The Last of the Walled Gardens

In Europe, Open Banking is the latest iteration of digital transformation. But what about trends in the US? How can banks and fintechs respond to the rapidly changing landscape, and meet increasing consumer demands for ease of use and interoperability while maintaining security? Listen to this discussion with Nick Thomas, co-founder and President of Finicity, to hear how the digital revolution is playing out in finance.


Nick Thomas is the co-founder, President and CTO of Finicity and the Co-Founder and Director of the Financial Data Exchange. Previously, he served as the Chief Information Officer at Unicity International, and also co-founded Mvelopes and Bluetooth SIG. He also worked in engineering and program management leadership roles in industry-leading companies such as 3Com, USRobotics and Megahertz.

Eric: 00:02 Welcome to The Finance Frontier. I’m your host, Eric Hathaway. We’ve just completed our miniseries on financial inclusion, and today we’re going to be speaking with Nick Thomas about digital transformation in financial services. Nick Thomas is the co-founder, President and CEO of Finicity, and the co-founder and director of the Financial Data Exchange.

Eric: 00:25 Previously he served as the Chief Information Officer at Unicity International, and also co-founded Mvelopes and Bluetooth SIG. He also worked in engineering and program management leadership roles in industry-leading companies such as 3Com, U.S. Robotics and Megahertz.

Eric: 00:44 Thanks for joining us, Nick, and really looking forward to today’s conversation.

Nick: 00:48 Yeah, thanks, Eric. It’s a pleasure to join you today.

Eric: 00:51 I wanted to talk with you a little bit today about your concept of digital transformation. That’s a big term, obviously. There’s digital transformation that’s been going on for years, but in this space, what does it mean to you, Finicity, and why the explosion in this space that you guys have taken out there?

Nick: 01:13 You know, obviously digital transformation is a big term, and there’s a lot of aspects to digital transformation. If you think about the world of lending specifically and the process that consumers have had to follow to fax, upload, email or just deliver in a box their financial data to a potential lender, the fact is that finally, after 19 years of data aggregation, consumer permission data aggregation, being in the market, that it’s being used to basically speed up or enhance both the experience for the consumer, the time it takes to underwrite, and also the ability for the lender to be able to look at that data with a little more scrutiny.

Nick: 02:11 What Finicity is doing in terms of digital transformation is simply digitizing the data that has already been used for decades in the underwriting process, and doing so with the explicit permission of the consumer digitally, through the permissions of their account data to be used by the lender. It’s important to note that data aggregation is not alternative data. This is the same data that consumers have been providing to the lender for decades, it’s just in a digital form, and it’s just much better. It’s faster, it’s easier, and a whole lot less friction for the consumer.

Eric: 02:51 How does that change the back end for the financial institution? Because financial institutions, you know, especially in sort of the secured lending space, have had a process now for ages, and it’s very paper-heavily-based obviously, but curious as to how you guys are working with the financial institutions in changing that process, because they’re using a lot of external systems to process all of that work and paper. Is it a simple process, or is it something that you’re going to have to have the banks change before this takes off, or is it something they can integrate very quickly?

Nick: 03:25 It’s a great question. Banks have had their underwriting models, and those underwriting models have evolved over the last 20 years as well. The process of getting the data into the underwriting model is what’s really being transformed. In the past, where you’ve faxed, emailed, uploaded your PDF statements, there’s been people in the middle who have taken that data and put that into the underwriting system.

Nick: 03:56 What we’re doing is helping financial institutions streamline the ingestion of the data so that their existing models can work, and also helping them to enhance their models to be able to utilize this data in a more efficient way. It’s not that things are fundamentally changing in how they’re underwriting, it’s just making more efficient the delivery of that data into their underwriting models.

Eric: 04:22 Okay, that makes sense. Digitizing that data, great. Now I’m the consumer, I’m walking in. Why is it important that I have the permission base for that data?

Nick: 04:35 Yeah, totally, and a good example is I was speaking at a conference and brought some statements. The last time that I did a loan, I did a refi on my house, and I had to upload my documents. The process of logging in to your bank, going to the statement page, downloading a PDF, putting it in an email and sending it to the lender, or uploading it to the lender site, think about it. This is the exact same thing, but just delivered via an API.

