Being an Open Banking Startup in SEE: Why Iris Solutions Pivoted from a B2C to B2B Solution Right after the Launch
Eleven Ventures’ Visa Innovation Program helped Iris’ team design the right timeline […]
Open Banking (r)evolution in Central and Eastern Europe: Insights, Trends and Players
by Alexandra Kozbunarova & Etien Yovchev
… you could purchase an insurance policy from Finland through a mobile wallet in Romania, see the transactions of all your bank accounts through a single login in one platform, or you could open your personal finance tips app, ask which bank offers the best price for a new saving account and be able to open one automatically…
These, among many others, are applications that the new open banking directive in Europe (PSD2) is making possible. Pushing the conservative paper brochure-loving banking sector to enter a new era of digitalization, data, and customer-centric services, open banking not only opens up tremendous opportunities for users, makes accounting and audit better and smoother for businesses, allows everyone cut costs, but also allows startups and other service providers to offer novel financial solutions.
Don’t worry if you cannot imagine it right away, as we learn from Mihael Mihaylov from Iris Solutions, one of the pioneers of open banking solutions in Southeastern Europe, even bankers are still getting educated on the matter.
Open Banking is not a new concept to the world, but in Europe, it’s gaining momentum with the recent Payment Service Directive (PSD2) that entered into force in 2019. The directive basically requires all European banks to make certain information accessible to other licensed providers (the so-called third-party providers or TTPs, which can be different service companies or startups) in a standardized, straightforward, and secure way.
It basically says: banks have to open up towards other players in the financial market and allow innovative service providers to get access to users’ data and leverage it to create useful services.
To make this happen, banks need to release their Application programming interface (APIs), through which, certified by local authorities fintechs (TTPs), can access certain data and information and launch new services.
In the current PSD2, it’s mostly about payment initiation and account information services. This practically means that banks need to provide APIs that other companies could use to collect and store information from a customer’s different bank accounts in a single place and thus allow customers to have a global view of their financial situation and easily analyze their expenses and financial needs. This could translate in new ways to automate different processes like accounting and auditing, but also into building artificial intelligence that could give financial advice and choose the most suitable products for the users.
In addition, users of open banking enabled apps can pay companies directly from their bank account rather than using debit or credit card. This is a way not only to cut costs by avoiding card transaction fees (both for users and online merchants) but also an option for users to automate different types of regular payments too.
And this is where the financial (r)evolution begins…
Third-Party Providers are organizations or natural persons that use APIs developed to Standards to access customer’s accounts, in order to provide account information services and/or to initiate payments. Third-Party Providers are either/both Payment Initiation Service Providers (PISPs) and/or Account Information Service Providers (AISPs).
These players are authorized to retrieve account data provided by banks and financial institutions. They access information stored with account-keeping financial institutions on behalf of a customer, analyse and consolidate customer and account data so that in turn they can be used for services from other banks and third-party providers. Popular services include multi-banking apps that use AISPs to aggregate various online banking accounts under one user interface, or online credit platforms that conduct a real-time credit check based on an aggregated expenditure account and liquidity assessment.
The PISP players are authorized to initiate payments into or out of a user’s account: Rather than only viewing data on an account, PISPs are authorized to make payments on behalf of a customer. PISPs do this by initiating transfers directly to or from the payer’s bank account using the bank’s own tools. Thus, these players simplify payments – users can directly pay merchants from their banking account instead of through a card and thus avoid transaction fees, or can automate repetitive payments.
Everyone could benefit from the new open banking regulations. For end-users, this means an easier way to have an overview of their financial life and make more informed decisions as they can now have a single point of receiving information about all their bank accounts, cards, and transactions.
For instance, Iris Solutions, a company part of the Visa Innovation Program network, allows customers to see all their banking transactions in one single platform, which gives the users better transparency and more control over their finances. Iris also has a product for online retailers that allows them to easily accept online payments from users through a QR code. Another example from the program comes from the loyalty startup Reloyalty that has developed a mobile app where users register their bank card and start earning cashback whenever they pay with it. Reloyalty reads transactional and historical data thanks to open banking and targets the rewards to the specific customer spending behavior.
In November 2019, Roland Berger surveyed over 40 leading banks and TPPs across 12 EU markets. One-third of respondents see an increase in their service portfolio as a key opportunity resulting from open banking. 25.9% see a possibility for the acquisition of more customers while 18.5% are looking forward to building a partnership-based ecosystem. For 35.1% increasing revenues has been the top motivator for the pursuit of an open banking case.
The same research distinguishes five main types of players in the open banking space – large universal banks, smaller niche/regional banks, monoliners specializing in a specific product category, neobanks following a digital-first approach, and big technology firms that can use their huge user base to enter the banking vertical. Each of these groups can benefit from open banking in a different way.
