Plaid Direct Deposit- Be Afraid, Be Very Afraid

You’ve probably seen the bumper stick that reads, “If you’re not outraged, you’re not paying attention.” Based on recent news I’m offering a new spin for leaders of credit unions and community banks: If you’re not terrified, you’re not paying attention.

It’s possible this headline skirted through unnoticed given the hubbub over GameStop and WallStreetBets, but last week Plaid announced it is developing an API to enable the seamless switching of direct deposit funding to a new financial institution. Not to be overly dramatic, but this should be registering a threat level on a par with December’s SolarWinds system breach. Before I get carried away, Plaid’s solution remains in beta and still has some notable gaps. However, let’s consider the implications should they execute on the promise.

As Cornerstone Advisors’ Ron Shevlin often points out, checking accounts have become “paycheck motels,” a brief parking place before funds move on to destinations like Venmo, brokerage accounts, etc. Though it’s probably not the customer relationship most banks and credit unions aspire to, there’s some comfort in retaining “primary account” status. After all, so long as a customer’s main source of income is regularly dropped into the bank, an ongoing degree of interaction was assured, at minimum.

Enter Plaid Direct Deposit, which seems designed to play the role of Airbnb by siphoning off traffic from paycheck motels. Arguably, a key reason behind the “stickiness” of these inflows has been the paper-based, labor-intensive process of unhooking and re-hooking direct deposit. Should Plaid succeed in its quest to make this exercise hassle-free, it’s easy to envision funds moving out faster- or bypassing legacy FIs altogether. Plaid is touting its service as particularly helpful for 1099 (often Gig Economy) workers, a fast-growing market segment.

Smaller institutions with limited digital offerings are most at risk of account attrition if digital-first customers opt for higher-tech solutions. If this doesn’t send shivers down the spine of Main Street credit unions and banks, I’m not sure what will.

Now that I’ve painted a dire picture, let’s consider the fine print. As noted above, Plaid’s API is still in beta, so the headlines are ahead of the reality- at least for now. Plaid will also need to coax employers and payroll processors to code to the API in order to gain traction- this can be a tall order, although early success with some Fortune 500 firms and the likes of ADP would certainly build momentum. Perhaps most telling, Plaid promises to offer a “fallback method” for end users whose employers haven’t enabled the API. This sounds like a fancy term for “manual workaround” which will likely lead to frustration for all involved (think screen scraping).

Nonetheless, it seems clear the days of direct deposit as a barrier to entry for challenger banks are drawing to a close sooner than later. Let’s be honest, however- relying on customer inconvenience to retain business is hardly a sustainable business model. While the window for action is closing, Plaid’s move serves as yet another wake up call for credit unions and community banks to up their digital game, develop compelling new offers for growing segments like gig economy workers, and convince customers they deserve to be considered a financial home rather than a motel.