Nick: 05:16 A consumer is still logging in to get their statement, because they’re logging in through the Finicity platform in this case, and then the data is being delivered through an API digitally to the lender. It’s still permissioning, it’s just that we’re talking about the consumer permissioning the data to flow in this particular manner versus the friction of download and then upload, or download and fax, or print and fax, or download and email.

Eric: 05:55 What about the security side of things? Is there an increase in security risk?

Nick: 06:00 Yeah, and this is actually a really cool space that’s being innovated today. I’m not sure if you’ve heard of the Financial Data Exchange, and the objective of FDX is to standardize the security APIs and user experience associated with the permissioning of that data directly from the bank to the places where the consumer wants it to go. One of the aspects there is moving away from credentialed aggregation to tokenized aggregation.

Nick: 06:36 Rather than giving the aggregator your credential and they operate on your behalf, the aggregator or the application that you’re engaging with will be granted a token by the financial institution based upon the scope of rights that you permission. Not only is there a permissioning of the data to flow, but there’s also an explicit grant saying that this is what you can use it for.

Eric: 07:08 That leads me into the question of regulation. I mean, everybody, the globe has talked about open banking, and obviously with some of the U.S. regulations, it’s been a tough concept for regulators to address. Is this the challenge? Is this the next step?

Nick: 07:26 When we went about really evangelizing the idea of the Financial Data Exchange, one of the first steps was with the regulators, and having conversations with them about how they would like to see the market evolve, because you have other models being done in other countries, where regulators are basically leading the charge for what this digital transformation should look like.

Nick: 07:55 All the way back in 2016 when Richard Cordray gave a keynote speech at Money20/20, the CFPB at the time, his speech and then subsequent writings by the CFPB … not regulation, but just opinions … they really reinforced the importance of consumer permission data. They reinforced the importance that the consumer has a right to that data, and they recommended that the industry get together and solve the problem. That happened in multiple, multiple cases and multiple statements from the CFPB.

Nick: 08:36 Then the Treasury report that just came out a few months ago, they reinforced the same thing. They said, “Hey, listen, industry should get together and solve for this,” and so the Financial Data Exchange really is the culmination of recommendations from regulators as well as kind of this homegrown, bottoms-up partnership between fintech and financial institutions to really enable a brand-new ecosystem, that globally it’s being called open banking.

Nick: 09:10 It’s fully blessed by the regulators, at least from a statement perspective and an opinion perspective, and we’re seeing the buy-in from, you know, top financial institutions globally around the desire to standardize that experience for consumers.

Eric: 09:38 You know, an interesting space that opens up in that conversation is, as we’ve seen a move to a more digital bank, you know, competing with some of these larger financial institutions now, is it going to be easier for these new digital banks to integrate with this kind of technology?

Nick: 10:00 That’s hard to answer, but let me give you from my best guess, is that the Open Financial Exchange, the OFX spec, has been in market now for 20 years. There are over 7,000 financial institutions who have implemented some form of OFX already, and so the data of your bank account has been available to consumers in products like Quicken and QuickBooks for decades, literally. The systems, the data flow and the availability of that data, has already been baked into the existing tech stacks of most financial institutions and most platforms.

Nick: 10:46 The tuning and tweaking and modernization of that data flow under the FDX spec is the exercise that these banks have to go through, and so my guess is that the implementation is not going to be nearly as difficult as something brand-new. Whether you’re a digital bank or an existing bank, existing banks have already been enabling consumers to get their data digitally for decades.

Eric: 11:17 Yeah, and I guess the reason, or where that question comes from, is when we look at sort of the current move of fintechs, and if you open it up to a global perspective, there’s this debate of equaling the playing field, both from a regulatory perspective as well as a technology perspective. Even myself, I am considered, I believe, an old man from my children’s point of view, but you know, mid 50s, and I’m finding the ease of use of some of the new I guess digitalization of accounts and access to be something that as a consumer, I’m moving to very quickly.

Eric: 11:59 In the competitive space of smaller banks or digital banks now and the big ones, I’m just curious to see where this is going to go over the next 10 years and with these types of technologies, if they aggregate these into their systems quicker and smoother than do the larger financial institutions.

Nick: 12:18 Yeah. I think it’s more about a mindset than it is about the technology. I’ve been talking about the open financial web for several years, and if you think about it, banks are kind of one of the last walled gardens in our ecosystem. Financial institutions who take the position that they are trying to earn a higher share of your business, they want to be everything to the consumer. They create the walled garden where it’s hard to engage with products and services on the outside. That to me is the walled-garden approach, and I think that that philosophy is going to lose.

