With new financial regulations comes great opportunity, and one London-based startup wants to be the middle man for the open banking era. By providing access to the newly opened data streams being released by major banks across Europe, TrueLayer wants to power fintech startups looking to build innovative financial applications for users.
Just as opening up Transport for London's data allowed Citymapper to build a best-in-class navigation app for Londoners back in 2012, now a whole host of fintech startups are looking to do the same with people's financial data. This could be by coaching people to better use their money by accessing recent transactions, comparing financial products to get customers a better deal, or offering more seamless payments or lending options.
As new open banking regulations come into effect this year, with the second payment services directive (PSD2) in Europe and open banking in the UK, approved startups can start to build applications on top of people's actual financial data (once given permission of course), direct from the banks via an application programming interface (API).
Few fintech startups are betting the farm on the concept of open banking as much as TrueLayer is, building an API (actually two APIs, but I will get to that later) enabling turnkey access to the newly opened banking data without fintechs having to design their own integrations.
Cofounder Francesco Simoneschi came up with the idea while working at the San Francisco venture capital firm Mission and Market, which he also cofounded.
"I started seeing the banks becoming more of a utility," he explained to Techworld. "On top of payments and money holding, a new breed of companies were building new ways for consumers to manage their finances. So there must be something connecting those two pieces together.
"The companies want to innovate user experience and create value, not worry about the underlying banking infrastructure, so that's where TrueLayer comes in."
So Simoneschi moved back to London - where he studied economics at LSE between 2011-2013 - to set up TrueLayer with his cofounder Luca Martinetti. They raised $4.5 million (£3.2 million) across two rounds of funding from the likes of Connect Ventures and Anthemis Group, and set out to create the core APIs customers would come to them for.
How does it work?
Simoneschi likes to compare TrueLayer to Twilio or Stripe, two developer-centric Silicon Valley unicorns (startups valued at more than $1 billion) whose whole business models are prefaced on providing simple, secure and regulated access to core infrastructure through a best-in-class API, charging a small fee every time it is called.
Essentially these companies allow startups to outsource a huge chunk of their technical and regulatory requirements to a commoditised API.
Twilio allows startups like Uber to securely communicate with its users by tapping into core communication infrastructure for phone and SMS, by connecting HTTP and the public switched telephone network (PSTN) through its APIs. Stripe performs a similar service for startups looking to access payments infrastructure, such as BACS and Faster Payments in the UK. As an aside, Truelayer's COO Shefali Roy spent two years as a chief compliance officer for Stripe in Europe.
So TrueLayer intends to sit between the newly opened up financial data and the fintech companies looking to deliver new services on top of that data.
As hinted at earlier, TrueLayer actually offers two services: a data API and a payments API. It has already been approved by the financial conduct authority to be an account information service (AIS) and payment initiation service (PIS) provider.
The data API, which is live now, allows clients to access identity data, balance and transactions from their users' bank account.
The payments API is not yet in the wild, but TrueLayer promises it will let users "transfer funds directly from their bank account, as an alternative to card payments and direct debits," the company writes.
So why can't the fintech startups access these newly opened up APIs themselves? They can, but like with Stripe for payments, TrueLayer streamlines the process, removing the need for fintechs to build and maintain compliance, security, reporting, and administration considerations by outsourcing this to TrueLayer and focusing on its front end, offering and delivering value to customers.
Simoneschi hopes that open banking and PSD2 will put the work TrueLayer has been doing on the map.
"There is a very clear understanding of how things work and what the opportunity for consumers and companies involved is," he said, adding that this should provide plenty of business opportunity for the startup. "It opens up a market of more companies to work with."
He is frustrated by hair-trigger media reports regarding the security risks open banking could pose however, stating that risks will always exist but that the potential upside of the new regulations for consumers should be the story.
When it comes to security, TrueLayer has a business critical responsibility to stay ahead of the game anyway.
"For security and compliance we play a tricky and special role where we must be extremely good at the different security aspects of our service," stressed Simoneschi. "We set up the company to be security first and we're always looking to innovate to limit security risks and try to address preemptively any security concerns.
"That goes all the way through from a compliance standpoint, getting various certifications and running pen tests and making sure the infrastructure is compliant," he added.
Can TrueLayer follow in the footsteps of Twilio and Stripe? It's very early days but this will hinge on the quality of its API, and how much easier it makes things for developers at already-stretched startups. Twilio and Stripe were both founded by developers and had great success in capturing those hearts and minds, not executives. TrueLayer would be well placed to take a similar approach.
Open banking will also have to resonate as a concept for TrueLayer to have any sort of real success. If there aren't enough fintech companies looking to jump on the bandwagon there simply won't be enough customers looking for this sort of service. TrueLayer is as much invested in the idea of open banking as it is the technology behind it.
Then there is the issue of market size. Twilio and Stripe managed to quickly corner their home markets before scaling globally, which isn't easy when you consider the regulatory work these companies need to put in. TrueLayer only has a market opportunity in Europe at the moment as these new regulations are EU (PSD2) and UK (open banking) specific.
What Simoneschi and his investors will hope is that the concept of open banking spreads after a successful incubation period here in Europe, and the company will have to keep its eyes open to these opportunities.