Innovation in Open Banking

Journal of Payments Strategy & Systems Volume 14 Number 3

Innovation in open banking: Lessons from the recent wave of payment institutions that have been authorised to provide payment initiation and account information services

Received (in revised form): 10th June, 2020 Fred Bär* Fred Bär Partner, Payments Advisory Group, The Netherlands Ivan Mortimer-Schutts** Senior Financial Sector Specialist, World Bank, USA

Fred Bär is a partner at the Payments Advisory their business models, provides some insights into Group, an international business consultancy how the market is evolving and how it is react- specialised in payments. He has advised on ing to recent regulatory and market infrastructure topics relating to the Revised Payment Ser- changes introduced through the PSD2 and open vices Directive, instant payments in Europe and banking architecture. This paper reviews the pop- the recent launch of the Vietnamese NAPAS ulation of payment institutions that have recently Ivan Mortimer-Schutts automated clearinghouse. He is Secretary Gen- obtained authorisation to provide payment initia- eral of the European Automated Clearing House tion or account information services in the EEA. Association. It examines the (1) geographic reach, (2) company origins and investors, and (3) business function of Ivan Mortimer-Schutts is a senior financial sec- these new actors to provide early insights into the tor specialist within the World Bank Group. He changing economics of banking and payments. advises on public and private sector projects related to policy and regulation as well as payments and financial services development. Keywords: open banking, PSD2, PISP, Previously he worked with BNP Paribas on AISP, payment service licence, new emerging market retail network development entrants, EUCLID database, payment and on EU securities market regulation and institutions, payment service passport- compliance. He has also led financial sector ing, FinTech investment trade regulatory studies at Sciences Po Paris. INTRODUCTION Abstract This paper reviews the population of com- *Payments Advisory Group, The Revised Payment Services Directive (PSD2) panies that have obtained authorisation Papendorpseweg 99, to provide payment initiation or account 3528 BJ Utrecht, came into force in all EU member states in 2018. The Netherlands One stated aim of this legislation was to create room information services in the European Eco- E-mail: fred@ for innovations in technology and business models in nomic Area (EEA). It examines the (1) paymentsadvisorygroup.com order to give account holders more choices and more geography, (2) company origins and investors **The World Bank, 1818 H direct control regarding access to their account infor- and (3) business function of these new actors Street, NW, Washington, mation and ways of initiating payment transactions. to provide early insights into the changing DC 20433, USA Although an evolving array of new services and ser- economics of banking and payments. E-mail: [email protected] vice providers has emerged over the past few years, the market remains in an early phase of experimen- CONTEXT Journal of Payments Strategy & Systems tation. Nevertheless, information about the range Innovations in technology and business Vol. 14, No. 3 2020, pp. 1–18 © Henry Stewart Publications, of newly licensed service providers in the EU, and models have gradually weakened legacy 1750-1806

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banks’ control over the choices account that have obtained authorisation to provide, holders have for accessing account informa- as per PSD2 Annex 1, payment initiation tion and initiating transactions. Although (#7) or account information (#8) services. an evolving array of new services and ser- In the EUCLID database, institutions can vice providers has emerged over the past few be registered as payment initiation service years, the market remains in an early phase providers (PISPs) or account information of experimentation. Nevertheless, infor- service providers (AISPs). In the Neth- mation about the range of newly licensed erlands and Germany, organisations that service providers in the EU, and their busi- provide account information services only ness models, provides some insights into are recorded as payment institutions rather how the market is evolving and how it is than AISPs. The data sample used for the reacting to recent regulatory and market present study also includes electronic money infrastructure changes introduced through institutes. the Revised Payments Services Directive EUCLID data contain the name of the (PSD2) and open banking architecture. institution, the country in which it is reg- The introduction of the PSD2 has for- istered and authorised, the additional EEA malised and structured the role of ‘payment countries in which it has specific authori- initiation’ and ‘account information’ service sations (eg through passporting rights), the providers. Although these functions began date of authorisation and the services it is already to appear much earlier, both within authorised to provide in each EEA mem- and beyond the EU, the regulation of these ber state. The data in the sample relate to activities has required companies operating the state of current authorisations at the in the EEA to be licensed. The EUCLID beginning of June 2020. New registrations database, managed by the European Banking continue to be made on an ongoing basis. Authority (EBA), provides a comprehensive Additional business-related data were list of such entities, the services that they are obtained from various public sources includ- licensed to provide, and the jurisdictions in ing official registries (Belgium: Carrefour which they may provide them. des Entreprises and the Centrale des bilans This short empirical paper exposes some hosted at the BNB; France: Infogreffe; Ger- of the key features of this evolving market many: Bundesanzeiger; Ireland: Companies space, drawing on data collected about these Register Office; UK: Companies House), companies from diverse public sources. It company websites, investment portals and provides some initial insight into the sources other open sources. of efficiency gains, consumers’ needs and By selecting this particular sample, the forms of economies of scope that are being scope of this analysis is focused on reviewing targeted, as well as the types of strategic the activities of new entrants, ie those compa- investors involved and some of the bets nies with a newly issued licence for service investors are placing on business models in #7 or #8. Some of these are newly formed AISP and PISP services. businesses, others have been launched as a spin-off or a new business initiative of an existing company, which may or may not THE DATA be a financial services company. It should This study uses data taken from the EUCLID be noted that credit institutions (CIs, com- register of payment institutions authorised monly referred to as ‘banks’) are also active by competent authorities in the EEA. The in this space, but these are not included in sample looks at those institutions (payment the sample. Under PSD2, all existing CIs institutions and electronic money institutes) have automatically been granted the right to

