Sep 3, 20205 min read

Decoding the jargon: Open Banking explained for FinTechs.

Elias Pitsavos

by Elias Pitsavos

Cutting-edge technologies and new regulations create exciting opportunities for the banking sector to enhance customer experiences, and streamline outdated processes. So much so, that the global Open Banking market is set to exceed $43 billion by 2026. A large chunk of this is attributed to smart financial services offered by FinTech companies targeting consumers or businesses.

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 with a few lines of code.

To unlock the benefits of Open Banking, you first need a concrete understanding of its underlying concepts. It’s important to address the key motivations behind the latest legislation, explore new opportunities for third-party providers (TPPs), and assess why FinTech companies are so excited about this banking innovation.

What is Open Banking?

Open Banking enables the secure movement of financial information between large banks and smaller financial service providers to boost innovation and competition across the European banking sector. The call for FinTech innovation through Open Banking is also fuelled by the opportunity to empower end-customers with control and transparency over who has access to their financial information and how they intend to use it for the customers’ benefit.

After reviewing the concentration of power by large European banks and searching for new ways to incentivise FinTech innovation, the European Commission enforced the Second Payment Services Directive (PSD2) as of 13th January 2018.

What is PSD2 regulation?

PSD2 calls upon all regulated European banks to provide the option for customers to decide whether they wish to share their financial data with other authorised providers. While most large banks are reluctant to hand out valuable customer information, PSD2 aims to pull control away from the banking giants and help smaller providers harness the power of data and fuel innovation from the ground-up for the benefit of the end customers.

Open Banking providers have embraced PSD2 to fetch and process financial information from multiple banks through a single protocol. This helps TPPs build highly-accessible and user-friendly services, without facing the same barriers to entry that previously stunted FinTech growth. Instead of striking individual agreements with every bank in Europe, TPPs can use Open Banking providers as a central node which serves as the gatekeeper between banks, FinTechs and end-consumers.

Is Open Banking safe?

In short, yes.

While the prospect of accessing financial information from a network of TPPs may sound alien, PSD2 aims to promote responsible data use and protect everyone’s privacy.

Under PSD2, regulated banks can only share information with licenced providers. FinTechs that comply with the EU Commission’s data protection laws essentially receive a tick of approval by the financial regulator that opens doors to a world of opportunities and allows them to leverage the power of Open Banking.

Two types of FCA-approved Open Banking providers

  • Account Information Services (AIS)

Account information services are online services that retrieve information from a customer’s payment account. This consolidated information helps TPPs retrieve account details in a safe and secure manner — opening doors to a host of value-adding features for customers.

  • Payment Initiation Services (PIS)

Payment Initiation Services (PIS) provide customers with an alternative to credit or debit cards for online transactions. The PSD2 regulations help third-parties receive open access to payment accounts without compromising customer security.

PIS essentially allows users to pay directly from their bank account — meaning TPPs can process payments to anyone with an approved bank account. Instead of complicating the customer conversion process with account creation and asking for bank details, PIS offers seamless integration with a network of regulated banks.

How do you fetch customer information?

As of 14th September 2019, a process known as Strong Customer Authentication (SCA) was introduced to enhance authentication processes and pave the way for secure innovations in the Open Banking space for years to come.

Following this regulation, the main mechanism used to make bank account data available to TPPs is through Application Program Interfaces (APIs). An API is a set of programming code that enables an exchange of data between services. Just as e-commerce 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 come into play by aggregating all these APIs into one and therefore tremendously lowering the barrier of entrance for TPPs and providing them with regulated access to bank accounts, a seamless and secure flow of data to build new value propositions.

What’s next for Open Banking?

We believe Open Banking will revolutionise how TPPs and established banking networks share customer financial information.

As PSD2 helps FinTechs bring new business models, exciting features and value-adding services to market, the opportunity to break down barriers and connect with millions of customers is enormous. Optimising the connection between financial stakeholders and refining legislation around Open Banking will further influence the future of finance and empower TPPs to embrace innovation.

Here at Klarna, we’re excited to lead the change in building a highly-connected banking ecosystem and simplifying Open Banking to empower smaller financial institutions. Klarna connects TPPs with the largest number of banks in Europe with a single API and just a few lines of code.

Learn more or request API Credentials for Playground

Visit Klarna Open Banking to learn more about Open Banking, schedule a demo or request your API keys for our playground environment. Let’s connect and get started.