Over the last three years, Konsentus has monitored the growth of third-party providers (TPPs) in Europe. It has been a promising start: almost 300 fintech TPPs have received regulatory approval to provide open banking services since September 2019, and API open banking transactions have risen from around 4 million a month to over 2 billion.*

This upward trajectory will continue exponentially through 2022: more TPPs, more users, more transactions. It will be the year people stop talking about open banking as a new phenomenon. As use cases become embedded in society, open banking will be viewed as just another way to gather information and democratise data. Users will become more comfortable with the applications and their benefits, whilst not necessarily knowing that they are using open banking technology. 

In addition to fintech TPPs, we are likely to see more financial institutions (who are already regulated to provide open banking services) acting in the capacity of TPPs. There are currently around 1200 banks that are already acting as TPPs according to Open Banking Europe. But as more banks begin to realise the business benefit of open banking and the pressure to stay relevant and retain customers, this number is likely to increase. In addition, we’ll see more partnerships and collaboration, and will likely reach full PSD2 compliance as the remaining smaller banks implement APIs.

With PSD2, regulators only identified a small number of open banking services, these were in the categories of account information services (AIS), payment initiation services (PIS), and card-based payment instrument issuers (CBPII). More services will emerge outside these categories as we transition to open finance, with use cases comprising wealth management, data collection for secure loans, and hyper-personalisation. The European Union will finalise the legislative proposal for open finance later this year and as it will incorporate non-regulated entities and a broader definition of finance, we will witness an influx of new innovative services.

With the market maturing, developing TPPs can expand their product range by offering more services. But in addition to new services, TPPs may also expand by offering services into more markets, through what is known as passporting. Passporting accounts for the vast majority of TPPs in all EEA countries and has doubled in the past two years, with a current average of 80 passporting TPPs per country.

PIS alone accounts for only 5.8% of open banking services – the majority of TPPs offer AIS, or AIS and PIS together. However, Konsentus predicts that in 2022 payment initiation and embedded finance will take off. Payment initiation, also known as Pay by Bank and Account-to-Account payments, is likely to threaten card-based transactions. Merchants are embracing it as a far cheaper alternative to card rails, as well as benefiting from instant liquidity. For consumers, PIS is frictionless and offers added security, as no card information is disclosed. The growing relevance in PIS will go hand in hand with embedded finance. There will be more payment functionality incorporated into apps and more brands delivering finance directly to the consumer.

The overall upward trend simplifies what is in fact an increasingly complex ecosystem. As with any maturing market, there will be consolidation, mergers, acquisitions, and TPPs going bankrupt because of failing business models. Over 30 TPPs have had their regulatory status withdrawn in the past two years and this number is set to increase. With this added complexity and further complications like agents and outsourcing, misuse of data and the risk of fraud is certain to intensify.

There is an inherent risk as any ecosystem grows. Within financial services, because of the sensitivity of financial data, new payment channels are always a major target for fraudsters and criminal organisations. Open banking is vulnerable because it entails a shift from banks fully controlling their systems to an API economy where banks by default expose their APIs and allow third parties to access customer data. As a result, the misuse of end-user financial data is likely to increase leading to possible disputes.

It is therefore essential for data providers to have the right automated processes in place to ensure that all open banking transactions remain safe and secure. Manual solutions can run into major issues and are not viable long-term. Financial Institutions need to ensure they are only letting the right parties access end-user account data and funds. This is where Konsentus comes in. Konsentus makes sure that only authorised and identified entities are given access, protecting the financial institution, their brand and their customers.  

* The total API transaction figure for the EEA is estimated from the following data: UK Open Banking transaction volume, country population size and TPP count. 

[The Author of the article, Brendan Jones, is Chief Commercial Officer at Konsentus]

Helen Child, Founder & CEO, Open Banking Excellence