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Table 1: Data summary

Type of institution No. institutions

Payment institutions authorised to provide service #7 or #8 154 of which Payment institutions not authorised for payment initiation services (#7) 26 Payment institutions not authorised for account information services (#8) 13 Account information service providers (AISPs) 123 Electronic money institutes 39 of which Electronic money institutes not providing account info services (#8) 4

act as PISPs and/or AISPs. Several CIs have growth in these areas is greater than the rate indeed started to offer such services, either of growth in the area of electronic money under their existing brand name, or under institutions. a newly established brand name. These CIs Some entities and groups have multiple undoubtedly contribute to the competitive authorisations. Six institutions appear twice dynamics in the emerging market of PISPs in the database with different authorisa- and AISPs, and a deeper analysis of this tions. Corporate groups may hold different group might well uncover some interest- licences through subsidiaries or related com- ing insights into how the incumbent banks panies, as is the case with Google, Revolut are responding to the new competition. and Klarna/Sofort, among others. Of the 39 However, with over 5,600 CIs listed in the electronic money institutes, only three cor- EUCLID CI register, many of which are not porate groups also have payment institution active in the AISP or PISP space, such anal- licences. This is the case for Fire Financial ysis is left for future research. (which has a payment institution licence in Ireland), Google (which has payment institution licences in the UK and Poland) and Overview First Data (which has a payment institution The data cover a total of 316 institutions. licence in Ireland). The data sample is summarised in Table 1 The majority of firms are authorised in and covers (1) payment institutions and elec- one EEA member state only (see Figure 1). tronic money institutions licensed to provide The next biggest contingent have obtained payment initiation services (service #7), and authorisation to operate across 26 or more (2) payment institutions and account infor- EEA jurisdictions. Very few companies in mation service providers licensed to provide the sample are in between. account information services (service #8). A cursory view of the data reveals how While there were, as of the date of research, significant the creation of and investment in 1,071 authorised payment institutions in the new businesses has been. The vast major- EEA, the subset of those that are authorised ity of companies in the sample are relatively for the provision of service #7 or #8 (ie pay- young, having been established in the last ment initiation and account information) ten years (where the company was estab- is much smaller. Nevertheless, the rate of lished as a subsidiary of another company,

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PISPs and AISPs by model and # of EEA countries in which they have obtained authorisation to operate 180

160

140

120

100

0 1 only 2 to 9 10 to 25 26 to 31

B2B B2C Both Figure 1: Distribution of PISPs and AISPs by model and number of EEA countries in which they have obtained authorisation to operate

the date of establishment of the parent or 31 in the EU or EEA respectively (see company is used). The oldest companies Figure 2). include the ICA Spara AB supermarket, The majority of businesses in the data Amex, Transunion, First Data, Bankomat, (184 out 316) are active in only one mar- CRIF, Sage, Wolters Kluwer and B+S ket. Business models that are more strongly Bankensysteme AG. A drop in the num- focused on one or two home markets are ber of companies established in 2019 is found in the areas of consumer analytics, likely an indication of the lag between the accounting and enterprise resource plan- date on which the company is incorporated ning (ERP) integration, corporate banking and the date of applying for or obtaining services and wealth management. Con- authorisation. sumer banking service providers — such as new digital banks — are more likely to aspire to regional coverage. Meanwhile, Market coverage and passporting some of the business models in which there Almost all business models display a are few representatives — such as in loyalty strong preference for either local or full or identity — are also authorised in just one EEA ambitions, with the obvious excep- market. tions of banking IT service companies The main businesses more likely to aspire and application programming interface to full regional scope of operations are in (API) integration providers that support merchant services, for which over twice a network of banks that cover more than the number of firms have a licence to oper- two countries but less than the full 27 ate in the full 31 countries compared with

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number of institutions authorised to provide payment initiation or account information services, by year of establishment* (or founding parent institution) 40

