At the beginning of December, Latvian fintech startup Nordigen achieved a fintech first.
It became the first in Europe to offer a free application programming interface (API) for accessing bank account information.
It was a bold move given the money others were charging for similar services, and was aimed at overcoming one of the major obstacles in realising the potential of open banking, namely the often high cost of accessing raw data.
It could also help millions get better access to credit.
“We’re at the very beginning, but we’re excited. Free banking data shouldn’t be expensive, and it's expensive today,” Rolands Mesters, Nordigen’s chief executive and cofounder, tells Sifted.
If you switched from focusing on credit histories to focusing on bank data, you would immediately be able to include twice as many people into the effective system of credit.
Information drives innovation
The arrival of open banking regulations across Europe, which came into force in 2018, has been an important step in democratising access to financial data collected by incumbent financial institutions. However, overall adoption is still a work in progress, and many have been frustrated by the slow pace.
When it comes to areas like credit ratings and bank loans, the system is still playing catch up.
Up to 90% of loan applications around the world are rejected. “Those numbers can go up to 95%, especially now when credit data is very complicated,” says Mesters, pointing to the new reality of people increasingly moving between EU countries for work opportunities, with their credit histories often left behind.
“Banks don't find your credit record on [credit rating agencies] Experian or SCHUFA, or one of the credit bureaus, so they immediately assume that you're not creditworthy,” he says of the existing model.
There’s an alternative, though. “If you switched from focusing on credit histories to focusing on bank data, you would immediately be able to include twice as many people into the effective system of credit.”
Credit where credit’s due
Nordigen, which was founded in 2016, is at its core a bank data analytics company, says Mesters. “It’s just that now we're also kind of positioning ourselves as a freemium open banking API.”
Even so, he stresses that his five-year-old startup isn’t a charity. “We make money from the value adding, the hard bits, which is the analytical side.”
It currently works with around 50 financial institutions, mostly in Europe and Australia, focused particularly on those using open banking for credit assessments.
They could be loan brokers trying to automate the screening of loan applicants, consumer lending companies, or buy-now, pay-later companies that want greater speed and higher conversion rates.
These companies can build their own data science teams that do nothing but data cleansing, enrichments, transaction categorisation and analytics on top, says Mesters, but it's a pretty big investment. “The alternative is to come to Nordigen,” he says.
Go free or go home
Mesters estimates that there are around 380 account information service providers (AISPs) operating in Europe — companies like Plaid, Tink and Truelayer — each offering their own pricing models and different API documentation.
“We started looking at those APIs and we realised you can build a super lightweight, very low-cost infrastructure,” says Mesters.
The next step was deciding whether to try to offer the cheapest solution on the market or take the bold approach and offer it for free, financed through analytical solutions on top. “It took us a really long time to decide,” he says.
Now that they’ve done it, Mesters expects others to follow suit. “I'm pretty sure that many companies have been thinking about it and now they realise that they should do this, to avoid us being the only ones.”
Nordigen runs its services on Microsoft Cloud, with its analytics almost fully automated. Most clients sign up through a self-service portal and use pre-built libraries (although the startup also has clients who request more custom-built systems, Mesters says).
Mesters says Nordigen has been cautious about not raising too much capital too fast, in order to avoid a situation where it has to be too aggressive on how it spends. “We’ve only raised €1.4m, and that's because we’re trying to actually generate revenue,” he says. The company now has 20 employees, all based in Riga.
However, Nordigen currently has a massive list of signups that it’s processing. “If 2021 is a normal year, we’re considering doing a fundraising round just to accelerate the speed at which we're able to provide the free service and also extend the number of countries where we operate,” he says.
There are regulations that are really taking care of them. Technologies are accelerating fast.
Mesters expects European regulators to continue to open up access to banking data, building on open banking and the second iteration of the Payment Services Directive (PSD2). “PSD3 is going to have more data, PSD4 even more — this is like a train,” he says.
The fact that PSD2 went into effect at the same time as GDPR is also key. “I think that's the best thing to happen for consumers,” he says. “There are regulations that are really taking care of them. Technologies are accelerating fast, and the regulation is also very, very stringent.”
With its latest move, Mesters says that Nordigen has stepped on many feet, “but then how can you have progress if everyone is nice all the time?”
“It feels like we’ve started a new venture within an existing five-year-old startup,” he adds.
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