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 had spent 18 years, most recently as Senior Vice President, Omni Payments Solutions—at the end of July, getting out a couple of month before the payments company released a policy update in October that said users would have to pay up to $2,500 in damages for spreading misinformation.
That announcement—which the company later rescinded—sparked a 1,400% increase in searches for “delete PayPal,” and an immeasurable loss in customer accounts and payment volume.
Magats might have jumped from the frying pan, but he may very well have landed in the fire, nonetheless. The financial data space—sometimes referred to as “open banking”—is a highly competitive arena, with regulatory developments concerning the use of data always nipping at financial institutions’ ankles.
The fire got turned up a bit in October when MX announced it had “made the difficult decision to reduce the size of our team and reorganize the company to better deliver on our mission.”
Interview with Jim Magats, CEO of MX
Not long after joining MX, Magats recruited two PayPal colleagues to join him, naming 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 dominance in the banking data space? To answer that, I sat down with Magats at MX’s recent Money Experience Summit. Here are some excerpts from that conversation:
Q. What do you see as the opportunities in the financial data space?
Magats: The challenge that we face today is data has been siloed, unusable, and kept at arm’s length from the people who actually need it. If we are able to properly serve customers from the end customer perspective, data will be the key to unlock that.
Q. It seems to me that the challenge is in the insights and experience, not the connectivity and the data.
Magats: Yeah. Data by itself is useless unless you are able to take some action on it, At PayPal we had 50 petabytes of transaction data [but that] data wasn’t actionable. When I say MX is a data company, it’s in the realm of how do you take data and generate actionable insights and create great experience on top of it.
Q. How would you grade MX in terms of its capabilities around connectivity, insights, and creating experiences.
Magats: My evaluation six weeks into the job is that it is a very strong experience company in terms of the mobile banking capabilities. I’d say the data piece in terms of cleansing, categorization, very strong. I say the connectivity piece is something that we have work to do on.
And I think we have a relatively competitive product. Give us another year, year and a half, I think we’re going to have a robust connectivity solution. If you play this forward, what we’re trying to do is to change the ecosystem from what has been a screen scraping environment, which is very taxing on financial institutions. There’s security risk associated with it. We are helping the ecosystem get data in a much more permissible scalable manner through OAuth or tokenized connections.
And in doing so, we create the reservoir of data in a manner that you can then add insights and experience on top of it. So it’s really important for us to think about that as a base level of service. We believe that if we can move the industry along to do it in the right way, the experience piece can be better and done with greater efficiency.
Q. You’ve described a big vision. What types of companies do you think you will need to acquire to build out that vision?
Magats: I’m not sure acquisitions will be the first step. I’ve always been a big fan of partnerships. At PayPal, a lot is done through the partnership channel. I think there is an opportunity for us to find like-minded organizations that want to innovate on the customer. There are those that are getting access to different connectivity places and those providing even greater insights on data.
Q. How do you see the infusion of PayPal execs into MX impacting the company’s culture?
Magats: I think it’s going to compliment the company’s culture. We’re all mission-driven. You would’ve thought that Wes and Nandita came 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 view it as an infusion of people that have worked at scale with great experience, with people that have a longstanding history with data and insights and connectivity. I think it’s a perfect compliment.
The Open Banking Battlefield
Magats’ assessment of MX being weakest in connectivity is more of an industry problem than just an MX issue.
An FDATA study found that consumers experience connectivity failures 40% to 50% of the time they first attempt to link their accounts to third-party sites using tools from data aggregation firms.
Three variables influence this lack of connectivity success:
- Coverage. This reflects the number of financial institutions that can be accessed with a high degree of reliability. Most aggregators connect to the biggest banks, but how many community-based institutions and investment and wealth management providers do they have?
- Connection quality. The odds that a customer trying to connect to their account will succeed at any given time depends on: 1) the depth of the data that can be accessed through the aggregator’s connections, and 2) how quick and easy the connection experience is for the end customer.
- Permission management. Lastly, connectivity is impacted 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 influenced when APIs are utilized instead of screen scraping. Aggregators will say they’re moving away from screen scraping towards APIs.
But what types of API integrations are they building? Proprietary APIs that limit the visibility and control that data suppliers have or open, interoperable APIs that balance benefits between data buyers and suppliers and provides suppliers with visibility and control over the data being shared?
Proprietary APIs benefit the narrow interests of the aggregator. Open, interoperable APIs benefit the whole ecosystem.
Separating the Wheat From the Chaff: Insights and Experiences
Connectivity is just one of three factors that will determine who will win the financial data aggregation battle—the others being insights and experiences.
The insights layer is where much of the innovation in open banking data aggregation is happening. Open banking data aggregation helps create new insights regarding consumers’ income (verification and estimation), cashflow-based credit worthiness, and financial health.
To separate themselves from the competition, data aggregators need to demonstrate that they can: 1) do something with the data collected; 2) clean and enrich the data; 3) accurately provide simple attributes like current account balance and more complex calculated attributes like total income; and 4) generate scores to evaluate the risk of default for a new loan or fraud for an ACH payment.
The current leaders in the data aggregation space vary widely on these criteria (with MX, arguably, leading the pack).
The ability to create “experiences”—e.g., subscription management or early wage access—is at the top of the data value pyramid.
Ultimately, this will evolve to be the key differentiator in the open banking space—who can best (i.e., the fastest with the best quality) create experiences (think: products and services) that their partners can monetize and use to differentiate themselves.
The Open Banking Battle
Magats may like, and have extensive experience with, the partnership model, but it’s hard to see how the company can evolve on just partnerships alone.
Creating a portfolio of insights and experiences will certainly require the major aggregators to look externally to fill their internal shortcomings and gaps, but…