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Since the earliest days of fintech, when PayPal was getting off the ground two decades ago, fraud has been a big, scary threat to startups—and the scale and severity of the problem have kept growing. In 2021, fraud attempts on merchants rose 140% compared with 2019, according to LexisNexis. Today Plaid, which helps fintech apps connect with consumers’ bank accounts and was valued at $13.4 billion in a fundraise last year, is announcing new features to try to help fintechs in their ongoing fraud battles.
In January 2022, Plaid paid $250 million to acquire Cognito, a nine-year-old identity verification company based in Oregon, and now it’s integrating Cognito’s main product with its own bank-account-linking feature. Plaid’s new identity verification service will use data sources like Social Security numbers, driver’s licenses and selfies to verify whether people are whom they say they are.
Here’s what this new merging of Plaid features means for consumers: If you’re signing up for a fintech app that uses Plaid for identity verification and account linking, you’ll only see a single series of questions to both verify your identity and connect your bank account, instead of being taken to a different screen to do each one. The combined steps typically take less than three minutes to complete, the company says.
Plaid claims this new setup will allow it to gain a deeper and wider view of consumers’ online behavior, which will help block bad actors from signing up for a fintech app. “Fraud is currently being solved in silos,” says Alain Meier, Cognito’s former CEO and the current head of identity at Plaid. “Companies have a system for ID verification, a system for account funding, a system for account linking. . . . But there is signal in the fringes,” he says. In other words, valuable fraud-fighting information is lost when the systems remain separate.
For its new identity verification product, the starting price will be $1.50 per identity check. Meier thinks the new service will put Plaid in competition with the growing ranks of other identity verification services, such as New York-based Alloy, which was valued at $1.35 billion valuation in a September 2021 fundraise.
Another new feature Plaid is releasing is Signal, which assesses the risks of pending bank transfers so companies can decide whether to approve a transaction. Since America’s bank-to-bank transfer network can take days to settle a transaction, fintech companies that let consumers move money faster take on substantial risk that, by the time the transaction is finalized, the sender no longer has enough money in his account to complete it. Such scenarios create failed transactions, dollar losses and operational headaches.
To assess transaction risks, Signal uses 1,000 different data points, including the history of how many times a consumer has tried to connect to a bank account. For example, “if 20 connections happened in the past four hours,” that would be a red flag that a fraudster is at work, Perret says. Plaid also has a record of past times when attempted bank-to-bank transfers failed because a consumer didn’t have enough money in his or her account and will use that data to inform Signal’s risk assessments. Meier thinks Signal will compete with other fraud-scoring services on the market, such as Orum and Sardine.
With Plaid’s Cognito acquisition and new features, it’s amassing vast troves of data, says Yanni Giannaros, the CEO of Wyre, a San Francisco startup and Plaid customer that helps consumers buy cryptocurrencies with debit and credit cards. “Plaid is becoming a data warehouse company, the new Equifax of the world,” he says. “They know how much I have in my bank account, and they could probably underwrite me in some way.” He suspects Plaid could eventually develop its own credit-scoring models to compete with the credit reporting agencies and FICO.
“That is not correct,” a Plaid spokesperson says in response. “More and more financial companies are using alternative data in their credit and lending decisioning models. Plaid helps enable that in a way that gives consumers more control over how they share their data and with whom they share it.”
Plaid’s announcements today are coming two weeks after payments giant Stripe said it’s launching “Financial Connections,” a product that does the same thing as Plaid—connect apps to bank accounts. When Stripe employee Jay Shah first tweeted the news, Perret replied that it was “surprising to see the methods” Stripe had used in launching the product, saying that Shah “took interviews with Plaid & asked probing questions multiple times over the past few years.” Two days later, Stripe president John Collison tweeted an internal email that Stripe CEO Patrick Collison had sent, which refuted Perret’s allegations. Perret later removed his tweet and wrote, “Deleted tweet. Misunderstanding or different styles perhaps. Presuming positive intent.”