Open sesame with open banking

Written by Lily Shaw and Charlie Renzoni

While the much discussed ‘summer lull’ in VC didn’t materialise for us at OMERS Ventures, we have found some time to reflect on where we are seeing a concentration of exceptional founders, and where we think segments of the market remain underfunded, and more importantly, underestimated.

One of those areas which stands out is Open Banking (OB). OB relates directly to the wider set of consumer data portability rights, where individuals should have full ownership of their financial data (where and how data is stored or used). In layman’s terms, what OB enables is a broader and more innovative set of financial product options benefiting the end consumer.

Being transatlantic investors, we have the privileged position of being able to see the full breadth of the OB spectrum across different geographies. Given the parallels between EU and Canadian adoption of OB, I have joined forces with my colleague, Charlie Renzoni, who covers OB in NA out of Toronto.

As we’re not looking to rival Tolstoy’s word count, and as there are many volumes of articles which have already been written by erudite OB professionals, we’re focusing on:

• How successful has the EU/UK prescriptive approach been, and our thoughts on how that’s being implemented in Canada.
• The different phases of innovation within OB — and introducing our categorisation of 1.0 vs 2.0.
• Finally, where we see the most interesting use cases moving forward and some startups who we think are ones to watch.

Market vs prescriptive

With self-deprecation imbued in the British national psyche, it’s rare that we are able, and willing, to make the statement that we are a world leader at something. Yet from both from the perspective of regulatory support and market adoption, the UK is unequivocally the world leader of OB, in large part due to the 2012 update to the Freedom of Information Act.

The US is making progress towards adoption, and they have taken a market-led approach to OB due to the scale of their market and the high level of fragmentation in their banking ecosystem. In contrast, in the EU and Canada, we have observed a prescriptive, centralized approach to OB.

Compared to the EU, the Canadian Open Banking Initiative is still in its infancy. Consumer FinTechs like WealthSimple and Neo Financial are genuinely enabling better, faster, and cheaper financial products and services for Canadian consumers. But they are innovating off of an ecosystem built on workarounds, such as the financial data aggregators who securely apply screen-scraping techniques in the absence of customer data available via API. The connections that do exist, such as credit card loyalty points or intrabank product offerings, are on a bespoke, bilateral basis; which causes the incompatibilities between services that yield the slow and manual processes we have all experienced as consumers.

The Department of Finance has already explicitly stated that OB will bring Canada more innovative financial products and greater financial inclusion for marginalized groups — there is no question that it will benefit all consumers, and this is something to be excited about. Of course, the glacial pace at which policies are changing is due to high customer concentration across the big Canadian banks (the top 5 banks hold 89% market share).

What excites us most at OMERS Ventures, is the opportunity for young companies, notably FinTechs, to play a crucial role in the country’s maturation. To move past today’s limited data approach, driven by use cases approved by the banks, we need the Canadian VC ecosystem to support more early stage players who enable the evolution of the ecosystem to an information-forward approach in the UK.

Does adoption meet expectations?

The pandemic has been a significant accelerant for OB adoption. As of March, it is estimated that there are 3+ million OB users in the UK according to the OBIE, and at the current growth rate it is expected that 60% of the UK population will have tried OB by September 2023. An even more bullish estimate has been put forward by PWC, who predict that by 2022, 71% of the UK SMBs and two thirds of adults will have adopted OB.

In Canada, COVID advanced the FinTech adoption by 3–5 years. Payment innovation led the charge, with 62% of Canadians using less cash and with 42% of Canadians actually avoiding vendors without contactless payment services. This suggests to us that cardless services and embedded finance will also see a 3–5 year jump. In fact, COVID pushed Canada to be the #1 cashless country globally. For robo-advisory, where OB streamlines onboarding, adoption jumped from 10% in 2020 to 16% this year (and there is a 94% CAGR). But for core banking services, there is still opportunity, especially with Canadian Millennials and Gen Zs who are more open to switching financial service providers, at 28–31% vs. 22–10% for other segments. For public equities in Canada, we are starting to see a more widespread understanding of the value of OB with 55 public filings referencing OB so far this year.

The funding background

Source: Statista 2021

This wave of adoption, paired with all-time-high levels of VC dry power, triggered a mammoth amount of fundraising announced throughout the year. It can be easy to view FinTech as an expensive and saturated vertical. Indeed, over the past 5 years there has been over USD$120B poured into venture backed fintech companies, resulting in over 59 unicorns, likely all leveraging data aggregators. However, we’re of the view that the current investment climate is a little more nuanced — with OB enabling verticals which haven’t necessarily seen the pace of investment which the size of the opportunity merits.

