Fintechs are taking advantage of open banking to improve customer experiences and streamline outdated processes in the banking sector, sparking a revolution in how consumers use financial services.
Revenues in the global open banking sector are expected to top USD 128 billion by 2030, up from USD 16.1 billion in 2021. Much of this growth is being driven by innovative fintech companies deploying new strategies and technologies into the sector.
With just a few lines of code, fintechs are improving conversions, simplifying processes, and gaining access to a global network of regulated banks.
Open Banking 101
Open Banking enables API-based connections between banks/account providers and third-party providers (TPPs), with the goal of boosting security, innovation, and competition across the European banking sector. The aim is to offer end-customers control and transparency over who can access their financial information and how they intend to use it.
After reviewing the concentration of power by big European banks and exploring new ways to encourage innovation, the European Commission enacted the Second Payment Services Directive (PSD2) in 2018.
How PSD2 is changing banking
Open Banking providers have embraced PSD2 to access customer data from multiple banks and provide account-to-account payments through a single protocol. This is helping TPPs to build secure, highly accessible, and user-friendly services, without facing the same barriers to entry that previously stifled banking innovation. Instead of striking individual agreements with every bank in Europe, TPPs can use open banking providers as a central node between banks, fintechs, and end-consumers.
Consumer benefit: the cash/money in the bank is yours, meaning you control it; the data related to your bank account is now in your control too, thanks to open banking. Consumers are at the centre of their own financial universe and will hold the power.
Open Banking services
Under the umbrella of Open Banking, there are a broad range of services that can be divided into two main categories:
Bank data (Account information). TPPs can securely retrieve account details, opening the door to a host of value-added features for customers, such as sharing financial information with a bespoke mortgage broker online, or managing multiple bank accounts through a dedicated dashboard.
Consumer benefit: Take control of your own banking data and supercharge it.
Bank payments (Payment initiation). Open Banking allows users to pay directly from their bank account, meaning TPPs can process payments to anyone with an approved account. Instead of complicating the customer conversion process with account creation and asking for bank details, open banking payments allow a seamless onboarding experience.
Consumer benefit: You’ll never need to input your card details again — searching for your card will be a thing of the past.
All these services can be accessed through a single API, making integration straightforward.
Levelling the playing field with APIs
TPPs access bank account data through APIs (application program interfaces). An API is a way for computers to communicate in a standardised manner. Just as ecommerce 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 Kosma come into play. By providing access to thousands of banks through one API, as well as a suite of other open banking services, TPPs benefit from a lower barrier to entry, helping them to build new value propositions while minimising regulatory obligations and reducing legal overheads.
What’s next for open banking?
The next steps will see these principles extend beyond banking, to the creation of open standards for finance, data, and digital identity. This will introduce a wave of innovation to sectors such as telecom, utilities, pensions, investments, and others.
Kosma is involved in all these future streams, and we’re excited to lead the change in building a highly connected financial ecosystem that fuels innovation and empowers smaller financial institutions.
Learn more or check out Kosma’s playground
About Conor Tiernan
Conor Tierman is the UK lead for Klarna Kosma. As a qualified financial advisor, he has spent more than 6 years understanding the UK Market and playing an important role in the growth of the Payments landscape. He currently sits on the Board of Directors for Sofort UK and is a Chartered Member of the Chartered Institute for Securities & Investment. Conor’s role is supporting Fintechs, Banks, Lenders, or SMEs growth through Open Banking.
About Klarna Kosma
Klarna Kosma makes game-changing ideas powerfully real. Launched in 2022, Klarna Kosma is Klarna’s Financial Technology Platform for banks, fintechs, and innovative merchants. Our proven and mature platform provides essential connectivity to a growing network of more than 15,000 banks in 24 countries through a single Open Banking API. We process more than 200 million transactions a year and are the most extensive Open Banking platform in the world. For more information, visit www.kosma.com.