How investments are shaping Europe's market for open banking

Investments in open-banking fintechs have accelerated recently, as many European banks are struggling to implement PSD2-compliant open banking APIs to meet the EU’s September 2019 deadline.

PSD2 — the revised Payment Services Directive — is expected to transform Europe’s payments industry, as it will facilitate new bank account-based payments previously the domain of credit cards such as installment loans, recurring payments, and embedded access to bank account transfers from e-commerce apps such as Amazon or Uber. It will build on the European Payments Council’s SEPA Instant Payments, a bank-to-bank Pan-European instant payments scheme launched in 2017.

The beneficiaries of this trend include open banking API provider TrueLayer, which raised $35 million in a round led by China’s Tencent and Singapore-based Temasek; as well as U.K.-based Yapily, which raised $5.4 million from HV Holtzbrinck Ventures and LocalGlobe. Token won $16.5 million from investors such as Opera Tech Ventures, BNP Paribas’ venture arm, and Sweden’s EQT Ventures. Konsentus, which provides real-time PSD2-compliance checks of European open payment service providers, closed a multimillion-pound Pre-Series A round led by Mastercard in June, and joined Mastercard’s Start Path program.

In June, PayPal invested €10 million in Sweden’s Tink, which will provide APIs enabling PayPal customers to connect their bank accounts to PayPal wallets. In February, Tink raised €56 million from investors including Nordea and ABN Amro’s VC arms.

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The EU’s PSD2 regulations create new service providers known as trusted third parties — payment initiation service providers (PISPs) and account information service providers (AISPs) — and require banks to allow customers to share their transaction data with these companies, typically via APIs. These same APIs can be used to initiate consent-based payments from customers’ bank accounts, for example for paying bills, transferring funds to e-money accounts, or shopping.

“We believe the whole financial services industry is being massively disrupted, both at the consumer level and on the rails that the banks run on themselves,” said Alistair Mitchell, a partner at Token investor EQT Ventures. “In a gold rush, you invest in picks and shovels, and this is what Token is. Open banking will enable consumers to have frictionless payments experiences, for example being able to use PayPal to transfer e-money directly to their bank in an e-commerce app.”

PSD2 will make it easier to move money between customers’ own accounts at different banks and between different apps or wallets, since open banking APIs will be embedded in third-party apps. Consumers making payments or moving money won’t have to leave the app they are using and manually log into their bank account.

“PSD2 will pose a threat to the card payments networks, as it will be much easier to use your mobile banking app to pay for purchases than your credit card,” said Francesco Simoneschi, TrueLayer’s CEO. “Approving payments on smartphones will be seamless if you log into your banking app with Face ID or Touch ID.” From September 2019, under PSD2, the EU will require two-factor authentication for online payments from cards or bank accounts.

Mitchell said Token is building a trusted API platform to interconnect banks across Europe. In February, Mastercard contracted Token to establish the connectivity layer linking merchants, retailers and other regulated third parties to European banks via the Mastercard open banking hub. This hub provides a Pan-European directory of third-party providers to help banks ensure that companies seeking access to customers’ accounts are legitimate.

Token provides APIs for both banks and merchants. “Our vision is to make bank payments as easy as card payments,” said Todd Clyde, Token’s COO. “We provide open banking APIs to 4,000 European banks, including premium APIs enabling them to offer more sophisticated payments. We also provide third parties such as merchants with a single-use API aggregating access to all the banks’ open banking APIs. When you serve software to both sides, you can offer more elaborate payments such as variable recurring payments or future-dated payments that can’t be done via simple banking APIs.”

Companies using open banking APIs include U.K. challenger bank Tandem, which is using Token’s platform; and Revolut, which partnered with TrueLayer to enable open banking-based fintech services such as money management apps to access Revolut customers’ e-money accounts. TrueLayer also includes U.K. challenger banks Monzo and Starling as clients.

“We’ve worked closely with Yapily,” said Carlos Gonzalez-Cadenas, COO of Yapily client GoCardless, which provides technology for businesses wanting to let customers pay via recurring bank payments. “Our goal is to fix a broken payment landscape by offering a frictionless service for our end customers and, with Yapily’s developer tools, we’ve been able to get closer to that quickly.”

Yapily is connected via API to 35 of the biggest banks in Europe for data retrieval and payments initiation, equating to 250 million bank accounts. By the end of 2019, Yapily expects to have connected to 536 European banks, said Yapily CEO Stefano Vaccino.

“Because of the requirement for Open Banking, connecting to banks' APIs directly would have required a vast amount of time and resources,” said Tim Mak, COO of Yapily client Zeux, which provides a banking, investing and payments app. “Traditionally, this would have been the only way to maintain proprietary user flows, own our own data, and stay in control.”