Where there have been notable financing rounds in OB, they have been concentrated in aggregation, with far less funding being directed towards upstream and downstream OB use cases. There are numerous recent examples, including Plaid topping up its Series D with new money from JP Morgan and Amex Ventures, or Tink’s acquisition by Visa, or Mastercard acquiring Finicity. In the great white north, the most prominent Canadian data aggregator, Flinks, was just partially acquired by National Bank for CAD$105m. This aggregator led era is wave 1.0 of OB innovation, and with fintech adoption at a 43% growth rate there is far more to be expected as the scope and adoption grows across both the EU and Canada.

Current prevalence of different use cases — data courtesy of Truelayer :

Developing use cases — where do we see the opportunities?

Given this highly concentrated funding within aggregation, this has somewhat unsurprisingly resulted in increased cost competition and aggressive coverage competition. As data aggregation becomes increasingly commoditised, (there are estimates of 380 account information service providers (AISPs) in Europe), this results in increased focus on additional use cases which will be in demand from consumers.

While 2020 might have taught us that predictions are somewhat a fool’s errand…that hasn’t stopped us. We’ve taken the time to pull together some of the companies who we think are contributing to the most interesting use cases which are emerging for OB. Our classification was inspired by the now infamous volcano and is by no means the definitive list of use cases. Likewise, our list is not exhaustive, and please feel free to call out anyone we’ve overlooked.

Our framework is the following:

• Wave 1.0: The pioneers and trendsetters. We view this as comprising ‘Account & API aggregators’ alongside the ‘payments’ focused enablers. While aggregation is a fairly developed use case in the UK, we still see significant room for growth in the ‘payments’ category in both the UK and Canada.
• Wave 2.0: We have focused on three areas where we see the most innovation. Namely within ‘Investment & Financial Management’, ‘Lending & Credit’, ‘Embedded Finance & Digital Wallets’ and a more generalist interpretation of ‘Personalisation’.

Investment & financial management

Personal Finance Management (PFM) apps have become fairly ubiquitous in the last few years in Europe, and were one of the early use cases enabled by OB. As we move towards Open Finance in Europe, it is clear there is huge growth potential for this segment, as the suite of financial data available will grow to include investment accounts and pension providers. This evolution will pave the way for a new wave of savings and wealth management offerings that, instead of simply presenting your current financial wellbeing, actually contribute to wealth accrual and actionable financial insights.

UK

• We’d be remiss if we didn’t mention decentralised finance (or ‘defi’) in a landscape about the future of FinTech. The team at Ramp sits at the intersection of defi and traditional finance. Ramp connects blockchain with banks using open banking APIs and it is the first crypto on-ramp to receive open banking registration.
• The team at ClearGlass is focused on providing transparency to pension plans via collating data on asset manager fees. ClearGlass views itself as a communication layer between asset managers and pension funds, helping simplify and reduce the time associated with data collection.

Canada

• Delphia is taking world-class investment data-driven investment strategies, typically reserved for hedge funds, and partnering with consumers to create a data flywheel where all stakeholders benefit.
• While the first wave of PFM solutions felt dry and generic, Billi is making it easy to see not only where your money is going but how it tracks against the norm. You bet we’re on this waitlist!
• Already in the Canadian market, Clearestate empowers families and estate executors by putting the entire estate planning and settlement process in one place.

Lending & credit

OB looks set to drastically increase the accuracy and ease of loan origination, and we are confident that this will also be possible for SMEs, in addition to consumers. One of the use cases we are most interested in is the ability to reconfigure the archaic world of credit scoring. There is a growing cohort of companies who are helping a previously overlooked segment of consumers improve their credit scores, and giving companies more accurate tools for assessing credit worthiness.

UK

• One example is Credit Kudos who are disrupting traditional Credit Reference Agencies (CRAs) through their ability to create far more accurate insights on an individual’s credit worthiness. They are a regulated CRA and data controller, which enables them to retain transactional data, and in turn creates a data moat which incumbent CRAs are not able to replicate.