Nick: 13:12 I think that the philosophy that’s going to win is financial institutions who think of themselves as maybe the core of an ecosystem, and that they are enabling their customers to be able to engage in all kind of products and services, some of which they own and some of which they operate. If they think about their customer experience inside of Xero, for example, or QuickBooks, and they extend their thinking to say, “I don’t care where my customer is, I want them to have a great experience with my bank,” and so those that think of themselves as the core of an ecosystem versus a walled garden are going to be those that win, and it’s going to be more about the philosophy of the bank than truly the tech of the bank.

Eric: 14:06 Yeah, I completely agree with that. Currently you’re addressing the digitization of financial statements that haven’t been thus far, so it’s not new data. What’s the next step for Finicity in sort of driving that digitization, that user permission data, to address the next level of information?

Nick: 14:30 Yeah, so we’ve announced a couple of new products in the markets, in partnership with FICO and Experian in the last couple months. We announced the UltraFICO product, and UltraFICO is a … it’s a new score, built on FICO 9, that leverages new attributes that are calculated on top of transaction data and basically account-level data.

Nick: 15:04 What the UltraFICO score does is it combines how do you manage your money. Are you spending less than you make? Are you going negative in your balances or maintaining a balance? It looks at those kind of attributes over time and says, “Okay, this person has a propensity to be a … you know, they’re spending within their means and they’re maintaining a good relationship with the FI,” and so that data, or the attributes of how you manage your checking and savings accounts, is then added to your traditional bureau data to come up with the new UltraFICO score.

Nick: 15:51 The other cool thing is that we know that 70% of Millennials are coming out of college without a credit card. They’re actually listening to their parents. They’re not taking out credit card debt. You know, unfortunately there’s a whole lot of student debt, but the revolving debt is declining with students coming out of college. As a result, they don’t have bureau data, and so the other thing that UltraFICO does is that it enables, you know, a big volume of the unscorables to be scored just off of their checking account.

Nick: 16:28 The Boost product from Experian, we are basically discovering trade lines, so looking at utilities and telco payments from the transaction data. We’re able to give the consumer credit for having paid their utilities and cell phone bill and add that to their credit history. These are two ways that we’re leveraging this data in a new way, and we’re putting the consumer in the middle of permissioning the data to in this case be written to file, if they’re paying their utility and telco payments consistently.

Eric: 17:12 Is it something to the utility bills and these checking accounts that the user is then choosing to give access to then build a score, or is this something that they’re able to reach out to and build that credit file on their own?

Nick: 17:25 The consumer will walk through the permissioning experience. They’ll log into their accounts and they’ll permission. They’ll select which account they want us to look at, and then we go in and we find these trade streams. A trade stream is really just we’re finding the utilities and telco payment history, and then that’s presented to the consumer.

Nick: 17:52 The consumer says … they approve whether that should be written into their file, and so it’s really the consumer is fully in the middle. They are explicitly permissioning, and they can remove that permission any time. It’s new because it’s not a business talking to the bureau and giving them information which you then have to challenge. This is the consumer who is giving the bureau the data, and the consumer can pull that anytime they want.

Eric: 18:31 I want to kind of wrap up. Is there anything else that sort of surrounds this? We talked about a pretty broad swath of information here from the institution, regulatory, back to the consumer. Is there anything else you’d like to add into the conversation that maybe I’ve missed?

Nick: 18:47 I think one of the areas that we see a lot of future innovation, and that you’re going to see a lot of movement in in the coming years, is the implementation of consumer data privacy and the ecosystem and products and services that will help this existing FDX-centered world to move into a more scrutinized, and more consumer control in how their data is used. We are huge proponents of the idea of self-sovereign identity and of enhancing the control of the consumer when it comes to their credentials and their data, and so I think that’s a big new area that is exciting, but that’s a huge area innovation that’s coming with enhancing the security and the control of consumer data.

Eric: 19:56 Well, thank you again very much for being with us today and taking the time.

Nick: 20:00 All right. Hey, thank you.

Eric: 20:05 We hope you’ve enjoyed this episode of The Finance Frontier. Tune in every other Wednesday for new episodes, and until next time, subscribe on your favorite podcast app. As well, since we depend on listeners like you to help us spread the word, we’d love it if you’d take the time and post a review of our podcast on iTunes. Until next time, I’m your host, Eric Hathaway.


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