumer payments
2.2%
ACH payment volume saw a 2.2%
YOY increase in Q1 2022.
“With consumers managing
their money in more places
and outside of traditional
bank accounts, novel
alternative payment methods
are gaining traction.”
// THE FINTECH SPOTLIGHT NO.3, 2022
The benefits of alternative payment methods
With advances in technology, new and evolving payment methods have emerged
as viable alternatives to traditional credit and debit cards, maximizing choice,
improving the consumer experience, and reducing costs.
ACH payments, for example, saw double-digit volume growth in both 2020 and
2021, due largely to the explosion of digital business in the wake of COVID-19.
Even the first quarter of this year—free from the pandemic-related government
assistance payments that accounted for much of 2021’s growth—saw a 2.2%
year-over-year increase.
By now, the reasons for the ACH network’s attractiveness are well documented—
in particular, their substantially lower processing fees when compared to other
payment rails, such as credit and debit cards. Their traditionally increased risk of
payment return can now also be mitigated by dedicated products like Plaid’s own
Balance, Signal, and Guarantee, for example.
These developments may help explain why same-day ACH use has grown
dramatically, changing the time-intensive perception of the ACH system.
However, the desire for truly real-time payments continues to be top of mind.
Over the next decade, the overall market for real-time payments is expected to
advance at a compound annual growth rate of 33%, driven by the likes of push-
to-debit, the upcoming FedNow (set to launch in 2023), and The Clearing House’s
RTP® (real-time payments) network, which lets users send funds between bank
accounts within seconds—24 hours a day, 7 days a week, 365 days a year.
PROJECTED CAGR OF REAL-TIME PAYMENTS OVER THE NEXT 10 YEARS
2022 2032
Source: American Banker
// 08
 With consumers managing their money in more places and outside of traditional
bank accounts, other novel alternative payment methods are also gaining
traction. That includes both open digital wallets such as Paypal and Cash App
and—increasingly—crypto wallets, which are aiming to build out their own
closed-loop payment networks or strike partnerships with card rails to leverage
the latter’s well-established reach.

In many ways, crypto is evolving much in the way of buy now, pay later (BNPL),
which exploded into the mainstream during the pandemic. Although currently
under regulatory scrutiny, BNPL continues to grow and gain in legitimacy,
providing a potential model for crypto’s evolution as a means of payment.
Companies like Affirm have built out acceptance directly with some merchants,
as well as issued virtual cards to allow customers to use their Affirm accounts
at nearly any merchant. Block, meanwhile, acquired Afterpay to strengthen their
holistic position in the market.

All these alternative payment methods act to increase competition, ultimately

driving down costs and allowing merchants to favor faster, more secure methods
of money movement with lower fees. And with the annual inflation rate currently
at 9.1%, the latter will be a key concern, as traditional payment methods add an
average of up to 3.5% per transaction. Savings here will have a tangible impact
on a business’s bottom line—and potentially be passed on to consumers where
they need it most.

Plaid’s take:

In an uncertain economic future colored by skyrocketing prices, an increase in

payment method options is a win for consumers. Cost-effective choices can
help their money go further towards everyday essentials such as bill payments,
digital subscriptions, and food and transport services. The key will be to ensure
simplicity in the consumer experience and robust risk management for the
merchant; the payment method that gets it right is poised to become the cash-
equivalent of the digital economy.