For traditional banks, the newly generated information will contribute to a much more comprehensive view of their customers, thus enabling a better understanding of their needs and circumstances. This data can be used for the creation and sales of personalized offerings and improvement of risk management capabilities. Large banks may successfully build up their own open banking ecosystems around existing services and provide clients with a one-stop-shop for financial services products, coupled with the possibility of personal consulting. For smaller banks, one of the positive news coming from PSD2 is that they probably won’t need to develop all possible services themselves, for which they usually don’t have the resources.
For neobanks and fintechs on the other hand, open banking is an opportunity to deliver services with real added-value and quickly grow their customer and product base. “While traditional banks in particular often face challenges due to legacy infrastructure, neobanks usually do not face these problems and have open platforms with APIs at their core. Open Banking allows them to leverage their superior user interface even further, for example by increasingly integrating even non-financial services, products, and offerings,” state the authors of the report. In addition, Open Banking provides standardized data, which providers can run through artificial intelligence algorithms to develop richer insight.
In general, while no dominant model has been established yet, as per PwC’s research ‘The future of banking is open’, there are three distinctive ways, banks and fintechs can capture value from open banking on a financial level. The first one relates to the implementation of additional revenue streams – for example, pay-per-use or subscription for services, commissions for recommendations of third-party providers, or sales of aggregated data and trend analysis. On the other side of the profitability coin, the costs for digital transformation may be significantly reduced through collaborations with external technology companies. Through the optimization of customer acquisition and retention, open banking may also enable an increase in market share for those who do it well and in turn, higher equity valuations.
End consumers can also find themselves in a position to benefit from open banking. Value propositions for them fall into several categories: a) aggregation platforms that offer greater personal finance visibility and sharpened decision making; b) better access to services resulting in less financial stress; and ultimately c) money savings, as a bigger choice of providers means more competitive prices of financial products (for example, loans) and better value for money.
For SMEs, the very same features – greater visibility and insights into business performance might result in reduced business failures, while lower barriers to financial products and services are an enabler for long-term business growth. For businesses, PSD2 unlocks the potential of having more available data about their customers. Thus, accountants could have most of the information filled in automatically, instead of manually, when their systems are integrated with open banking service providers. It also makes expense management way easier. Loan brokers, insurers, banks, and leasing companies have access to more data about their clients when integrated with open banking service providers, which could reduce the time of decision-making because they have the credit history of the applicants at a glance. All of these are solutions that a company like Iris Solutions makes possible. Surprisingly, open banking also reveals an enhancement potential for marketing companies and teams as it allows them to see and measure the payment behavior of potential clients and develop their buyer personas.
And there are countless more existing and potential solutions – from smart finance assistants to better digital wallets… to applications in IoT. For example – a car knowing it has crossed a border and offering the driver to purchase a vignette and pay it with the card with the lowest transaction fee.
All in all, Open Banking means users’ data is no longer locked in the bank. It also unlocks potential for creative entrepreneurs who want to leverage this and, last but not least, has the potential to truly unify the market.
There are different stakeholders in the open banking ecosystem and the new open finance (r)evolution. On the one hand, we have the banks, who have the trust of the customers but are also slower to innovate than fintechs. Then we have the providers of the new solutions (the TPPs). And not least, regulators, who are the gatekeepers of the process – on the one hand, they license providers and make sure they can be trusted by users, on the other – they are the ones to push banks to open up their systems. In order for customers to be able to benefit truly from open banking, all these have to be aligned with each other and work together.
In any case, the customers are the big winners. But in terms of business, everyone is well-positioned to be a winner too. “For the open banking ecosystem to thrive, however, we’ll need banks to really understand the value of open banking and not only launch APIs because PSD2 requires it. It is a regulation that gives opportunities for value creation for everyone,” says Marinos Xynarianos from the Greek innovation consultancy Crowdpolicy, the organization in charge of the Visa Innovation Program in Greece.
In a way, open banking moves the needle towards uniting more services in one platform, which could allow banks to offer their customers a more complete experience, and thus gain new revenue streams. “We at RBI think that PSD2 offers great opportunities for innovative banks to increase their market shares,” says Catalina Arateanu, Senior Partnerships & Ecosystems Manager at Raiffeisen Bank International in the annual Fintech Atlas Report. For the banks, the new directive gives opportunities to start acting as platforms aggregating and offering their customers a variety of third-party solutions (e.g. by fintechs) all in one place.
For fintechs, on the other hand, it opens up a whole new market to experiment on. Not least, as the market matures, more companies, outside the financial sector, will be able to launch better and complementary products and solutions for their customers. So in a nutshell, open banking is here to create value, not just move it from banks to fintechs or the other way around.
