In the past weeks, I’ve had numerous discussions with startup founders about open banking providers in Europe. All of them were looking for a provider but due to the increasing number of players, they were facing troubles finding the ideal Open Banking provider for their use case. And the last 12-18 months have been hectic in the space: Large funding rounds, new product offerings, expansions, partnerships and so on. This hasn’t made it any easier for founders looking for the right partner.
How do you choose an Open Banking provider?
As I recall, back in the days in 2014 when I joined the Open Banking industry, finding a provider that could deliver some kind of connectivity to relevant banks used to be a big deal. You basically just started working with the provider when you discovered them. No need to look further due to very limited choices. Now there are plenty of options, but whom should you work with?
When answering this question, I typically suggest the following plan:
- Define the banks you need to connect to
What banks do you need to connect to? What type of accounts (for example current vs. investment account)? This is your most important requirement, so pre-select providers that are able to match both these requirements. Personally, I would only take actual live connectivity in consideration and not plan (too much) with roadmap promises.
- Dive deeper into the offering
Based on the providers selected in the first step, now it would be time to dive deeper into the offering: API stability, speed of bank connectivity updates, overall tech, ease of integration, pricing and (perhaps) brand exposure. This might be already the point where you identified a clear winner.
- Expansion plans and roadmap for additional products / features
If there is no clear winner yet, then these future features and expansion plans might help to make a final choice. I would not look at these things too early in the analysis, as promises are often easily made and luckily often there are providers already suitable for your needs.
And in the future?
If you’re involved in the Open Banking industry, you know that connectivity is destined to become a commodity. As described before, I believe that connectivity is the most important factor today. However, other factors will become more important and bank connectivity coverage will lose its most important criteria. This will happen faster in regions with regulation (e.g. Europe) than in countries without regulation (e.g. US) – but I‘m certain it will happen everywhere. But when?
Last month, I started to build a list of Open Banking players in Europe to share it with my network to navigate this dynamic landscape (probably many names missing – please let me know). While I was working on this list, I wanted to include a USP or differentiating factor for each provider, so that the navigation gets easier. Realising that this was a little too early, and connectivity is still highly important, I was thinking how will the Open Banking provider space in Europe look like in the future? I concluded with the three following scenarios:
Big players will win the market
Tink, Truelayer and Yapily are the most well-funded local players here in Europe and obviously the US player Plaid has an even bigger warchest and is likely to focus more and more on Europe as well. One of the main objectives of these funding rounds is probably to expand into various countries – mostly focusing on Europe.
Of course, this is driven by demand in all countries, but an increasing number of potential customers will start requiring and expecting international coverage. Therefore, an Open Banking provider doing 1+X countries is always better than a player doing just one.
In the last few months, Tink acquired a few competitors: Instantor from Sweden, Eurobits from Spain, and OpenWorks from the UK. It will gradually become more difficult for smaller providers to compete with well-funded organisations like Tink or Truelayer. As a result, we could end up with 2 – 4 players in total in Europe that cover all countries and all use-cases.
Local players will be able to defend
Although the first scenario sounds realistic, I should emphasize that the connectivity market can be quite complicated. There’s a lot of talk about Open Banking in Europe, but not all bank accounts are truly “open”. If all types of bank accounts were available via modern APIs, then connectivity might be something to be achieved “easily” for everybody over time. However, that’s not the current state.
Overall, there are a few reasons why local players may have a chance of defending themselves against the heavily-funded competition:
- Different type of accounts are required and only payment accounts are available via PSD2 APIs
- Some countries have a large number of banks
- Some countries have a small market and are initially not that attractive
- Domestic customers might favor local providers
All these arguments are in favor of local players defending their market in one way or another. This might not work for every local provider, but it could work for some.
Use case players will win
The last scenario that I’d like to describe is one where open banking providers will segment the European open banking market, not so much by country coverage but by specialisation.
What do I mean by that? We’ve already agreed that access to bank accounts will become a commodity, but most companies don’t want to access bank accounts for the sake of it. They do it because they want to build something on top of this access. The areas for this are quite diverse, and each category might have specific needs when it comes to go above and beyond “normal” Open Banking:
- Account aggregation
For successful multi banking use-cases, providers must offer great coverage and a variety of account types. Further capabilities could include some categorisation and additional data whenever it’s available. These applications may also add merchant or partner logos to provide clear visual cues that can help users easily identify their transactions or subscriptions, e.g. a netflix logo next to that €7,99 going out each month.
In addition to categorisation, lending providers require other features that help them to score their users. This could be recognition of negative transactions (e.g. a normal bank transfer but to a debt collector), income verification or calculation of disposable income. Lending is typically an area where an Open Banking provider can charge a premium, thus, I believe we will see more companies focusing on this in the future (Credit Kudos is a good example of what this could mean).
- Contract/subscription management
These players also need to categorize transactions of their users, however, the type of transactions are very different to lending categorisation for example. Categorisation is a beautiful term, but it needs to be good in the area that matters to you. Contract management players need to recognise recurring transactions in areas such as internet, water, gas, telephone, music, video, insurance, etc. and ideally be even able to understand what type of product this is (e.g. dog or car insurance).
- SME Services
This category consists of players that offer accounting, invoicing, factoring, cash flow management, and other services. These players typically require Open Banking access for various reasons, but Open Banking for SMEs can be very different to Open Banking for consumers. Accessing the account might be (more or less) similar, however, if it goes beyond simple invoice reconciliation, then categorisation is typically very different and a lot more complicated. An Open Banking player which does not have a specific expertise in this area, might only be able to offer half the things you need.
All areas mentioned above are focused on data readout of Open Banking. If a company is planning to use Open Banking for payment initiation (account to account transfer), then the list of additional features besides pure connectivity will be very different. If the company is in the e-commerce sector then an easy refund solution might be important, or if the company is planning to offer an internal account transfer with payment initiation then it might be confirmation of payee.
As you have seen before, Open Banking solutions are today already in various different areas and this will increase over time even more. Today, you can already spot some Open Banking players that focus on one or two different verticals and are increasing their product offering and company brand in that specific area. This might enable them to fight against other (well funded) competitors.
So, which one of these scenarios is the most likely? If I had to guess, I would take the easy route and say “a mix of all three”, mostly depending on the exact timeline.
I think it’s fairly obvious that the well-financed players will have a strong advantage and win numerous deals based on pricing and coverage. This might push the smaller ones into certain countries (that are less attractive for the big ones) and or towards a certain use-case. If they can find services and solutions that customers in that segment require and other Open Banking competitors will not easily copy, then this might work.
What do you think?