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August 11, 2020updated 24 Mar 2022 6:19am

Open banking: Europe holds the world in its hands

By Robin Arnfield

UK and Europe are leading the rest of the world in the introduction of open banking services. With regulators compelling banks to open their customers’ data, third-party service providers and fintechs have been lining up to offer new services, reports Robin Arnfield 

The UK and Europe are world leaders for open banking, but consumer adoption of account information and payments initiation services is still at an early stage.

A key element of open banking involves ensuring that European third-party providers (TPPs) are able to access bank customer data in multiple countries, subject to consent and preferably in real time, via APIs based on multiple standards. Open banking API aggregators such as Mastercard, Tink, Token , TrueLayer and Yapily play an important role, connecting to banks at one end and providing TPPs with a single connection at the other.

Licensed by a National Competent Authority (NCA) under the UK’s Open Banking and the EU’s PSD2 regulations, TPPs are non-banks that offer products or services to customers using their data held at account-holding financial institutions such as banks and credit card issuers.

These TPPS can be either account information service providers (AISPs) with read-only access to customers’ account data, or payments initiation service providers (PISPs). So far, the largest use of open banking is for account information services rather than for payments initiation, indicated by the fact that 94% of licensed European and UK TPPs are registered to provide account information services.

Of the 361 TPPs registered with a European NCA including the UK’s Financial Conduct Authority in the second quarter of 2020, 168 are registered to provide only account information services, 21 are registered to provide only payment initiation services, and 172 are registered to provide account information and payments initiation services.

Use cases for this data include personal financial management and account aggregation tools, small business accounting services, savings products, and facilitating loan applications by eliminating the need to manually provide information to lenders.

To date, consumers have shown a cautious interest in sharing data. According to Vocalink research published in September 2019, 38% of UK consumer respondents were willing to share their personal data with banks or credit card companies to receive lower interest rates on loans, mortgages or credit cards, and 32% were willing to do so for account aggregation services.

As of January 2020, over one million UK consumers had connected their bank accounts to third-party open banking providers, and currently UK consumers generate around 400 million monthly successful API calls to TPPs.

Account opening

An important benefit of open banking is easier opening of new accounts by consumers by using the customer’s primary bank for ID verification, for example.

“In 2019, 56% of UK customers abandoned bank applications before they were complete,” says Neil Harris, director at UK-based fintech b.yond. “By comparison, we’re seeing dropoff rates below 20% in applications where open banking is used.”

While banks can lose revenues by facilitating applications for competing financial services from third-party providers, they can also gain by offering their customers a range of new products and by being able to sell their own products through financial marketplaces.

Spain’s CaixaBank has two approaches to open banking, says Jordi Nicolau, director of retail banking. “Firstly, with the integration of third-party services within our CaixaBankNow digital channels, we offer customers a range of non-financial benefits,” he says. “For example, for retail clients there’s a travel vertical integrating third parties such as Booking.com and a mobility offer through electric scooter-sharing service eCooltra.”

New Models

Secondly, CaixaBank has developed APIs for consulting account information and for initiating payments, which are available in the CaixaBank API Store for third parties such as fintechs.

“We see open banking as a great opportunity, and with PSD2, we see opportunities to introduce new models to improve our engagement with customers and to benefit our platform and the wider ecosystem,” says Nicolau.

Santander also offers a hub where fintechs can integrate with its APIs and a developer marketplace where it provides access to products that do not compete with its own.

Another model is for products from established players to be distributed via new platforms. For example, Berlin-based savings marketplace Raisin offers savings products from European partner banks on its portal. Customers only need to register once with Raisin in order to access multiple savings products from partner banks, while participating banks benefit by being able to raise funds from Raisin customers.

Digital-only banks such as Starling and illimity have been more willing to embrace the concept of partnerships with fintechs than incumbent banks.

At the heart of illimity

In 2019, Italian neobank illimity partnered with Santander to make Santander personal loans directly available to illimity customers through the illimity app. Products from UK insurer Aon and Swiss insurance group Helvetia are also available directly through illimity’s website.

“illimity was founded in 2018 as a result of PDS2 regulations,” says Carlo Panella, illimity’s head of direct banking and chief digital operations officer. Open banking is at the heart of its operations, providing customers with increased transparency and financial choice.

“Whilst many banks saw PSD2 as a challenge, we saw it as an advantage in working with customers, and a positive step in the evolution of the banking sector,” Panella says. “We have focused on providing customers with very simple products which are easy to understand.”

Open banking works to the advantage of both traditional banks and new entrants, Panella believes. This is because many fintechs that entered the banking sector in the last decade are unable to offer the full range of product lines or services that traditional banks can.

On the other hand, traditional banks are lumbered with old-fashioned technology that hinders them in delivering efficient open banking services to customers.