According to the report published by Allied Market Research, the global open banking market generated $7.29 billion in 2018 and is expected to reach $43.15 billion by 2026, growing at a CAGR of 24.4% from 2019 to 2026.
Unlike the US where the open banking evolution was driven by market demands and there’s no regulation or push to make all banks adopt openness towards other service providers, in Europe, the requirement for banks to be compliant with the PSD2 by a certain date drove an increase in the urgency on the demand side. And “so did the offer side… 17 (yes, seventeen!) European data aggregation players have launched since 2012, with Tink being one of the most advanced on the list,” writes the fintech investor Pauline Brunel.
The COVID-19 pandemic has also played its role in accelerating open banking in Europe. In the UK, which is the most advanced fintech market, over two million customers are now using open banking-enabled products, growing at a pace of 160K new users monthly since January, reveals recent research by The Open Banking Implementation Entity (OBIE).
If there’s one keyword describing the benefits of open banking for everyone, it’s definitely ‘saving’ – time, as a lot could be automated, or money – both from card transfers and by enabling users to easily choose the best rate and priced product. Currently, in the more developed and advanced fintech ecosystems, most of the applications of open banking are in three areas. The first is e-commerce where merchants seek to reduce expenses for card transaction fees by enabling users to pay directly from their bank account. The second category is personal finance management – mostly budgeting applications for end-users. The third is the credit risk assessment, leveraged by loan brokers, banking and non-banking financial institutions to more quickly make decisions based on the quickly attainable credit history of the applicants.
Currently, most of the big fintechs in the space are working on enabling the connectivity of banks to various other services and thus helping end customers have a better experience. For example, Swedish Tink is an open banking platform offering a variety of solutions for both end customers and businesses. It provides the standardized API for the connection of fintechs and banks. One of the examples of a product built with Tink is the Grip app, developed in partnership with Dutch bank ABN AMRO to give their customers a more complete mobile banking experience, using account aggregation to let users see all their different banks’ accounts on one screen. This is also what the most prominent US player Plaid (acquired by Visa at the beginning of 2020 for $3.5B) is doing. These two represent one of the business models of open banking solution providers. In the same space, there are also other companies like Bud, which is based and operates only in the UK, and the Polish BanqUp that operates throughout Europe, including the SEE. Such solutions are typically used by banks that want to integrate the products of fintechs in their platforms or fintech (startups) that need to easily access the APIs of many banks. For the users and customers, this means mainly convenience and being able to benefit from more services offered by their banks.
Alongside the B2B oriented players, there is also plenty of space in the b2c segment where one sees budgeting apps, AI-driven finance robo advisers, and mobile wallets. Coming from the Netherlands, Yolt is a budgeting app that allows users to link all financial accounts and manage through the app, track transactions, set saving goals, and make peer-2-peer payments. Another example is the UK Emma App for tracking and canceling wasteful subscriptions, and syncing budgets to payday. As open banking enabled products continue to evolve, it will become possible to integrate more services into one and enjoy even better transparency, optimized ways for users to choose between different, e.g. insurance products based on comparison data and personalization, and more.
In the different parts of Europe, this transformation has been happening at a different pace. “If we should draw a parallel with the UK, for example, we could expect that open banking will be, at some point, pivotal in reducing transaction fees for end-customers, increasing transparency of financial services and thus – creating trust in the system, and helping other incumbents (such as the telcos), enter the financial services market with even more confidence,” explains Gergana Stoitchkova, Investment Associate at Eleven Ventures and Advisor at the Bulgarian Fintech Association.
For the trend fintech investor Pauline Brunel no clear pan-European winner has emerged so far. “Instead, local winners are burgeoning, and the scalability of these companies is going to take time,” he says. Unlike the US, the EU consists of 28 member states with different legislations and separate authorities that need to push for the translation of the PSD2 into local laws and push banks to launch their APIs, so it is expected that in Europe there will be more and more players – at the beginning, national or regional. With small exceptions, most of the companies are focused on the UK, Western Europe, and to a certain extent Central Europe. Eastern and Southeastern Europe are also catching up with the trend and producing local payers.
Eastern Europe may turn out to be a winner in one very interesting area – developer experience (DX), which according to Platformable refers to the ‘ease with which banks are enabling businesses to integrate and use their APIs’. The developer experience includes several components ranging from whether the bank offers a developer portal, through proper descriptions of use cases all the way to clear pricing and the provision of testing data.
As per Platformable’s research from Q1 of 2020, 88% of banks with APIs in Eastern Europe and Russia have a developer portal, compared to just 65% for the rest of Europe. A larger percentage of banks in Eastern Europe also seem to have clearly described pricing and API use cases. Another piece of research coming from Innopay puts The National Bank of Greece as the frontrunner in the same category, followed by Nordea and bunq.
