Since the launch of the EU Commission’s Second Payment Services Directive (PSD2) in 2018, the adoption and implementation of Open Banking has been fraught with unexpected challenges and technical hurdles.
As the Engineering Manager responsible for connecting European banks with Klarna’s Open Banking API, I’ve enjoyed a front-row seat to this critical era of change for the finance sector. My role at SOFORT GmbH (the Pay Now payments wing of The Klarna Group) involves assembling and overseeing a team of crack engineers and banking veterans to ensure a seamless transition to PSD2 for our banking partners and end-users.
Much like the dry savanna plains or cold arctic tundra, the world of Open Banking is a demanding and uncharted environment that requires bravery, ambition and preparedness to explore its potential.
So, join me as I tell the story of my ‘Open Banking Safari’ and take you on a journey to explain how Klarna is leading the charge to improve PSD2 coverage and connectivity across the continent.
The Coverage Conundrum
One of the biggest challenges with building PSD2 connections alongside banking partners is striking a balance between geographical reach and quality of service.
As with any innovation, Open Banking deployment involves a trade-off between quality and quantity. While many providers saw the EU’s mandate to adopt PSD2 as a ‘box that needed ticking’, Klarna was focused on working with a range of stakeholders to ensure the legislation was used in the best possible way.
Instead of creating sub-par APIs that would lead to bugs and errors down the road, we wanted to take a proactive approach where we communicated with the regulators, supported the banks and listened to end-users to deploy long-term solutions that would cement Klarna’s position as an Open Banking pioneer.
Our ‘coverage philosophy’ is all about striking a healthy balance between breadth and depth to ensure we could offer PSD2 connectivity to Europe’s largest banking ecosystem, without compromising on the quality and scalability of our solutions in each locality. While many payment providers claim “coverage” in a growing number of regions, Klarna guarantees a usable and accessible service by establishing reliable connections with at least 90% of banks in a given country. Additionally, in 10 core countries we have managed to cover more than 99% of the banks per country.
Connectivity Is a Two-Way Street
The cornerstone to successful PSD2 deployment is improving the synergy between Open Banking providers and banks to support two-way connectivity.
While the EU Commission’s initial mandate required all European banks to adopt PSD2 connectivity by September 2019, unstable systems and reliability issues forced the EU to loosen the reigns and provide vital breathing space for stakeholders to refine their approach.
Open banking connectivity is a far greater challenge than simply developing an API and expecting a bank to integrate it into their existing systems. API development is a two-way street that requires Open Banking providers to work directly with banking partners to ensure a smooth and error-free transition.
Crucially, the collaboration between technical partners and banks is an ongoing and iterative process that requires constant maintenance. As banks evolve, legislation changes, and the wider economic landscape moves with the times, Klarna is committed to working with its partners to adjust to their specific needs.
Playing in the Sandbox
Possibly the biggest challenge for PSD2 deployment is bridging the gap between test environments and real-life scenarios. While almost all Open Banking providers use sandboxing to simulate APIs in a safe and risk-free environment, building realistic simulations that can anticipate on-the-ground issues is an incredibly complex (and often overlooked) task.
There are three key disconnects between sandboxing and running APIs in production:
- Sandboxing typically uses static information, yet the real world involves highly dynamic data.
- The real-world is subject to thousands of interconnected variables that are impossible to account for in an isolated sandbox.
- Simulated environments can’t anticipate uncontrollable or unpredictable events.
Bridging the gap between PSD2 API sandboxes and Account Servicing Payment Service Provider (ASPSP) production APIs is a critical success factor when establishing connections with new banking partners. Moving from a sandbox API to a production API presents a whole new set of challenges and unexpected complexities that require live data sets from real customer accounts to ensure a smooth transition.
Critically, the challenges of implementation vary in different localities and between banking partners. The secret to successful expansion involves tuning into these nuances and tailoring your approach to provide bespoke solutions.
PSD2 connectivity is not a ‘one size fits all’ exercise.
Finding Friends Along the Way
For me, the most important success factor behind Klarna’s expanding Open Banking coverage boils down to our human-orientated culture. We care about people, and we’re genuinely interested in building meaningful relationships with our partners.
My Open Banking Safari has taken me across the globe and sparked lasting friendships with hundreds of banking partners. Striking a balance between breadth of coverage and depth of service hinges on a providers’ ability to interact with partners on a human level and understand what support they require.
While it’s all too easy for individual stakeholders (i.e. regulators, providers, or banks) to play the ‘blame game’ and rebound responsibility onto others, Klarna’s philosophy involves tackling challenging situations head-on and taking a proactive approach to help all parties move in the right direction.
Practically speaking, SOFORT’s German HQ houses a number of region-specific teams with the sole mission to build and maintain strong bank connections. Each team focuses on delivering localised solutions and forming meaningful relationships with partners to ensure Klarna’s Open Banking expansion is supported by robust and reliable APIs. Since the start of our Open Banking journey, these teams have exchanged over 12,000 emails with banks, processed over 2,000 pages of feedback to regulators and executed over 600 ABC tests to optimise the flow between Klarna’s API connection and the banks’ existing APIs.
Continual communication, refinement and iteration are crucial to address location-specific challenges and move closer towards a fully-optimised Open Banking solution.
A Shared Vision of Success
The ultimate driver behind Klarna’s growing dominance in the European Open Banking space is teamwork. The combined efforts and insights from our team of world-class engineers, innovative minds and pioneering partners are shaping the future of finance.
My Open Banking Safari has been a challenging yet highly-rewarding adventure that shows no sign of slowing down.
Since starting our Open Banking adventure, Klarna has successfully established coverage in eighteen European countries, as well as the US where we continue working with banking partners to establish reliable and widespread connections ‘across the pond’.
In the first few months of 2021, we have plans to roll-out into six more European countries and achieve full continental coverage by the end of the year. Furthermore, Klarna’s scalable and proven Open Banking expertise gives us scope to expand our services into New Zealand, Australia, and further into the North American market.