Why Europe’s open banking startups are so eager to partner with crypto wallet firms

When Bud, the London-based open banking startup backed by HSBC and Goldman Sachs, announced the launch of a payments product in June of last year, crypto wallet provider Blockchain was named as the first customer.

The firms said they were running a trial for Blockchain’s European customers, allowing them to fund crypto wallets directly from their bank accounts without needing to share their card details.

At the time, it probably seemed to many like just another crypto trial.

Some six months later, it looks more like something of a trendsetter, as the marriage of open banking and crypto companies has become a happy one.

From open data to open payments

Open banking is the three-year-old UK regulatory framework under which data held by banks can be accessed by a host of authorized third parties — many of which are fintech firms — with the consent of the customers who own that data. The data can be used to power a series of fintech tools, such as authentication services or the aggregation of multiple bank accounts.

The UK’s approach is distinct from the EU’s Revised Payment Services Directive (PSD2), which gave rise to the possibility of open banking. In the UK, a single group called the Open Banking Implementation Entity (OBIE) has been tasked by the Competition and Markets Authority to hold all local banks to a single standard. Under the EU rules, on the other hand, there is no single standard, leaving more room for banks’ interpretation.

Access to data is not the be-all-and-end-all in open banking. The second, less-hyped piece of the puzzle is the payment functionality, which in theory allows customers to make payments directly from their bank accounts without having to rely on intermediaries like card networks, as in the example above. 

Data released by the OBIE on January 13, the third anniversary of PSD2 coming into effect, may explain why direct payment tools have received less attention. 

The group revealed that the number of API calls (the method through which bank data is accessed) increased from 66.8 million in 2018 to 5.1 billion in 2020. Open banking payments made progress too, just on a much smaller scale, growing from 320,000 in 2018 to 3.4 million last year.

But the emerging payment method has the potential to be both faster and cheaper for customers, and many believe this was a big motivator behind Visa’s failed attempt to buy Plaid, the U.S. data-sharing firm with a foothold in Europe.

The argument goes that open banking payments, initiated using an API that connects to a customer’s bank account and circumventing the need for users to enter card details, could impinge on Visa and Mastercard’s dominance in the wider payments market. 

“Especially in Europe, there’s been a lot of push for a third card scheme or some alternative and generally the introduction of an API through an open banking mechanism could have been a third way of making those payments,” Starling Bank chief executive Anne Boden said in a recent interview.

That makes the payments market "very, very interesting space for the owners of the existing rails to play in" right now, according to Boden. “Visa buying Plaid and Mastercard buying Vocalink is all a way of maintaining what is basically a duopoly."

In the United States, banks are not required by law to share data with authorized third parties, as they are in the UK and Europe. Instead, companies that facilitate access to transaction data negotiate terms with the banks on one side and data-hungry fintech firms on the other. Plaid is one such firm, and perhaps the biggest of them all. 

That may help explain why the US Department of Justice was none too pleased about Visa’s plan to absorb Plaid.

Wanted: Crypto wallet firms

Since the Visa deal was scuttled, Plaid’s European business has doubled down on account-to-account payments – with crypto firms as a major target.

UK lead Keith Grose told The Block that Plaid has shifted to focus more heavily on payments in 2021. “We’re planning to double our team this year in Europe, and just really focus on making open banking payments a success,” he said.

One of the biggest things crypto wallet firms struggle with is “getting fiat in successfully and allowing users to trade for that,” Grose said. “That is something that Plaid is uniquely placed to help with, in addition to helping to verify users’ identity and things like that with bank account information.”

Ordinarily, loading crypto wallets with fiat currency requires a manual bank transfer or a card-based transfer. It can cost up to 3% to top a crypto wallet this way, according to Stefano Vaccino, founder and chief executive of the London-based open banking firm Yapily. 

Using biometrics and app-to-app redirects, open banking payments promise a cheaper and near-instantaneous alternative.

“So for us, crypto applications is one of the segments that we think is most attractive for payment initiation, so we’re really going out and trying to work with those applications to ensure that they have the easiest, fastest, cheapest funding method available,” Grose said.

Yapily, which closed a $13 million Series A led by venture investor Lakestar in April 2020, is already working with several crypto wallet firms. It is a marriage, in Vaccino’s view, which could “significantly increase” the adoption of digital assets in the region.

“With Account Information Services, users are able to manage crypto and fiat currencies all within one application, removing the separation that currently exists between them,” he said. 

Account Information Services is the technical name for tools that allow people to view all their financial account data in one place. Payment Initiation Service is the name for tools that facilitate direct payments. 

“This removes the friction within the user journey and instills confidence for customers engaging with crypto products.”

On the other side of the fence, crypto companies seem equally willing to play ball, perhaps taking their lead from Blockchain.

Mark Hipperson, who runs London-based crypto wallet firm Ziglu, told The Block that his firm will be looking at open banking integrations later this year.

“We’ve evaluated leading players and are finalising commercials,” he added.

By the sound of things, open banking’s new love for crypto wallet firms won’t be unrequited.