While bigger players or western startups (except for BanqUp) are rather hesitant to invest in CEE, and particularly Southeastern Europe, because the markets are smaller, some local players embrace the opportunity. “As every single bank account is a potential for open banking, I do think this region is interesting. In Bulgaria alone, there are 13M retail and business bank accounts. Roughly, there are four times more in Romania and in Greece. I do think this is a market,” says Galya Dimitrova, managing director of Iris Solutions.
Iris is one of the companies that is part of the 2020 cohort of the Visa Innovation Program in Bulgaria and was the first certified TTP in Bulgaria. The company provides various services – an online terminal that allows merchants to easily accept payments online through a QR code, a multibank wallet that allows users to add payment accounts from different banks in one digital wallet, accumulate information from them and pay from the account the user prefers. Not least, the company has a product called PSD 2 HUB, a solution that allows any financial institution to build innovative services for its own clients.
Clearly, the company could offer many different services being one of the first certified TTPs in the region and in a fairly new and empty market. The question here is: What is the market ready for? Iris entered the Visa Innovation Program facilitated by local corporate innovation and fintech-focused fund Eleven Ventures to find its best positioning in the broad open banking space. Eventually, the young venture pivoted from the initial B2C approach to a B2B and B2B2C orientation because it turned out the market needs education first (read Iris’ case study of finding the right market segment).
His company is providing middleware that builds a bridge between businesses and their financial service providers in Romania and Croatia.
Open Banking is still a new concept in CEE. Alongside the potential a barely penetrated market brings along, there are also challenges: perception on the side of the banks, as well as trust from the end customers in using such services. Fintechs have the task to both convince the banks of the value that open banking can bring to them and to build trust among end-users to share their data with TPPs for the purpose of gaining better service and experience.
Another challenge is the procedure to become a licensed TTP as Marinos Xynarianos, who is in charge of the Visa Innovation Program in Greece, notes. According to his observations, there are several open banking players from the region who’d prefer to register and get certified in countries like Estonia, the UK, and Germany, where they’d receive more support in the process.
In addition to that, it is hard for local projects that want to bring novel services to these smaller markets. One of the major challenges is the lack of capital and investor expertise in this field, adds Cosmin Cosma from Finqware.
To tackle some of these challenges and accelerate the development of fintech innovation in the region, in 2019, Eleven Ventures, the Bulgarian private VC fund launched the Visa Innovation Program as a major element of Eleven Platform for supporting fintechs in the region. This partnership with Visa is aimed to facilitate the collaboration between startups and corporates, and thus accelerate the development of the market. By the third quarter of 2020, eleven companies (including the loyalty startup Reloyalty, the PSD2 provider Iris Solutions, digital insurance company Boleron, and the expense management software Payhawk) have been through the program, which quickly resulted in new products available on the regional market.
Eleven Ventures’ Visa Innovation Program helped Iris’ team design the right timeline […]
If we assume, we are in the prehistory of open banking, then the most exciting developments are yet to come. And it will be interesting both from a technological but also from a business perspective. The global management consulting company Kearney, predicts four scenarios the way business will change the paradigm:
Large tech companies use their scale and customer proximity to expand further into retail banking. They exploit their digital expertise to make compelling customer experience with a low cost base. They take significant market share in key markets.
PSD2 and CMA are launched with a very limited impact amid low customer uptake. The value propositions are not compelling enough to encourage users to adopt beyond niche levels. The banking value chain remains unchanged with limited impact.
Retailers use PSD2 and Open Banking to create value for their group. They vertically integrate financial services into their store offerings without holding the balances. They use loyalty schemes and targeted marketing to increase sales, boost margins and improve performance.
The retail banks use PDS2 and Open Banking to capture value back from NIM compression and loss interchange. They build their own payment schemes and integrate directly with the largest merchants. They leverage customers’ trust to compete and develop ‘digital ready’ solutions.
What these scenarios miss is the role of new players – fintechs, startups in different verticals that leverage the open banking regulations and who need to prove their role in the new financial game. “I’d even go a step further and suggest that there could be a PSD3 that will expand the requirement to other products such as loans, investments, etc., which will create more and more services and models,” says Marinos Xynarianos.
The users will see many more solutions available from the banks, but they will be different in the different countries, he adds. Xynarianos speaks of the future of open finance when players from different verticals, not necessarily finance and fintech, will enter the space to provide services and products.
Probably most intriguing are, however, the technologies that could be developed in this transformational process and on top of the open banking infrastructure. This is just the beginning. Marinos Xynarianos is optimistic this curious reality is not too far ahead. “I think in 2021 we’ll see a different environment with many new initiatives and solutions,” he says. So it remains to be seen what and where, and whether there will be CEE entrepreneurs who dare to create such solutions and to scale them.