Open banking explained for fintechs.

Open banking is creating exciting opportunities for fintechs to improve customer experiences and streamline outdated processes in the banking sector. The scale of this opportunity is clear — revenues in the global open banking sector are expected to top $128 billion by 2030, up from $16.1 billion in 2021. Much of this growth is being driven by disruptive fintech companies that are shaking up the sector.

As a fintech, whether you’re struggling to convert customers with existing payment systems or looking for a trusted solution to bypass a complex process, open banking gives you access to a network of regulated banks — and all it takes is a few lines of code.

To understand the benefits of open banking, let’s look at some of the underlying concepts, from key motivations behind the latest legislation to opportunities for third-party providers (TPPs) and why fintech companies are so excited about this banking innovation.

Open banking enables API-based connections between banks/account providers and TPPs, with the goal of boosting security, innovation and competition across the European banking sector. It is also hoped that this will give end-customers control and transparency over who can access their financial information and how they intend to use it.

After reviewing the concentration of power by big European banks and exploring new ways to encourage innovation, the European Commission enacted the Second Payment Services Directive (PSD2) in 2018.

Under PSD2, all regulated European banks are required to provide the option for customers to share their financial data with other authorized providers. While large banks were reluctant to hand over valuable customer information, PSD2 has pulled control away from the legacy banks and helped smaller providers to harness the power of data and fuel innovation for the benefit of end customers.

Open banking providers have embraced PSD2 to access customer data from multiple banks and provide account-to-account payments through a single protocol. This is helping TPPs to build highly accessible and user-friendly services, without facing the same barriers to entry that previously stifled banking innovation. Instead of striking individual agreements with every bank in Europe, TPPs can use open banking providers as a central node between banks, fintechs and end-consumers.

In short, yes. Improving the security of digital banking data was one of the primary goals of Europe’s open banking reforms.

Under PSD2, regulated banks can only share information or initiate payments with providers that are licensed by an EU member state. While there are strict security requirements for winning an open banking license, the process is much less onerous than for a full banking license. TPPs need to invest in reliable infrastructure and follow data privacy laws, but they can also be much more flexible and innovative than banks.

Under the umbrella of open banking there are a broad range of services that come under two main categories.

• Bank data (Account information). TPPs can securely retrieve account details, opening the door to a host of value-added features for customers, such as sharing financial information with a bespoke mortgage broker online or managing multiple bank accounts through a dedicated dashboard.

• Bank payments (Payment initiation). Open banking allows users to pay directly from their bank account, meaning TPPs can process payments to anyone with an approved account. Instead of complicating the customer conversion process with account creation and asking for bank details, open banking payments allow a seamless onboarding experience.

All of these services can be accessed through a single API, making integration straightforward.

In 2019, the EU introduced Strong Customer Authentication (SCA) to enhance authentication processes and pave the way for secure innovations in the open banking space.

Following this regulation, the main mechanism used to make bank account data available to TPPs is through APIs (application program interfaces). An API is a way for computers to communicate in a standardized manner. Just as ecommerce sites use APIs to share shipping information with couriers and streaming services like Netflix use APIs to distribute content through approved devices, TPPs can harness APIs to seamlessly retrieve information from banks with end-to-end encryption.

This is where open banking platform providers such as Klarna Kosma come into play. By providing access to thousands of banks through one API, as well as a suite of other open banking services, TPPs benefit from a much lower barrier to entry, helping them to build new value propositions while minimizing regulatory obligations and reducing legal overheads.

We believe open banking will revolutionize how TPPs and established banking networks share customer financial information.

As PSD2 helps fintechs bring new business models, exciting features and value-added services to market, the opportunity to break down barriers and connect with millions of customers is significant. Optimizing the connection between financial stakeholders and refining legislation around open banking will further influence the future of finance and empower TPPs to embrace innovation.

The next steps will see these principles extend beyond banking to the creation of open standards for finance, data, and digital identity. This will introduce a wave of innovation to sectors such as telecoms, utilities, pensions, investments, and much more.

Kosma is involved in all these future streams and we’re excited to lead the change in building a highly- connected financial ecosystem that fuels innovation and empowers smaller financial institutions. Kosma connects TPPs with the largest number of banks in Europe with a single API and just a few lines of code.