B2B B2C B2C; B2B Figure 2: Number of institutions authorised to provide payment initiation or account information services, by year of establishment (or founding parent institution)

just the home country of the operator. Addi- significant number of AISPs. The retail tionally, some operators in this group that banking market there is seeing the entry of are operating in only one country them- a wide range of customer mobile apps, ana- selves are part of a bigger corporate group lytics and payment service providers that (such as Nets). may serve to intermediate between banks Figures 3–5 illustrate the overall growth and end customers. This is likely caused in authorised PISPs, AISPs and electronic by the lead that the UK has taken in cre- money institutes. ating a UK-specific regulatory framework Broken down into different institution for open banking, which goes well beyond categories, the picture remains similar, PSD2 to open up a larger space for new although registrations in Lithuania and Ger- entrants. many represent a greater portion of the overall population of electronic money institutions than in the overall sample (see Business services and models Figure 4). There is a wide variety of business models Once passporting is taken into account, represented in the sample. Although many the distribution across EEA jurisdictions businesses seeking PISP or AISP authori- is more balanced but still skewed towards sation are directly active in the provision a large contingent in the UK, followed of financial and payment services, there by Germany, France, the Netherlands and is also a range of other businesses. These Sweden (Figure 6). A significant portion include, most prominently, accounting of the divergence in the UK is due to a firms, credit reference agencies, retailers, IT

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350 Growth of new payment initiation and account information service providers - by home country of registration and date of authorisation - cumulative number of entities United Kingdom 300 Sweden Spain Slovenia Slovakia 250 Poland Norway Netherlands Luxembourg 200 Lithuania Italy Ireland 150 Hungary Greece Germany France 100 Finland Estonia Denmark Czech 50 Cyprus Croatia Bulgaria Belgium 0 Austria 01-08-2009 01-12-2009 01-04-2010 01-08-2010 01-12-2010 01-04-2011 01-08-2011 01-12-2011 01-04-2012 01-08-2012 01-12-2012 01-04-2013 01-08-2013 01-12-2013 01-04-2014 01-08-2014 01-12-2014 01-04-2015 01-08-2015 01-12-2015 01-04-2016 01-08-2016 01-12-2016 01-04-2017 01-08-2017 01-12-2017 01-04-2018 01-08-2018 01-12-2018 01-04-2019 01-08-2019 01-12-2019 01-04-2020 01-08-2020 01-12-2020

Figure 3: Cumulative growth of new payment initiation and account information service providers by home country of registration and date of authorisation

licensed Electronic Money Institutions with authorisation to provide Payment Initiation Services (per home country of registration) 45

30 United Kingdom

25 Spa…

20 Lithuania Italy

15 Ireland number of licensed institutions 10 Germany

5 France Estonia Czech Cyprus Bulgaria 0 Belgium n-13 n-14 n-15 n-16 n-17 n-18 n-19 Ju Ju Ju Ju Ju Ju Ju Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Figure 4: Licensed electronic money institutions authorised to provide payment initiation services, by home country of registration

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160 growthgrowth inin ffirmsirms aauthoriseduthorised ttoo pproviderovide aaccountccount iinfonforrmmaattiionon serrvviices,ces, bbyy mmonthontth ooff authorisationautthorisation andand home ccountryountry of ccompetentompetent aauthorituthoritty 140

120 United Kingdom Sweden Spain 100 Poland Netherlands Lithuania 80 Ireland Hungary Germany 60 France Finland Estonia 40 Denmark Czech Belgium 20

Figure 5: Growth in firms authorised to provide account information services, by month of authorisation and home country of competent authority

250 Distribution of sample firms by type and EEA members in which they have authorisation to provide services

200

150

100

Payment Institutions Account Information SPs Electronic Money Inst.

Figure 6: Distribution of firms by type and country

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Payment institutions by principal business activity

Payment Processing & accounting & Services ERP Non Money Transfer Other services-Financial Services API Banking integration Banking & Payments support tech

Banking IT software merchant services services

Card Scheme

Consumer banking & finance IT software & development

Investment & wealth management

Credit reporting & references Corporate & SME financial Consumer services & tools services

Figure 7: Payment institutions by principal business activity

software developers and companies provid- both consumers and financial services and ing customer loyalty applications. The full other institutions. One firm operates a spectrum is outlined in Figures 7 and 8. B2B2C model targeting employees. The population of AISPs also encompasses a wide variety of business models. Although the majority of firms provide consumer- Segments warranting further comment oriented financial management and ana- The biggest group of firms is in the lytical tools, the full spectrum of AISPs consumer-facing ‘services and tools’ includes other firms whose core busi- grouping. This includes a diverse range of nesses include (1) accounting and audit, early-stage businesses, many of which pro- (2) insolvency and (3) loyalty applications. vide a new set of channels for financial In terms of customer orientation, 173 institutions to acquire and interact with end companies authorised to provide account customers. Many of them offer free ser- information services are primarily business- vices to consumers to analyse their financial to-business (B2B) firms, offering ser- health, capacity or behaviour (eg spending vices to other institutions including banks, patterns), and advise them on products or corporates or other technology firms; help them benefit more from loyalty, sub- 99 firms primarily follow a business-to- scription or other bonus offers. Many of consumer (B2C) model; and 26 firms them appear to be free to users, who can operate a two-sided model with offers for download an app and activate them. Some