// THE FINTECH SPOTLIGHT NO.3, 2022 // 09

 Crypto
16%
16% of US adults now use crypto.
“Innovation will likely need to
refocus its energy on concrete
solutions to consumers’
everyday problems.”
// THE FINTECH SPOTLIGHT NO.3, 2022
The shift to real-world utility
Crypto rose to prominence on its promise to revolutionize the current financial
system. However, despite continued growth in adoption (16% of US adults now
use crypto), broad change has come more slowly and incrementally, with use
cases operating outside the traditional financial system and traditional providers
exploring ways to serve mainstream crypto demands.
At the same time, price volatility and a so-called “crypto winter” have directed
attention away from utility and innovation and onto market viability. Markets are
seasonal; and crypto is far from an exception. Many argue these high-profile
ups and downs are part of a “price-innovation cycle” that has propelled crypto
forward through diverse waves for over a decade. In this cycle, prices drive
interest, which drives ideas and activity, which in turn drive innovation, eventually
leading back to a bullish outlook and a stronger industry.
This time around, such innovation will likely need to refocus its energy
on concrete solutions to consumers’ everyday problems and the ways in which
crypto can fit into the existing financial services industry. It’s a shift that’s
already begun: Ledn, for example, enables customers to collateralize their
real financial assets with their crypto assets for a more seamless experience,
while Goldfinch empowers crypto lenders to facilitate real world loans.
Even established players like Visa and MasterCard are betting on real-world
applications, as they study ways to offer crypto-backed debit cards
to customers.
Whether for speculation or for real-world purposes, consumers stand to
benefit when they can engage with their finances holistically, across both fiat
and crypto. Plaid’s own announcement that our network now supports major
crypto exchanges including Binance.US, Gemini, Robinhood, and SoFi aims to do
precisely this, enabling customers with assets in these exchanges to securely
share account information—including asset types, balances, and transactions—
with the apps they use to provide a more complete financial picture.
Plaid’s take:
While innovation in cryptocurrency expands its utility for consumers, it remains
just one piece of their broader financial lives. Data portability can establish
a stronger link between the two for consumers, while also enabling quicker
onboarding and real-time account funding into crypto use cases. All of this builds
greater trust with consumers, which will be a key component of its ultimate
adoption by the masses.
// 10
 Banking
92%
92% of consumers say
keeping their information secure
and private is extremely or
very important.
“
Regulation will surely work
both ways, meaning financial
institutions will increasingly
be able to act not only as
data providers, but also
as data consumers.”
// THE FINTECH SPOTLIGHT NO.3, 2022
Leveraging data privacy to strengthen business
This time last year, the White House urged the Consumer Financial Protection
Bureau (CFPB) to advance regulation around open finance. Since then,
momentum has continued to build as governments worldwide embrace open
finance and/or establish rules to protect consumers’ rights to their own financial
data. The United Kingdom, European Union, Brazil, Australia, and others are
promoting open finance to advance innovation and improve financial services,
while Canada recently moved forward with plans to establish an open finance
regime by 2023.
As the industry continues to await the arrival of similar regulation in the United
States, the general expectation is that it will secure consumers’ right to data
portability, allowing fintechs, neobanks, and traditional financial institutions to
compete in new ways—on a level playing field—and provide further assurances
to the industry that open finance is here to stay.
But such regulation will surely work both ways, meaning financial institutions
will increasingly be able to act not only as data providers, but also as data
consumers, with equal opportunities to build business around consumer-
permissioned data in an effort to secure account primacy. Though financial
institutions have been working with Plaid for years in their role as data providers,
many are now using our services in their own digital and lending strategies, for
example.
These regulations are also expected to consider consumer privacy and data
protection practices, which will likely cause further prioritization of trust and
privacy amongst all players concerned. Trust has long been critical to financial
institutions’ value propositions, comprising a prominent role in their branding.
Understandably so: A study shows that 29% of adults who’ve lost trust in a
financial services provider would never consider using them again (the highest
for any industry surveyed), while only 17% would consider doing so.
RESPONDENTS WHO LOST TRUST IN A PROVIDER IN EACH INDUSTRY WERE
ASKED WHETHER THEY WOULD...
...never use that provider again ...consider using that provider again
29%
Financial services
17%
25%
Food & beverage
31%
21%
Retail & e-commerce
23%
19%
Social media
25%
15%
Technology
13%
Source: Morning Consult
// 11
 In fact, according to Plaid’s own study, concerns about whether their data is
secure and private are the two most important factors for consumers when
managing their personal finances. More than 92% say keeping their information
secure and private is extremely or very important, while 86% expect more
meaningful control over their financial data.

A consumer-centered open finance ecosystem will likely create a more level

playing field for actors of all sizes and foster greater opportunity for new
business entries—along with more robust competition, in turn. Data privacy
offers a way for companies to differentiate themselves in this context, while
bolstering all-important trust with their customers.

Plaid’s take:

With fintech clearly here to stay, the US government will increasingly play an
essential role in overseeing the market, while companies that embrace—and
are prepared for—impending regulation will be best poised to succeed. Securing
strong consumer data rights can be a boon for the fintech market and traditional
financial institutions, as both stand to benefit from the certainty and added
assurances regulations can provide—as well as from the data access
consumers want.

For fintechs, that means potential for increased scrutiny, as well as for the
opportunities that being treated like a financial institution creates to better serve
consumers (think access to the forthcoming FedNow real-time payment rails).
For traditional financial institutions, that means building a business strategy that
considers how best to leverage data in addition to providing it—and, in turn, drive
customer acquisition and retention. Both groups, meanwhile, should be focused
on ways in which best-in-class data privacy practices can be used to differentiate
themselves in the eyes of consumers.

// THE FINTECH SPOTLIGHT NO.3, 2022 // 12

 Plaid powers the digital finance solutions that
enable millions of people to live healthier financial
lives. Trusted by 6,000+ of the world’s leading
companies and connected to 12,000+ financial
institutions across the US, Canada, UK, and Europe,
Plaid’s mission is to unlock financial freedom
for everyone.

plaid.com PLAID HEADQUARTERS

1098 HARRISON ST.
growth@plaid.com SAN FRANCISCO, CA 94103

// 13