After crossing the Atlantic 14 times since starting my MBA in 2019, I have been back in London as of late February, where I hope to stay for good (excluding one last graduation trip in May). It feels great to be back in one place and settling into a new flat (read: apartment) and being close to friends and family. As the COVID restrictions have started to ease in England, seeing my nearest and dearest is what I am most excited about for the rest of the year.
With all of this, as I begin to transition out of my MBA and back into gainful employment (I am actively seeking roles so hit me up if you are hiring in London!), I am pumped about the fintech space and its prospects in Europe. That said, let's dive into what happened in the first few months of the year, with a focus on Plaid competitor TrueLayer.
Q1 Fintech in Europe
The first 3 months of 2021 saw 131 deals and $3.5B invested in UK fintechs alone. The largest deal was LendInvest’s $680M with the quarter dominated by payment companies (Checkout, Rapyd, GoCardless) and neobanks (Starling, Curve, Monument).
Looking across to Europe, there were a total of 291 deals with nearly $6.4B invested (inclusive of the UK). The largest deal was Klarna’s $1.3B round and the remaining top spots were dominated by UK fintechs (6 of top 10).
I want to focus on another company that had a funding round for this newsletter though. While news of Plaid’s raise dominated headlines in the US, European competitor TrueLayer raised $70M in April, bringing its total investment to date to $172M. In its announcement, TrueLayer talked up expansion and scaling. It also focused on building out new premium products, with founder Simon Simoneschi saying payment initiation will be the default way to pay.
Source: Banco de Portugal
Payment Initiation Background
What exactly is payment initiation? It’s a new payment rail which provides a way to make a payment directly from a consumer’s bank account to a merchant via a licensed Payment Initiation Service Provider (PISP) such as TrueLayer, Plaid or a number of other providers. No card needed. A customer’s payment experience is seamlessly handed off from merchant to their bank where they log in using their usual online banking credentials.
The benefits of this are touted as increased conversion rates since consumers don’t have to scramble to find their card, as well as security/fraud improvements through increased security on mobile devices. Additional benefits include easier reconciliation and importantly, it's cheaper. With UK-to-Europe payments interchange set to increase 5x post-Brexit, this should be a prime opportunity for payment initiation.
Even though I often have conversations with naysayers highlighting the lack of support for recurring payments and the lack of ability to process a refund on the same rails, volumes are taking off. Mastercard data indicates only 6% of third parties are registered to be PISP. They also found that in August 2020 there was a 8x increase in UK consumers using payment initiation during the first lockdown. This surge in volume was confirmed with data released with TrueLayer’s recent funding round where they said its payment API had seen “volumes grow by 600x as more companies adopt open banking such as Revolut, Trading 212, Freetrade and Nutmeg.” In terms of adoption a third of customers chose open banking payments and some fintechs are seeing 70% using open banking as its primary payment method.
A Brighter Future For Open Banking?
Plaid and TrueLayer raising aren’t the only sources of activity in the Open banking space recently. Some other recent activity includes;
- April 2021-Australia’s EML Payments Limited acquired Nuapay
- April 2021-Trustly announced $9B IPO plans
- Mar 2021-Enfuce raised $8.4M
- Feb 2021-Equifax acquired AccountScore
- Nov 2020-Token raised $15M
- Feb 2021-GoCardless raised $105M
- Dec 2020-Tink raised $101M
The recent raises by Plaid and TrueLayer thrust Open Banking back into the spotlight at a difficult time. A recent study by Mambu found widespread misunderstanding about Open Banking still exists, and there’s a clear gap in communication of what problems it solves for consumers. Banks were found to be lacking in education and promotion, which is no surprise given their antipathy towards it and their lobbying efforts to prevent and stall its implementation. 57% of people surveyed by Mambu said they would be more likely to use open banking if their bank had more successfully implemented and promoted it.
This is one of the downsides to forcing rules upon banks. They are not fully bought in, and they do the minimum needed to comply. The requirement for Strong Customer Authentication is one example of their efforts to stifle the innovation which has resulted in high churn for fintech customers with a requirement to renew authorisation every 90 days.
The data from Mambu confirms a perspective of Monzo founder Tom Blomfield, who was quoted last year as saying “The positive effect of Open Banking on innovation has been nil. I don’t see any businesses based on Open Banking in Europe whatsoever.” TrueLayer founder Francesco Simoneschi recently poured cold water on that perspective, but admits the pace of innovation was slow early on.
Open Banking is moving to Open Finance in the future, with banks being required to share more data, beyond just payment account data. However, just broadening the scope will not solve the fundamental problems of Open banking. Open Banking platforms like Plaid and TrueLayer are instrumental in advocating for the consumer and providing the infrastructure for other fintechs to build on top of, even more so in an Open Finance world. It is the job of fintech companies to step up and fill the void by focusing on solving consumers' pain points. Based on the stats above, it would appear there is a place for payment initiation.