Canada

• Fraction, out in Vancouver, helps Canadians unlock equity in their homes.
• Targeted at employers, Benefi, is creating financial stability for employees by helping them get out of high interest debt traps.
• The US and Canada provide billions in R&D tax credits, and Boast AI is helping companies save time and get their cash sooner through gathering and aggregating data from company systems.

Personalisation

A recurring theme when meeting companies in the sector has been the ability to personalise and the customisation of data, thereby enabling customers to view financial data in a far more elucidated manner.

UK

• Berlin based, Airbank, are founded by a mix of former operators and investors. Their view is that the bank account is not broken, rather it’s the processes which are broken e.g. accounts payable and receivable. They are focused on the need to build more solutions to help the user, rather than giving the user more financial products.

Canada

• Sensibill collects and analyzes spending data to help brands better understand their customers’ habits, lifestyles and needs.

Payments

Currently in the UK single payments are fairly reliable across all the major banks, but there is still work to be done on bulk payments, where APIs in some instances, are still yet to be built. Moreover, as we progress towards ‘Open Finance’, further use cases are now possible. For instance, Variable Recurring Payments (VRP) is a feature which looks set to disrupt direct debits. For example, even if a bank doesn’t support bulk payments, they can use VRP as effectively a ‘sweeping’ mechanism.

In Canada, payments, as you may have expected, are slightly behind the UK, though there are points of innovation across a variety of use cases. These products are driving Canada closer to true real time API-driven payments, eliminating chargeback risks, and reducing fraud. While OB traditionally focuses on the read access to financial data, it is important not to ignore the opportunity that API based payment initiation presents.

UK

• Comma is a UK based team, who quickly realised that it is incredibly hard to change payment behaviour from the supplier side, you have to tackle the actual payment process itself. Comma is positioned to help SMEs as they begin to outsource more financial responsibilities.
• A particularly technical offering has been created by the Weavr.io team, which is a provider-agnostic platform, tackling the legacy issues of payment issuance. Weavr.io is a platform which provides the technical building blocks for payment standardisation due to their unique APIs.
• Volt.io is another UK based team who recently raised their Series A. Volt.io provides PSPs and merchants with a global point of access to account-to-account (A2A) payments. Thereby eschewing traditional payment rails and, as a result, delivering lower processing costs, faster settlement time and higher security.

Canada

• Real time payments are changing payments globally, Zum Rails, out of Montreal, is creating a new standard for payments in Canada through an all-in-one payment gateway.
• On the B2B side of the payments spectrum, Mazuma Go is eliminating cheques through modern digital payments processes with full integration to tools businesses already use.
• Flinks (yes, an aggregator) recently launched pre-auth bank debits with Stripe — a partnership between Canadian & US FinTechs that we at OMERS would like to see more of.

Embedded finance & digital wallets

In Canada, the demand for embedded financial services is skyrocketing. Increasing numbers of players are building consumer or B2B products and services integrated seamlessly with financial products off the back of data aggregators, payment players, and banks. In the US, digital wallet users have begun to exceed deposit account holders at some banks — something we are likely to see in Canada as well with younger demographics.

The embedded finance companies we are excited about:

Canada

• Float is tackling the spend management software stack through automation and embedded cards, not only saving customers time but also giving them increased insight into operations.
• For financial product manufacturing and full-stack BaaS, Finaptic is a white-label end-to-end financial products and services.
• Benji, targeted for the growing freelancer market (creator-economy enthusiasts take note) helps you manage all your business finances online, and on autopilot.

Account & API aggregation

In Canada, there is still white space compared to the EU in the Account & API aggregation space. Some companies that we are excited about in this category:

• FISPAN enables commercial banking clients to control the data flow between stakeholders, and allows customers to view their full financial picture.
• Railz connects companies’ accounting platforms to easily aggregate and normalize financial data.
• In the often overlooked estate administration space, Estateably assists law firms, accounting firms, and trust companies in streamlining operations and automating workflows.

Conclusions

‘Democratising access’ has become a somewhat clichéd term in FinTech, but OB is a vertical which is rapidly improving convenience and access in people’s financial lives. We’re hugely impressed by the quality of founding teams we’ve seen in the space, and we’re looking forward to seeing how they disrupt the often painful processes in consumer and SME banking.

If you’ve found any of the above interesting, we’re looking to speak to companies who are taking inspiration from other industries and offering truly unique products in their markets. So please, reach out if you’re building in the space! Lily on Twitter and Charlie on linkedIn.