The history of open banking dates back to the 1980s. The innovations we see today in the open banking market are the results of many small but consequential steps over the last four decades. This journey is said to have begun at the German Federal Post Office, which helped fuel further adoption throughout Europe and now the world. One industry expert who has witnessed and helped impact the growth of open banking in Europe is Panagiotis Kriaris.
In this discussion, Kriaris helps summarize the history of open banking and what we can learn from that growth. The conversation quickly evolves into best practices for the future of open banking in Europe and how things are trending currently.
This article is an adapted transcript based on the audio recording of Season 2, Episode 5 of the Mr. Open Banking podcast. The audio version is available here.
Europe is the birthplace of open banking
There is little doubt that the birthplace of open banking started in Europe.
As a concept, we can trace open banking to earlier times, but it in Europe in 2015 that enacted the first open banking legislation in the form of the PSD2. Today, Europe is reaping the rewards of being the first mover.
But it isn’t all good news. While Europe seems united behind common legislation, there have been delays and confusion. What works for some countries, doesn’t work for others, leading to a further lack of clarity and direction. So, while Europe was first, other regions are quickly catching up, as open banking spreads around the world.
To explore this, we sat down with someone who has witnessed the rise of open banking in Europe up close and personal.
Open banking in Europe then and now
Since global open banking began, Panagiotis Kriaris has been at the forefront of the market and movement. He has spent his career at the intersection of business and technology, bringing senior expertise to financial services across the board, including banking payments, fintech, and e-commerce.
Today, Panagiotis is the head of business development at a payment services provider based in Germany, bringing innovation, digitization, customer experience, and partnership expertise wherever he goes.
The birth of open banking in Europe
The story of open banking in Europe goes back nearly a decade to around 2013.
The key date, however, is January 13, 2018, when legislation known as the Payments Services Directive 2 (PSD2) came into effect. Although the legislation applied across the EU, it was implemented at the local level of each country.
A common misconception is that PSD2 introduces actual standards, but that is not the case. PSD2 and the local modifications were just the regulation, the legislation, and the standards came later.
Taking a step back to step forward…
Taking a step back, Panagiotis explains that API (Application Programming Interface) is the technology that enables PSD2. He likens the API to a translator who interprets speech for the purposes of a conversation, meaning it enables two parties to cooperate and work together on the technical side of things.
Why API is the Enabler of PSD2
“The API is the enabler of PSD2, and despite this being a fact, we don’t have the EU or EBA, which is the European Banking Authority, defining how this is going to look or how this is going to work. I would attribute this to time, so if you go back to the timeline and how things have been developing in terms of gradual evolution and adoption of PSD2, I think this is why.”
He cites a second reason for this lack of standardization, which was the aim of being tech agnostic and ensuring fairness across the sectors.
The changing landscape of banking in Europe
Since APIs just went live in 2018, Panagiotis says it’s probably too early to tell whether European open banking is meeting its stated objectives. However, he says as of late, Europe is seeing a massive wave of initiatives and innovation, especially in fintech.
While the revolution happening on the continent and globally can’t be attributed entirely to European open banking, Panagiotis says, he notes that over 5,000 banks opened their gates through the APIs and there are now more than 400 third-party providers in Europe.
But our guest is quick to point out that quantity isn’t everything — quality is what really accounts. And on that score, Europe has been churning out fintech innovators at an alarming pace.
To be sure, the disruption of banking in Europe started before PSD2, but the emergence of open banking has poured fuel on the fintech fire.
Open banking and disintermediation of financial services:
“Now you have the disintermediation of financial services, meaning that if you go to a supermarket, for example, you’re able to choose from different offerings and different players. This has been happening through fintechs.”
Panagiotis explains fintech brings the focus back to the customer experience.
A term you often hear in relation to this banking disruption is banking as a service or platform, or “embedded banking,” which refers to companies providing financial services from non-financial services players.
Panagiotis says fintechs are offering experiences that aren’t necessarily related to finance, but any financial aspect of the experience is embedded into their flow, meaning that these companies are in a position to offer financial services without being a financial service provider.
