OBSERVATIONS FROM THE FINTECH SNARK TANK
They say timing is everything. And for Jim Magats, the new CEO of financial data aggregator MX, the timing is looking pretty good.
Magats left PayPal — where he’d spent 18 years, most recently as senior vice president, Omni Payments Solutions — in late July, exiting a few months before the payments company released a policy update in October that said users had to do so Pay up to $2,500 in damages for spreading misinformation.
That announcement — which the company later retracted — triggered a 1,400% spike in searches for “delete PayPal” and an immeasurable loss in customer accounts and payment volume.
Magats might have jumped out of the pan, but he could still have ended up in the fire. The financial data space – sometimes referred to as “open banking” – is a highly competitive space where regulatory developments related to the use of data continue to irk financial institutions.
The fire was raised somewhat in October when MX announced that it had “made the difficult decision to reduce the size of our team and reorganize the company to better serve our mission.”
Interview with Jim Magats, CEO of MX
Not long after joining MX, Magats recruited two PayPal colleagues to join him, appointing Wes Hummel as chief technology officer in August and Nandita Gupta as chief product officer in September.
How does this trio of former PayPal execs plan to lead MX to bank data dominance? To answer that, I sat down with Magats at MX’s recent Money Experience Summit. Here are some excerpts from that conversation:
Q. What opportunities do you see in the area of financial data?
Magats: The challenge we face today is keeping data isolated, unusable and away from the people who actually need it. If we are able to properly serve customers from the end customer perspective, data will be key.
Q. It seems to me that the challenge is in the insights and experiences, not the connectivity and the data.
Magat: Yes. Data by itself is useless unless you can do something about it. With PayPal, we had 50 petabytes of transaction data [but that] Data was not actionable. When I say MX is a data company, it’s about how you take data, generate actionable insights, and on top of that create great experiences.
Q. How would you rank MX in terms of its connectivity, insights and experience building capabilities?
Magats: My assessment after six weeks on the job is that it is a very experienced company when it comes to the possibilities of mobile banking. I would say the piece of data in terms of cleansing, categorization, very strong. I’m saying the connectivity piece is something we need to work on.
And I think we have a relatively competitive product. Give us another year, year and a half, I think we’ll have a robust connectivity solution. Playing this forward, we’re trying to change the ecosystem from a screen-scraping environment, which is very taxing for financial institutions. This involves a security risk. We help the ecosystem get data through OAuth or tokenized connections in a much more permissive, scalable way.
And we create the data reservoir in such a way that you can then supplement it with knowledge and experience. So it’s really important for us to look at this as a basic level of service. We believe that if we can get the industry to do it the right way, the experience can be made better and more efficient.
Q. You have described a grand vision. What types of businesses do you think you need to acquire to achieve this vision?
Magats: I’m not sure if takeovers will be the first step. I’ve always been a big fan of partnerships. At PayPal, a lot runs through the partnership channel. I think there is an opportunity for us to find like-minded organizations that want to innovate for the customer. There are those that gain access to various points of connectivity and those that offer even greater insights into data.
Q. How do you think the introduction of PayPal Managers in MX will impact company culture?
Magats: I think it will complement the corporate culture. We are all mission driven. You would have thought Wes and Nandita would come from central casting at MX – they believe in the power of doing good and using technology to do good. I really like that term “infusion” because I see it as an infusion of people who have worked at scale with great experience, with people who have a long history with data and insights and connectivity. I think it’s a perfect compliment.
The open banking battlefield
Magats assessment that MX has the weakest connectivity is more of an industry issue than just an MX issue.
An FDATA study found that consumers experience connection failures 40% to 50% of the time when they first try to link their accounts to third-party websites using tools from data aggregation companies.
Three variables influence this lack of connectivity success:
- Cover. This reflects the number of financial institutions that can be accessed with high reliability. Most aggregators are affiliated with the largest banks, but how many community-based institutions and investment and wealth management providers do they have?
- connection quality. The odds that a customer attempting to connect to their account will be successful at any given time depends on: 1) the depth of data that can be accessed through the aggregator’s connections, and 2) how quick and easy the connection experience at the end is customer.
- Permission Management. Finally, connectivity is affected by how an aggregator collects and manages the end customer’s permission to collect and use their data.
The API factor
These factors are all positively impacted when APIs are used instead of screen scraping. Aggregators will say they are moving from screen scraping to APIs.
But what types of API integrations are they building? Proprietary APIs that restrict visibility and control of data suppliers, or open, interoperable APIs that balance the advantages between data buyers and suppliers, giving suppliers visibility and control over the shared data?
Proprietary APIs benefit the narrow interests of the aggregator. The entire ecosystem benefits from open, interoperable APIs.
Separating the wheat from the chaff: insights and experiences
Connectivity is just one of three factors that will decide who will win the battle for financial data aggregation – the others are insight and experience.
At the insights level, much of the innovation in the aggregation of open banking data occurs. Aggregating open banking data is helping to generate new insights into consumer income (verification and estimation), cash flow-based creditworthiness and financial health.
In order to differentiate themselves from the competition, data aggregators must show that they: 1) can do something with the collected data; 2) clean and enrich the data; 3) detail simple attributes like current account balance and more complex calculated attributes like total income; and 4) generating scores to assess the risk of default on a new loan or fraud on an ACH payment.
Current market leaders in data aggregation vary widely on these criteria (with MX arguably leading).
At the top of the data value pyramid is the ability to create “experiences” – e.g. B. Subscription management or early access to salaries.
Eventually, this will become the key differentiator in open banking – who can best (i.e., fastest with best quality) create experiences (think: products and services) that their partners can monetize and use to gain from to stand out from others.
The open banking fight
Magats may like the partnership model and have extensive experience with it, but it’s hard to imagine how the company can develop on partnerships alone.
To build a portfolio of insights and experiences, the major aggregators will certainly need to look externally to fill their internal deficiencies and gaps, but ultimately the economics of the business will dictate that the aggregators acquire firms that have specialized skills like payroll APIs Offer Atomic and Pinwheel. Non-FICO based credit scoring algorithms and early access wage services.
With its deep pockets, Mastercard is poised to make more acquisitions in the data space to integrate with Finicity. Likewise, with the backing of the big financial institutions that own Akoya, acquisitions to support the data aggregator could be on the horizon.
Plaid has already acquired Cognito and Quovo, taking advantage of its strong market valuation. TechCrunch, in an article on the Cognito acquisition, commented that it was “an interesting purchase for Plaid” because Cognito offers verification services that are “distinct from what its acquirer is best known for.”
Interesting perhaps, but not surprising, because insight and experience are the key differentiators in the realm of aggregation—connectivity is just the price of doing business.
This gives MX a choice: acquire or be acquired.
Either way, Magats and his new lieutenants had to shape the expenses side of the income statement. A website reports that MX “increased its headcount by 728% in the past year,” though it didn’t specify the year.
Whatever the number, unlike other fintechs that lay off employees because they have declining (or no) revenue or questionable business models with no viability in sight, MX is different.
In fact different in many ways. With its historical focus on catering to the financial institutions space — as opposed to the fintech space where Plaid has dominated — MX could have the upper hand in the near term as fintech experiences a “funk” that sees VC funding drop and employee layoffs gain weight .
However, the longer term is a different story. Plaid has been actively focusing on the emerging crypto and Web3 spaces, including announcing a new service to streamline the integration of decentralized apps and self-custodial crypto wallets.
In terms of the battle for open banking dominance, as the Grateful Dead once sang, you know this space is heating up.