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AISPs by principal business activity* (* excludes Account Information service providers classified in NL and DE as Payment Institutions)

Payment Processing & Services Non-Financial Services Other merchant services IT software & development accounting & ERP Investment & wealth management API Banking integration Identity and consent Banking & Payments support tech management Consumer banking & finance

Credit reporting & references

Consumer services & tools

Corporate Services & analytics Corporate & SME financial services

Figure 8: Account information service provider business models (excluding account information service providers classified as payment institutions in Netherlands and Germany)

indicate that they may earn revenues from provided by Sofort. It would be reasonable product vendors to which end consumers to expect competition among these new are introduced. providers for the business of online and Some are focused on very specific niche physical merchants to increase. One exam- markets, such as helping people with lower ple of such increased competition can incomes or poor credit ratings to build be seen between credit card instruments a ‘thicker file’ or, in contrast, to provide and new instant payment schemes. Credit customised value-added advice to higher- card schemes have a strong and broad base income clients in private banking. One of merchants, and can offer compelling app is marketed by a wealth manager to services to cardholders, such as purchas- high net worth individuals to track the ing insurance (with pricing of risk enabled spending of their staff. by decades of experience). They can also A significant number of firms are devel- command relatively high prices from mer- oping mobile payment apps that target chants based on their market power. With both merchants and consumers to varying instant payments on the other hand, PISPs degrees, with the aim of better leveraging could potentially offer faster, immediate, data about spending patterns to drive loy- and much cheaper payment services to mer- alty and analytics on behalf of a variety of chants, including e-commerce merchants. users. With the introduction of lower-cost near real-time credit transfer systems such as Swish and Faster Payments, such mobile Shareholders and investors apps can allow merchants to accept payment In terms of number of companies, privately via alternatives to cards, such as the service funded early-stage and venture capital (VC)

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companies ownership / stage owned / acquired by financial institution non-bank corporate

mature private company

later stage company early stage private company independent tech or business services co

independent non-bank financial services company

early stage VC funded

Figure 9: Distribution of companies by ownership/development stage

funded companies dominate the sample. valued at US$44m in 2017;3 Eurobits in In the absence of comprehensive and com- Spain was acquired by Tink for €15.5m parable financial data, an assessment by in 2020;4 Olinda raised series C funding valuation is not possible. Nevertheless, of €104m from parties including Tencent;5 selected disclosures give some indication and API integrator BUD, backed by of the expected market potential. Beyond HSBC and Goldman Sachs, recently raised the established and listed players, some US$20m6 to aid in expanding its staff and of the biggest newcomers in this sam- market coverage. ple include Klarna subsidiary Sofort and Within the scope of shareholders and Revolut (Klarna and Revolut both valued investors, banks and other financial insti- recently at US$5.5bn1). Also in the sample tutions are very prominent. Fifteen of the is Plaid, which is being acquired by Visa early-stage non-VC funded companies are for a stated US$5.3bn.2 Most of the earlier- owned by banks or groups of banks. A wide stage companies have more modest but sig- range of credit institutions have created or nificant valuations: Paytrail in Finland was supported investments in new technology

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and services, including Danske Bank, OP firms and amount respectively to financial Financial Group, BBVA, Credit Agricole, and insurance activities. Venture capitalists Credit Mutuel Arkea, NatWest, Bundesver- invested just under €1bn in financial and band Deustcher Banken, SPARDA Bank, insurance activities. Wüstenrot & Württembergische, Gruppo In terms of the geographical allocation IVA Maurizio Sella, AXA Bank, Belfius, of investments, the Invest Europe data indi- BNP Paribas Fortis, HSBC, Goldman cate some correlation with this sample, but Sachs, ING, KBC, ING Ventures, Nordea, also demonstrate the level to which this the Volksbanken group and M.M. Warburg industry segment has become a focus for & Co. In other cases, banks have invested development in the UK and Ireland. This alongside VC funds in independent entities. can be seen in Table 2, which summarises A small number of non-bank corporates the number of earlier-stage companies have either established or acquired compa- invested in at seed, start-up and venture nies with authorisations. In the retail and stages (across all industries) in 2019. related space, for payments and in man- The large portion of firms registered in agement of subscriptions and loyalty, this the UK may be influenced by the focus includes BP, Enel, Zalando, Telefonica, of the economy on financial services and Esprit fashions and the supermarket chain investment management. To some extent, ICA Spara. however, this prominence may also be A larger contingent is made up of very linked to explicit efforts in the UK market big (ie listed or not early-stage) non-bank to support more competition in the bank- corporates that provide payment and related ing sector. Since the Cruikshank Report business services, such as payments process- 20 years ago and the financial crisis of ing, credit reporting and accounting, such 2008/9, in which RBS was brought into as CRIF, Sage, Wolters Kluwers, NETS public ownership, several steps have been A/S, First Data, Worldline and Ameri- taken to promote FinTech innovation and can Express. This contingent also includes competition in retail and small to local and global technology firms, including medium-size enterprise banking. The Office Google and Intuit. of Fair Trading has played a catalytic role There are a few smaller and relatively in encouraging open banking, reforming early-stage firms that have already acquired access to payment systems and laying other companies in the sample, perhaps an foundations for the licensing of new digi- early sign of consolidation that may increase. tal banks. The Bank of England and the This includes Klarna, which owns Sofort, Financial Conduct Authority also took and Tink AB, a Swedish firm that acquired early-stage initiatives to promote FinTech. a Spanish FinTech called Eurobits Technol- On the investment side, the British Busi- ogies in 2020. ness Bank has identified FinTech as one of its priority segments for investment. In 2018 it allocated 13 per cent of its funding to Correlation with European venture capital ‘future of finance’ companies. The organi- According to Invest Europe,7 total European sation has invested via a range of investment venture capital — across all sectors — in fund management companies, among which 2019 comprised 913 firms, making invest- several, including Balderton, Seedcamp, ments of €11bn in 4,696 companies. In 2019, notion.vc, Dawn Capital and Amadeus the overall market, including private equity, Capital partners, have been active in the buy-out, VC and ‘growth funds’ allocated payments space, including AISPs and PISPs 3.4 per cent and 8.2 per cent of funding by covered herein.