Best example of a company in a position to offer financial services without being a financial service provider:
“One of the best examples of this is Uber. Let’s assume that you take Uber and at the end of the ride, you have to pay by cash. What would this do to the customer experience? I don’t have to take out my wallet and pay the taxi driver because the payments side of things is embedded in the customer journey in the checkout process. This is what open banking is all about. This is banking as a service.”
Panagiotis highlights that banks and fintechs are on opposite sides of the same coin, so one concept has two separate realizations. However, he notes that increasingly, banks and fintechs are competing in the same arena, and the line between the two camps is being blurred.
European banks lead the way in open banking
Through open banking, banks now have access to more options than they’ve ever had in the past. That history and culture will always be part of the European fintech industry. That’s why European markets will continue to help inform Open Banking decisions throughout the rest of the industry and world.
Despite the ample opportunities this disruption has created, many banks are struggling to find their footing and a solid business case for open banking. Panagiotis says that even once companies can align on a business case for open banking, that’s just the first obstacle in the process.
In a best-case scenario, Panagiotis says, the new directives are coming from a top-down approach, but for many organizations, implementing changes of this scale is a massive undertaking that could take years.
Adapting from brick and mortar to new API revenue models
“I think if you have an organization used to doing things and delivering in a specific way and you’ve had a revenue model which is based on a brick and mortar set up for the past many, many years, and now they realize that they have to change overnight or they have to adapt, it’s not the easiest thing in the world.”
However, he says not every organization is floundering. Goldman Sachs, Santander, and DBS are among the players who have been successfully adjusting to the changes.
In terms of which countries are leading the pack in the open banking world, comparing countries is like comparing apples to oranges because of differences in culture and legislation.
For example, France is about 80 percent credit card-based, but cash is king in Germany, so certain approaches will be more successful in one country versus the other. Panagiotis says for companies trying to understand the nuances between each country, it would be best to hire a local lawyer who can help.
But there is no question that when it comes to open banking legislation and real implemented open banking standards, Europe remains the leader (especially if you still count the UK), making it a great place for others to start.
Open banking to open finance
Although it sometimes feels like open banking is still a brand-new frontier, some experts are already saying the future belongs to open finance. In the UK, they’ve introduced the pensions dashboard, which is another attempt to open up financial data.
Whether you call it open banking or open finance or embedded finance anything else, the goal is the same: ”to create an open economy which fosters innovation.”
“There are two things that are going to play a critical role in this revolution: one is technology and the other one is data. So, it’s not only being able to access data because that is what open banking is about, but it’s also, what do you do with the data?”
Europe is still learning what worked with PSD2 and what didn’t, so our guest is careful to warn us that discussions of PSD3 are still premature. But the rumblings are already there.
Early adopters are starting to learn what works too. Business models have started to emerge that generate real value, instead of just fighting over commoditized functions.
The smartest fintechs have evolved beyond the customer experience, taking the basic building blocks of open banking APIs and building intelligence on top of them, leading towards financial nooks and crannies that today remain undiscovered.
Culture matters too, it turns out. New kinds of financial products might work in one country, but not in another. This misunderstanding has led to as many fintech failures as successes.
Europe’s open banking future (and beyond)
The disruption of the banking sector is now well underway.
Thanks to PSD2, the world’s first open banking regulation, Europe has become a stage for this dance between fintechs and banks. And although open banking started in Europe, it has now become a global phenomenon.
If you’re trying to implement open banking, have clear success criteria upfront, promote common standards and define your players. Make sure you’ve got a clear path to a real API specification — don’t expect the market to figure it out on its own, without help. If you’re market-driven, consider a consortium model, like FDX in the US.
But in the end, it all comes back to the use cases, what you can actually do with open banking.
Whether it’s opening an account faster, seeing all your accounts in one place, sending money to a friend, managing your spending, getting a loan, investing your savings, or getting advice from a real person, open banking makes it easier. It also finally makes it possible to have your banking work with the other parts of life, so you can go bankless.
And that’s really what it’s all about. Banking, only better, the way it’s supposed to be in the digital age.
Visit Mr. Open Banking and learn more.
Learn more about Panagiotis and his work here.
If you missed prior episodes, catch up here.