Open Banking flying full speed ahead – major investments and acquisitions (Part 2)

You can read Part 1 here.

Open Banking - Mastercard and Visa`s spending spree

Over the past years, there has been a trend of consolidation in the fintech industry, with many incumbent players, such as Visa and Mastercard, engaging in a large number of acquisitions of startup companies. In Europe, specifically, the M&A market in the Open Banking space was pretty impressive in the last years. 

Modernisation of payments is happening all over the world (Europe with PSD2, UK with Open Banking, Australia with NPP, and the US with Zelle). And it is happening fast. It will take time for this change (real-time payments, moving away from payment cards, interoperability) to happen globally, however, things are looking promising.

But what is the role of card schemes here? They created the payment card rails (credit and debit) but it seems that they have missed the Open Banking bus, and are now hungry to own the Open Banking rails.

The new rails are very digital and different, with Plaid, Token, Finicity, Tink, SaltEdge, TrueLayer, Aiia, and other players powering Open Banking. Open Banking payments is a new tarmac allowing fintechs and incumbents to go at each other. Open Banking providers look to control payments in the future by providing seamless bank-to-bank transactions. This would make them a threat to traditional card rails like Mastercard and Visa.

Speaking of the latter, recently, many such large incumbents chose to acquire startups. With the fast pace of digitalisation came the high rate of acquisitions, and larger companies want to access the innovation of fintech startups. 

And now with acquisitions, Visa and Mastercard are moving here in the new-gen through acquisitions and other efforts, and they will continue to try to be relevant.

Regulations and scrutiny don’t allow established players of the financial services industry too much room for innovation. They had to improvise, deciding to acquire startups with more access to innovation. When a bigger player falls behind in provided innovative services, the easiest way to catch up is through M&As. Thus, such companies manage to level the playing field by eating up the competition.

Mastercard is an early advocate of Open Banking, by spotting the potential opportunity and aligngning with it to ride the industry growth wave. On this front, Mastercard is taking part in this revolution with all guns blazing. In 2019, Mastercard launched its first Open Banking connectivity offering in the UK and Poland through a partnership with open payments platform Token.

In 2020, it gained another major footprint in the Open Banking space with the acquisition of Finicity that connects users' bank accounts with other payment apps. Mastercard is leveraging Finicity’s existing relationships and become a one-stop partner for North America’s banking ecosystem. The implementation of Finicity’s API is aimed at enhancing user experience and offer consumers and SMEs better services provided by Mastercard. Mastercard chose to expand its Open Banking platform this way to improve its market position by leveraging the use of data. Moreover, this may bring more customers to Finicity API customers and the trustworthiness of the Mastercard brand could lead to revenue expansion. 

The company’s commitment to Open Banking continued with the buyout of the majority of Nets’ Corporate Services business in 2021. This is aimed at strengthening Mastercard’s account-to-account  payment capabilities.

Most recently, in September 2021, Mastercard has agreed to acquire Aiia (formerly known as Nordic API Gateway), the European open banking technology provider offering a direct connection to banks through a single API that claims connectivity to 2,900 European banks.

The connectivity of Aiia in Europe will enable Mastercard to deliver the credit decisioning and credit scoring applications of Finicity to European clients. Similarly, the connectivity of Finicity in the US will help deliver the account information services and payment applications of Aiia to US clients, according to Mastercard.

Visa is also taking deep plunges in the Open Banking space to cement its leadership position in the payments processing space.

In June 2020, Visa acquired Tink, which claims connectivity to 3,400 banks. For Visa, the acquisition of Tink is a move with clear strategic implications, as they seem to be acquiring whatever it needs to become a dominant player in the payment rails, futureproof their business, and invest in other infrastructures as well (instant payments, blockchain, crypto).

The fact that Visa is acquiring Tink speaks volumes of the growing competition for a dominant player in the Open Banking space, validating the relevance of the B2B tech coming out of Europe.

Visa did this smart acquisition for several reasons: to extend its Open Banking reach and diversify its revenue pool beyond credit cards, to get accustomed and friendly with Tink’s network, ecosystem, and A2A expertise, and to drive the pedal to the metal in the process of penetrating Europe’s market.

The acquisition of Tink will aid Visa in strengthening its global Open Banking platform, it will accelerate the European expansion of its Open Banking platform in key geographies and advance its position as a key Open Banking partner for fintech companies and financial institutions. 

Payments make the world go round

These acquisitions are not only a testament of the Open Banking industry going mainstream and how strategically important Open Banking is for the future of financial services, but it also cements the growth of the ecosystem and puts a focus on how hot the market actually is, while highlighting the speed at which the entire payments industry is changing.

The participation of card schemes in Open Banking is imperative to retain their position in the changing financial transaction services industry. The advancement of Open Banking can reduce the usage of cards. The movement from old to a modern Open Banking ecosystem is happening fast. Although Visa and Mastercard’s position in the traditional card segment may not be changing, the payments market as a whole is changing. If they didn’t move now, it will affect their long-term prospects. 

Incumbent, larger players will continue to want access to the new products and services which are being developed and it is no coincidence that the payments sector is the most funded sector considering the optimism surrounding how these players will revolutionise the financial services industry. Fintech startups tend to focus more on consumer-centric solutions, which proves to be more successful nowadays with newer generations and their demands and expectations. 

The fact remains that the frequency in deal-making is increasing exponentially, and this will enable other players to put their carefully planned strategies in motion. It will be no surprise when we’ll see other Open Banking providers making headlines soon. Keep a close watch on thepaypers.com for when this happens.

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.