The move towards Open Banking is ripe and growing at an exponential speed. Regulations, the market, and customer demand for new services are forcing a new way of thinking in financial services.
Open Banking adoption has been further accelerated by the pandemic and is likely to enable the creation of Open Finance, as it starts redefining customer interaction with the financial system and who owns and manages financial products and services.
The surge in third party providers (TPPs) in number in Europe is a clear indicator of Open Banking spreading like wildfire. From around 100, TPP numbers grew to more than 450 in Europe, in less than two years. Also, they are aiming beyond payments, looking to encapsulate the entire array of financial business models.
New analysis from Accenture, built on data sets covering 20 of the largest economies responsible for over 75% of global GDP worldwide suggests that as much as USD 416 billion in revenue will be at stake as the open data wave arrives. This revenue is likely to be captured or defended by agile players who recognise the opportunity early.
Open Banking brought along torrents of disruption. It made traditional financial institutions face the threat it brought to outdated business models. New technology comes with a competitive edge over incumbents. According to Harvard Business Review, disruptive innovations happen in markets that are overlooked by incumbents.
It`s all about disruption
As shown by Clayton Christensen’s research on disruptive innovation, disruption describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.
How is this apply to Open Banking? Take a look below.
Making way for new blood
Open Banking turned out to be quite disruptive to multiple industries at the same time. Nowadays we have PSD2 and Open Banking that regulates opening up via APIs (vs screen scraping). This means that with the customer’s permission, TPPs can access data via this API, without the need for screen scraping. The new wave of financial services products we’re seeing is underpinned by data aggregation and the categorisation of all transactions within it, whereby fintech firms are granted access to transactional data across their users’ bank accounts in order to broaden the scope of their digital offering. Until recently, screen scraping has been the primary method of assembling this data. Although, screen scraping has undoubtedly delivered a valuable service to many, the possibilities now available through Open Banking are truly game changing.
The growing Open Banking ecosystem led to key investments and acquisitions in this space. Why? 1. incumbents businesses need to protect themselves against innovators 2. The Open Banking players are moving from the early adopters to the more mainstream parts of the ecosystem, with investors choosing mature companies over early-stage deals to put their money in. This demonstrates a healthy appetite for the topic.
Payments - the preferred destination for investors
Covid-19 has no doubt brought about some unique challenges to the investment space. However, as a result of the resilient nature of the fintech sector and growing optimism surrounding fintech, M&A and investment activity recovered relatively quickly for specific sectors, such as the payments space. For instance, KPMG revealed that global fintech investment continued its rebound in the first half of 2021, rising from USD 87 billion in H2 2020 to USD 98 billion in H1 2021. Notably, fintech deal volume hit a new record of 2,456 deals during H1 2021.
In Europe, in particular, the fintech scene has experienced enormous growth over recent years, with EUR 10.4 billion already having been raised in the first quarter of 2021.
The payments space will continue to be a big focus for investors around the world. Open banking, in particular, will drive increasingly integrated payments solutions. It’s currently mandated or regulated in a number of jurisdictions, but we’re going to start to see it make its way across in many other regions, which will further support and facilitate Banking-as-a-Service platforms.
While we have traditional card networks, like Visa and Mastercard, whose retail payments approach will support their steady growth, there are also alternatives, such as account-to-account (A2A) payments which will turn into an increasingly useful (and used) payment method in time. Over the last months, we have heard top Open Banking platforms (Plaid, TrueLayer, Tink, which have now begun branching into the payments space and are set to undercut cards) become increasingly vocal about their opportunity to begin gaining some degree of share vs. the traditional payments over time.
We see investments pouring especially for successful players that achieved dominant positions in their fields. This growing trend is highlighted by capital raises for Yapily (USD 51m in Series B funding), GoCardless (USD 95 mln funding round), TrueLayer (USD 70 mln Series D), Tink (EUR 85 mln investment), Token (USD 15 mln in Series B funding).
By making payments capability and functionality better, more verticals will become attracted by Open Banking and the light shone by digital-first TPPs will reach the far-reaching side of commerce.
The second part of the article covers A2A payments, how the payments industry is changing, and how Mastercard and Visa are diving into Open Banking.
About Oana Ifrim
Oana Ifrim is a Lead Editor at The Paypers. Her research, industry engagement, and content-related activities revolve around Banking & Fintech innovation, Open Banking, Open Finance, B2B fintech. Oana is involved in diverse tasks ranging from content editing, planning & carrying interviews with key experts, representing The Paypers at various banking & fintech events to content research & production and strategic planning and coordination for large-scale, industry-specific research, reports, and projects. She can be reached out at oana@thepaypers.com or on LinkedIn.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now