WTF is data aggregation?

This is part one of a three-part series on data aggregation sponsored by MX. MX enables financial institutions and fintech providers to grow faster, reduce costs, and deliver exceptional customer experience. Founded in 2010, MX is one of the fastest-growing fintech providers, partnering with more than 1,800 financial institutions and 43 of the top 50 digital banking providers. Learn more about MX here. What is data aggregation? For banks, fintech firms, and other financial institutions to get a full view of customers’ financial data, they need access to their accounts. This is where data aggregation companies step in. Data aggregators provide fintech firms with APIs, enabling their customers to hand over their information by seamlessly signing into their accounts. Aggregated information can include bank accounts, credit cards, and brokerage accounts. The process works like this: A fintech company establishes a relationship with a data aggregator like MX, Quovo/Plaid, Finicity, Yodlee/Envestnet, ByAllAccounts, or CashEdge/Fiserv. The fintech firm connects to a data aggregator's API.  Now, when the financial technology company gets a new customer to sign up, they sign into their bank accounts, right on the platform. Their aggregated financial data is shared with the fintech firm. The market is heating up for these services and more investment dollars are flowing to the space. In late 2018, Plaid acquired Quovo. Why don’t fintechs connect directly to bank APIs? It is very difficult, expensive, and timely to connect to customer accounts in every financial institution they do business. It is more cost- and time effective for financial technology companies to pay data aggregators to do it for them. Providers aggregate as many institutions as possible using a variety of methods, allowing fintech firms to instantly connect to customer accounts.

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  Who uses data aggregation and why?

• Lenders: Traditional lenders use an applicant’s credit scores to make lending decisions. Many times the applicant’s credit scores are low or unavailable for reasons not related to his creditworthiness. Alternative lenders like Fundbox, OnDeck, and BlueVine pay less attention to credit scores, and instead focus on cash flows. This information is accessed by connecting to customer bank accounts via data aggregator providers.
• Personal Finance Managers (PFMs): If a personal financial manager (PFM) knows what a client’s spending habits, it can give more personalized advice. PFMs like MoneyLion, Geezeo, and Mint are able to see these spending habits -- right from the source. Additionally, if a PFM is being utilized by a bank, they can view their customer’s external financial accounts, and try convincing them to switch to their services by making custom, targeted offers.
• Global currency transfer companies: To make sure a ACH debit doesn’t bounce, traditional global currency transfer companies typically need to wait three days for a customer’s funds to hit her account. Some companies like TransferWise, Remitly, and WorldRemit use data aggregation to check a customer’s account balance, enabling faster transfer times.

How do DA companies aggregate data? Data aggregation providers access bank data differently, with varying levels of security.

• Screen scraping: This is a crude method of accessing bank data. An aggregator creates a computer script which acts like a human, logging into a customer’s account with her username and password. Once inside, the script accesses relevant customer data and sends it back to the aggregator for processing.
• API access: APIs, or application programming interfaces, are the hooks and software used by programmers to build applications that connect to other firms’ technology. Data aggregators can access these APIs in a variety of ways:
  • Some banks use an internal API to power their website and customer experience. The aggregator can access customer bank accounts by connection to this API.
  • Either the bank allows open access to its API or the aggregator has an established relationship with the bank which allows dedicated and direct access for their users. This is the preferred way, as access is mostly guaranteed and the connection is more secure.

Are there different types of data aggregation providers? Although there is overlap in what each data aggregator offers, providers tend to have a specific specialization. For example, some providers focus on investment data, others on credit decisioning, and others on early stage fintech firms. A more in depth comparison will be provided in the upcoming article in this series. How does data aggregation influence the future of fintech? In 2018, Europe enacted a regiment requiring banks to share their customers’ data when they permission it. While there isn’t a similar ruling in the US, banks everywhere are responding to consumer requests for the portability of their data. Slowly, with an eye on security, banks are opening up access to consumer data to the apps their customers are using to manage their finances. We’re in the early innings of the move to open banking. Data aggregation is the backbone of open banking because it requires specialization to aggregate data at scale. If open banking creates an ecosystem of banks and fintech firms working together to provide customers better access to their information, data aggregation is the circulatory system, providing connections and movement of data throughout the financial organism.