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Table 2: Number of early-stage investments, by region

Stage UK & France & Germany, Southern Nordics Central & ∑ Ireland Benelux Austria, Europe Eastern Switzerland Europe

Invest Europe, ‘Annual Activity Statistics 2019’ Seed 214 280 220 125 232 202 1,273 Start-up 546 833 506 415 338 151 2,789 Sub-total 894 1330 822 627 654 369 4,696 % 19% 28% 18% 13% 14% 8% 100% EUCLID sample (for comparison) Early & later- 108 32 21 5 34 15 215 stage VC % 50% 15% 10% 2% 16% 7% 100%

Source: Invest Europe, ‘Annual Activity Statistics 2019’, available at: https://www.investeurope.eu/research/ data-and-insight/ (accessed 30th June, 2020)

An additional financing initiative minority stakes in companies including emerged from the RBS bailout in 2009, Klarna (Ant), Olinda (Tencent) and True- under which a £425m Capability & Inno- layer (Tencent). There is also one firm that vation Fund (https://bcr-ltd.com/cif/) claims to be working in partnership with was established to provide grants to help WeChat to provide payments acceptance awardees improve their banking capabili- for them in Europe. ties for small and medium-sized enterprises. Under this programme, four firms covered in this data (Funding Options, iwoca, WHAT THIS SAYS ABOUT THE Swoop and Fluidly) received grants. ECONOMICS AND INVESTMENT Lithuania has also had a very proactive LANDSCAPE approach towards the FinTech industry. The New intermediaries are playing a growing authorities there have actively encouraged role in advising clients on financial ser- FinTech firms to use Lithuania as a base to vices. Many AISPs and some PISPs aim to serve Europe (Figure 10). Application and provide smarter data analytics, and to draw licensing processes have reputedly been on data that have previously been unavail- streamlined. Lithuania has attracted compa- able (technically or legally), to inform more nies including Revolut and Google. automated and dynamic advice. This can The sample also provides some and is overlapping into providing financial information about the mode of entry of non- advice to consumers and firms regarding European financial and technology firms. savings, investments and how to improve Several of the older and larger North one’s credit score. It is also fostering the American based technology firms have broader usage of artificial intelligence to established their own legal entities, mostly generate recommendations. using the UK, Ireland or Lithuania as a Many, but not all, of these businesses are base for servicing the broader market. This also two-sided. They are onboarding end includes companies such as Plaid, Yodlee, users, primarily consumers, with low or Google and Saltedge. Larger Chinese pay- no fees and offers but counting on gener- ments actors such as Ant Financial and ating revenue through advertisers, prospect Tencent have invested in this market through generation or fees levied on merchants.

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0.4 # of institutions in the sample per 100Tsd population and by country of home competent authority 0.35

0.3

0.25

0.2

0.15

0.1

0.05

EMI PI AISP Figure 10: Number of institutions in the sample by country of home competent authority