“illimity has been able to enter this space, bringing the knowledge and services of traditional players – but without legacy systems – and combining this with the stateof-the-art technology found within fintechs,” Panella says. “This is the direction in which we see the market moving.”

Starling has a marketplace where thirdparty service providers can connect to Starling’s public API and provide customers with services such as insurance, pensions, investment products, rent reporting service CreditLadder, and instant transaction notifications provider Slack.

In addition, Starling customers can connect to external AISPs and PISPs, with money management tools such as Emma and Yolt proving popular with Starling’s customer base.

“We opened up to third parties in 2017 and boast a vibrant developer community,” says Anna Mitchell, head of Starling’s Marketplace. “Open APIs are a key component in our technology infrastructure because they facilitate the development of valuable services.”

Open payments

So far, payments initiation makes up a very small portion of open banking activities. According to Celent senior banking analyst Kieran Hines, there will always be more use cases around transaction data than for payments initiation on its own.

Payments initiation, which includes bill payments, P2P transfers, funding prepaid cards and digital wallets, and e-commerce purchases, has only been possible under PSD2 in Europe since September 2019 and in the UK since 2018. “It’s still early days for payments initiation,” says Jim Wadsworth , Mastercard’s SVP of open banking.

A prime use case for payments initiation is billers emailing customers invoice payment requests. “If consumers don’t want to pay utility bills via direct debit, the biller can embed a URL in their bill,” Wadsworth adds.

Lower transaction-acceptance fees are an important benefit for e-merchants from adding payments initiation buttons to their checkout pages. But a key barrier to adoption by consumers is the lack of governance schemes offering purchasing protections similar to those provided by cards. Banks are also subject to third-party risks with payments initiation.

“PSD2 provides a certain amount of customer protection, such as Article 73, but there’s no governance scheme as such,” James Black, partner at UK-based law firm Hogan Lovells International , says.

“Transactions made via PISPs benefit from the same fraud protections as transactions made directly through your bank. This means that the bank is responsible for refunding the user if a transaction is made incorrectly or was unauthorised. And, if the bank can show the PISP was at fault, it has a statutory right to recover the loss from that PISP, but there’s no chargeback-style scheme to route liability away from the account-holding bank.”

Under open banking regulations, banks must respond to third-party requests to initiate a payment or to provide transactions data. “If something goes wrong in a payment transaction, such as purchases not being delivered or data being misused, the bank has to make the customer good,” says Wadsworth. “The bank is taking on the risk of a third party with whom it has no relationship.”

Mastercard and Visa

Though open payments threaten to cannibalise card payments, Mastercard and Visa are keen to play a role in developing open banking ecosystems. They plan to leverage and monetise their governance frameworks, relationships with banks, and dispute resolution mechanisms.

“Visa and Mastercard will play a key role in the development of open payments,” says Aite Group senior analyst Ron van Wezel. “Both have a strategy to develop ‘multi-rail’ payment networks. They are well positioned given their established bank relationships and experience in retail payment networks.”

In January 2020, Visa acquired US financial data aggregator Plaid, having invested in UK-based open banking API vendor TrueLayer in 2019. Mastercard has bought US financial data aggregator Finicity , after investing in 2019 in UK-based regtech Konsentus and partnering with UK-based open banking API vendor Token.io .

“We see open banking as an important evolution in financial services,” Wadsworth says. “Open banking-style access will become the typical way in which consumers and businesses interact with their money.”

In June 2019, Mastercard launched an Open Banking Solutions platform which acts as an intermediary service provider to third parties. “Mastercard developed its open banking solutions, as many of our major customers asked us for help,” says Wadsworth. “In Europe, implementing open banking means having to connect to many different bank APIs, as there are multiple standards and different bank implementations of standards. Third parties can connect directly if they wish, but most chose to use an aggregator such as Mastercard Open Banking Connect to provide connectivity to bank APIs.”

Token.io provides the bank API connectivity layer for Mastercard’s Open Banking Connect hub, which offers AISPs and PISPs a single, universal connection to European banks’ open banking interfaces. The Mastercard platform also offers disputeresolution and fraud-prevention tools. When banks receive account information or transaction initiation requests from third parties, Mastercard’s partner Konsentus verifies that these entities are PSD2compliant.

Wadsworth says Open Banking Protect allows banks to make real-time validations. “They can ask: is the third party asking for access correctly regulated? Does it have the permission to provide this service that it’s asserting the right to do? If the bank then determines that the third parties aren’t who they say they are, they have the right to deny the transaction.”

Mastercard also has a service called Open Banking Resolve for dispute resolution through a set of rules and protocols that participants in open banking agree to.

“If I buy an air ticket using open banking and the airline has a problem, given the way European open banking regulations work, I have no come-back unless my bank feels obligated to make me good,” Wadsworth says. “We think that this is an impediment to the long-term success of open banking payments, and that we need more structured disputeresolution capability to help resolve this.”

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