In the United States, consumers have a lot of options when it comes to choosing a primary place to bank. 11,312 options in fact: 5,670 FDIC-insured institutions and another 5,642 NCUA-insured credit unions. In theory, this expansive array should create lots of consumer choice. But in practice, the United States’ banking landscape creates not only choice but also challenges when it comes to ensuring financial technology support for every American.
That’s because with the rise of fintech, no longer is a bank just a bank. It serves as the hub of the consumer’s financial life, which for the most part still revolves around the checking account. That means financial technology must revolve around the checking account, too—because products and services are largely powered by the data within that hub. It’s this data that developers transform into actionable advice, faster payments, and better loan offerings. Put simply, financial technology depends on data portability, or the ability to connect and share data with that checking account.
And 11,312 is far too many institutions for a startup developer to try to support on his or her own. Think about it: This would require a developer to build unique integrations with every single institution—and maintain them, even as the underlying infrastructure changes. (And to be clear, they change frequently. In addition to routine technical updates, the landscape of banking is rapidly shifting. From 1984 to 2011, more than 10,000 banks left the industry, the result of consolidations or failures.) A developer might never get his or her robo-advisor or PFM or new application off the ground if a prerequisite was to build custom integrations with every institution with which its customers banked.
That’s why neutral, third-party trusted intermediaries have become so important in the United States. Trusted intermediaries like Plaid ensure that it’s possible for every app to serve every consumer, regardless of where they bank, because they take on that infrastructure burden on the ecosystem’s behalf. So while the United States’ banking landscape is changing fast, this means financial infrastructure must keep pace, too.
The fact is, the landscape has been disproportionately reshaped by the exits of smaller institutions, which has left more concentration at the top than ever. For example, now the top 200 banks and credit unions comprise about 70 percent of all U.S. depository accounts. These top banks tend to be better resourced and able to plow funds into technology infrastructure that supports third-party applications (or even applications of their own). It would be easy, then, to build solutions that favor the biggest banks and credit unions—that’s where the majority of accounts are, and in most cases where better technical resources exist. But that wouldn’t be inclusive. We’ve already seen that certain institutions are more equipped to create bilateral data access agreements, or provide prescriptive measures for how access for consumers is furnished. But that approach, if allowed to proliferate, threatens to leave out broad sections of the population, many of whom might benefit from alternative financial technologies most. After all, consumer choice is a powerful driver of empowerment. The ability for consumers to choose to bank with their rural credit union, for example, and to shop advisory tools is a critical right.
After all, the diversity of financial institutions drives the types of open banking initiatives and other data access efforts that could reasonably take root here. It wouldn’t work, for example, to force an overly prescriptive set of standards on the wide-ranging banking system in the United States. To be sure, the United States is effectively the birthplace of fintech precisely because of its support for data portability with trusted intermediaries, which supply the right tool for the job. And it stands in stark contrast to the dynamics in many foreign countries. Japan, for example, has just ~170 banks, while the U.K. has fewer than 1,500. Each, like the U.S., is complex in their own right, but there is no silver bullet that fits them all.