Some of these structures are well estab- contingent of AISPs. Many of these firms lished, although in some cases there may be are likely to have been already providing concerns about disclosure and potential con- consent-based access and data-sharing facil- flicts of interest, particularly where financial ities to clients before the introduction of investment products are intermediated. PSD2, but now find that they need to have What role do synergies with non- an AISP authorisation in order to formalise financial industry activities play in value and comply with this practice, as it pertains creation and competition? So far within this specifically to bank transaction information. sample there is little indication that non- Banking federations and associations financial services providers are expecting that have shared service companies are to internalise payment initiation function- using them to develop internal tools that ality. With a few minor exceptions (Esprit, larger banks may be able to develop inter- BP, ICA Sparda), retailers may be relying nally. Some of the companies in Germany, on existing payment licences (such as for Italy and France are set up by the IT and Uber and Airbnb) or the new companies shared services units of savings and coop- servicing merchants to provide access to erative banks. This includes companies in related data analytics. This trend is also the data such as the Linxo Group and BPCI consistent with the appearance of a small in France, VR Payment GmbH and PAY- number of loyalty application specialists ONE GmbH in Germany, Fabrick SpA in among the sample of AISPs. Italy, MyFin in Bulgaria and Payconiq as a Accounting and ERP software and regional service provider based out of Lux- service providers make up an important emburg. Their presence in the list may say

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more about how their shared business opera- that will allow overlay services on any tions function than about a specific focus on account-to-account payment instru- FinTech that sets them apart from other ment. The European Automated Clearing banks. Larger banks do not need to establish House Association is developing an separate entities or licensing arrangements interoperabilty framework to complement to provide such services. It is therefore the EPC SRTP Rulebook. reasonable to assume that other banks also have similar projects but have less incen- The more the above elements fall into place, tive to create them as separate ventures. In the more space will open up for PISP ser- contrast, it should be noted again that many vices. Companies like Klarna/Sofort, or banks have made minority investments in the leading acquiring processors (Worldpay, individual early-stage firms providing the Worldline, Nets) will be in a good position services covered by this analysis. to offer lower-cost options to merchants. The opening up of payment initiation They can then expect PISPs to similarly services may also lead to changes in the seek a position between acquiring banks and market share of card schemes. Platform merchants. The total and per capita payment competition between new SEPA Credit card expenditure of consumers gives some Transfer (SCT) solutions and cards should indication of the countries in which inves- increase. While it is still too early to fore- tors may see near-term potential. A recent see what portion of and at what pace study commissioned by the EU assessed the e-commerce and other retail payments effects of the Interchange Fee Regulation will substitute SCT, there appears to be (IFR) (see Figure 11).8 Although it recom- growing momentum for this. There are mends further assessment of the impact of also converging public policy and private maximum fees for transactions above €35, market forces heading in that direction from: there does now seem to be greater clarity regarding the stability of the current fee ●● the European Payment Council (EPC), for structures and regulation. This will enable SCT instructions to be confirmed as the new providers to have more confidence in European Instant Scheme for euro; assessing the business case. ●● the ECB, by positioning TIPS as the infra- From this early-stage sample, it will be structure hub that can connect the existing interesting to observe if and how AISPs ‘local’ SCT Instant Payments solutions in and PISPs expand their hold on retail-client Europe and allow cross-border reach and relationships and how loyal any new cli- full business interoperability, initially for the ent base proves to be. Some institutions, Eurozone, but pre-wired to support multi- such as Klarna and Sofort, have managed currency instant payment settlement; to expand from an initial niche in ●● the European Commission and the ECB, e-commerce payments and merchant ser- both of which have publicly supported the vices into providing a broader array of launch of the European Payment Initiative financial services to their own client base. (EPI), announced by 16 leading commer- Within this sample there are many compa- cial issuing banks — this will be a European nies seeking to insert themselves in between scheme, based on account-to-account or banks and their customers, and to this end card rails, which could present an alternative are clearly developing their own consumer to international card schemes; and branding. Of course, whether they will ●● the EPC, which has taken steps to fast- remain niche players or expand into the track development of a request-to-pay core activities of credit institutions remains scheme (SEPA Request-to-Pay Rulebook) to be seen. In a scenario in which core

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total value of all card payments in EUR billion (lhs) and per capita card expenditure EUR (rhs) 2017 1200 18,000

16,000 1000 14,000

800 12,000

10,000 600 8,000

400 6,000

4,000 200 2,000

0 -

Value of total card payments 2017 EUR billions per capita

Figure 11: Value of card payments per country (€bn) — total (left-hand side) and per capita (right- hand side)

banking services become commoditised, it markets with a high concentration of banks could prove to be more profitable to focus on and few alternative sources of finance, ver- client-facing intermediation and services. tical integration of new PISP and AISP Outcomes may depend on the depth services may be more efficient. If new and variety of product providers and other downstream intermediaries find few banks financial institutions (beyond integrated (ie upstream product providers) to work with, universal banks) to which PISPs and ASIP they may be in a weak competitive position will act as distributors and intermediaries. to compete with those banks’ own vertically Further analysis should extrapolate from integrated distribution arms. On the other modelling the effects of vertical integration hand, if there is also a growing variety of in oligopolistic industries. As Abiru et al. upstream independent market-based finan- note,9 when imperfections exist in both the cial firms — locally or via passporting — and upstream and downstream markets, double B2B product providers, a diverse array of marginalisation can occur, undermining new, downstream distribution layer actors welfare. In monopoly industries, vertical may be complementary and result in a new, integration is a stable equilibrium; in such less concentrated market structure. cases vertical integration may be economi- Although this aspect of market dynamics cally more efficient. However, as the level requires further research, one can certainly of competition and participants in upstream expect that the overall dynamics will depend and downstream sectors diverge, there is ‘no on the structures at both the up and down- uniquely dominant strategy’.10 stream layers of the market. The success of Transposed to the market context under account information and payment initia- investigation, the implications are that in tion services (financially as well as in terms

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of their impact on market efficiency) will key assumption of the legislator, that the depend in part on the structure and degree level of innovation in payments could be of competition in upstream markets. For this increased, given more regulatory leeway reason, policy makers need to monitor and (in the form of the PSD2). gauge competition within this more com- ●● Beyond consumers, merchants are the most plex context. For the further creation of both important group that should anticipate improve- a dynamic and integrated European market ments from the new competition. With the for financial services, this is just another introduction of new payments architecture chapter in a slowly unfolding process. and platform competition between cards and (instant) credit transfer systems there CONCLUSIONS AND POLICY is the expectation that merchants and con- IMPLICATIONS sumers will be offered new ways to pay that Although there will surely be further may undercut the fees of card schemes. This evolution both regionally and globally, this may work if merchants are offered signif- initial zoology of FinTechs has provided icant value-added benefits or reductions some initial insights into the dynamics in fees, and if consumer habits can in par- and expectations of market participants: allel be shifted away from cards to mobile apps and credit transfer products. Certainly, ●● The prevalence of new end-client facing inter- card schemes have woken up to the poten- mediation services implies that there is still some tial threat and are energetically improving room for efficiency gains. Most new entrants their services with additional features like will be betting on their chances of earning purchasing insurance, or increased security revenue from improving on the interaction with geo-blocking options. However, to between banks and end users — both con- the extent that banks still control acquiring sumers and merchants. Most markets in the services for both card and instant payments, EEA have high degrees of concentration in they may be able to adjust pricing so that retail banking, so there may indeed be space payment initiation services do not overly for some areas of client prospecting and sales cannibalise their card scheme commission to squeeze out margins for banks and com- revenue. pete with their internal product and mar- The investments in the merchant ser- keting functions. vice and payment apps suggest that some A significant element of competition investors have confidence in this hypoth- also focuses not so much on price but esis. In the UK, Kikapay targets both on variety competition, in which the merchants and consumers and highlights preferences of a new generation and of its potential to reduce both fraud and costs more bespoke business requirements are for merchants, as well as provide imme- addressed by more specialised services. diate availability of funds. In Sweden, However, in opaque market segments or Trustly, Mondido and Brite offer mer- in the context of uninformed users, there chants services that are more efficient, may also be the potential for new actors provide immediate funds and can improve to generate new revenue opportunities online sales rates. Perhaps not surprisingly, or increase overall market consumption it is in these two countries — the UK of financial services that are not welfare- and Sweden — that there are also some enhancing. The overall impact on sec- of the highest per capita spends by card.11 tor efficiency may take time to manifest As card fees are largely calculated on per- and will be increasingly difficult to assess. centage terms and instant payments often Nevertheless, the evidence supports one incur a flat fee, there could be significant

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arbitrage opportunities for new players to Further research exploit. It will be worthwhile observing Avenues for further research include the this specific area of the market (indeed, following: some markets in the EEA, such as Ger- many, already have a higher rate of credit ●● Several trends make it more difficult to transfers for retail payments). Again, the monitor and assess the changes in the sec- evidence supports another key assump- tor. With the growing diversity of actors tion of the legislator, that there is room in the ecosystem, blurring borders and a for more competition in payments. Bene- move from price to variety competition, ficial price effects for merchants have been it will be more complicated for policy observed as a result of the Interchange makers to measure and assess competi- Fee Regulation.12 Although further ben- tion and efficiency. While some changes in eficial effects for merchants or consumers regulation have de-risked end-user services have not yet emerged, more price reduc- and protected the central infrastructure, tions for merchants can be expected from other risks to integrity and consumers may the increased competition between cards arise. As the marginal costs of international payments and instant account-to-account expansion through these business models payments. decline, more complex supply chains may ●● The data point to what could become a wider arise that test the boundaries of regulators’ range of new information economy actors sharing and supervisors’ authority. It might become and accessing data. The sample highlights the easier for ‘thin’ client-facing service role of accounting, tax and credit reference models to establish a legal presence in firms in accessing and providing access local jurisdictions to address consumer to account information. However, PSD2 protection issues in retail banking, and only applies a data access and protection then to source products via B2B rela- framework specifically to certain banking tionships with foreign entities. This could operations and information. It layers on expand cross-border trade in retail financial top of General Data Protection Regulation services under regulations applied to requirements in a specific segment. business/professional investors. But as the emerging discussion around Further research could we warranted the role of data trustees and the approach to develop improvements in data and ana- taken by the Australian Competition lytics used by authorities to monitor and and Consumer Commission (ACCC) in oversee the market and keep up pace with Australia suggest, growth of data access its dynamics. and usage extends well beyond banking. ●● The speed, ease and investor appetite with Will cloud-based accounting and tax ser- which some of the providers in this sam- vice providers be the forerunners in the ple have expanded across borders ampli- AISP market, or are they the exception fies the importance of ongoing digital that has to comply with banking sector trade and FinTech agreements. Regional rules? Will other intermediaries emerge and bilateral trade agreements are focus- that share and manage data access for ing increasingly on the role of various other businesses? In this respect, both impediments to cross-border trade in Verimi GmbH, with its array of industry payment and related data services. In par- and service shareholders (Samsung, VW), allel, concerns about the strategic impli- and Giesicke & Devrient could provide cations of international expansion by interesting examples of how non-financial highly scalable tech-network services have firms might look at information access. prompted re-examination of competition

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policy frameworks and national interest. AUTHORS’ NOTE Informing this emerging trade and regu The views expressed herein do not engage latory policy domain is of importance or represent those of any of the organisations and warrants new and highly practi- with which the authors are associated. cal research that can guide policy makers in the interest of equitable economic development. REFERENCES ●● Research should also investigate the (1) Forbes Magazine (2019) ‘Klarna becomes Europe’s interactions between and effects of com- most valuable fintech’, available at: https://www. forbes.com/sites/samshead/2019/08/06/klarna- petition in these downstream distribu- becomes-europes-most-valuable-fintech-firm-with- tion functions and the market structure new-55-billion-valuation/#7aaef2aa323b (accessed in upstream parts of the financial services 22nd July, 2020). (2) Visa Inc (2020) ‘Visa to acquire Plaid’, available at: sector. Payment and account informa- https://usa.visa.com/about-visa/newsroom/press- tion services have long been structurally releases.releaseId.16856.html (accessed 22nd July, embedded in the services of banks. With 2020). (3) Nets (2017) ‘Company Announcement No. the help of technology, their joint DNA 23/2017’, available at: https://www.generation-nt. have been separated and freed to develop com/nets-nets-has-purchased-the-remaining-shares- more independently. But as they still are in-paytrail-oy-newswire-1944637.html (accessed parts of a common ecosystem, interactions 22nd July, 2020). (4) Fintech Futures (2020) ‘Tink completes €15.5m between them will inevitably influence acquisition of Eurobits’, available at: https://www. broader market outcomes and implications fintechfutures.com/2020/03/tink-completes-e15-5m- for welfare, competition and efficiency. acquisition-of-eurobits/ (accessed 22nd July, 2020). (5) S&P Global Market Intelligence (2020) Separating out the payment and account ‘Qonto raises €104M in series C financing information services offered by incum- round’, available at: https://www.spglobal. bent banks from the EUCLID database of com/marketintelligence/en/news-insights/ trending/9HZGHdIzTX9bnbtPSYqhPw2 (accessed credit institutions will allow for such 22nd July, 2020). investigation. (6) Forbes Magazine (2019) ‘Goldman Sachs joints ●● The specific role of large marketplace HSBC for 20 milllion bet on Bud’s AI Powered bank accounts, available at: https://www.forbes. ‘platform operators’ in the provision com/sites/oliversmith/2019/02/03/goldman-sachs- of payment services and financial ser- joins-hsbc-for-20-million-bet-on-buds-ai-powered- vices more broadly is worth further bank-accounts/#499e692967ff (accessed 22nd July, investigation. Some companies are build- 2020). (7) Invest Europe (2020) ‘Annual Activity Statistics 2019’, ing capabilities through the acquisition available at: https://www.investeurope.eu/research/ of a bank, electronic money institute or data-and-insight/ (accessed 30th June, 2020) payment institution; others are creating (8) European Commission (2020) ‘Study on the Application of the Interchange Fee Regulation — subsidiaries that are licensed to operate in Final Report’, available at: https://ec.europa.eu/ specific EU member states. Their platform competition/publications/reports/kd0120161enn. business models might be more focused pdf (accessed 30th June, 2020). (9) Masahiro Abirua, M., Nahatab, B., Raychaudhuria, on developing a broader and deeper end- S. and Waterson M. (1998) ‘Equilibrium structures user relationship (with the supply side of in vertical oligopoly’, Journal of Economic Behavior & their platform, or the demand side, or both) Organization, Vol. 37, No. 4 pp. 463–480. and less focused on earning immediate (10) Ibid. (11) Data obtained from the ECB Statistical Data return on payment services — leading to Warehouse (sdw.ecb.europa.eu) on 30th June, 2020. the risk of cross-subsidisation. (12) European Commission, ref. 8 above.

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