Open banking and embedded finance are two of the most important forces reshaping the financial services industry today. On their own, each represents a significant shift in how consumers and businesses access and interact with financial products. Together, they are creating a new ecosystem in which financial services are seamlessly woven into the platforms people use every day.
Nowhere is this more visible than in Europe. The region has been at the forefront of open banking adoption thanks to supportive regulation, innovative fintechs, and forward-looking banks. As embedded finance gains traction across industries such as retail, mobility, and small business services, open banking is proving to be the foundation that makes this integration possible.
Understanding Open Banking
Open banking is a framework that allows third-party providers to access bank data and initiate payments on behalf of customers, with their consent. Instead of financial data being locked within banks, open banking creates secure channels through application programming interfaces (APIs) to share information and services.
The concept has been driven by regulation in Europe, most notably the Second Payment Services Directive (PSD2). Under PSD2, banks are required to provide licensed third parties with access to customer accounts for two main purposes:
- Account information services (AIS): Aggregating data from different accounts to provide a comprehensive view of a customer’s finances.
- Payment initiation services (PIS): Enabling third parties to initiate payments directly from a customer’s bank account.
This regulatory mandate has transformed the competitive landscape, giving rise to new fintech business models and improving consumer choice.
Understanding Embedded Finance
Embedded finance refers to the integration of financial services into non-financial platforms. Rather than accessing banking products separately, consumers and businesses encounter them within the apps and platforms they already use.
Examples include:
- A retailer offering instalment payments at checkout.
- A ride-hailing app providing driver insurance directly in the app.
- An accounting platform embedding business loans or working capital products.
Embedded finance reduces friction, improves convenience, and allows companies to create new revenue streams by adding financial services to their core offerings.
Why Open Banking and Embedded Finance Are Linked
The success of embedded finance in Europe depends heavily on open banking. To embed financial services seamlessly, platforms need reliable access to banking data and the ability to initiate payments securely. Open banking APIs provide the infrastructure to make this possible.
For instance, a platform offering embedded lending requires accurate data on cash flows, transactions, and repayment capacity. Open banking provides direct, real-time access to this information, enabling faster and fairer credit decisions. Similarly, an embedded payments provider needs a way to initiate account-to-account transfers without relying on expensive card networks. Open banking enables this.
In essence, open banking provides the pipes, while embedded finance provides the user-facing experience. The two reinforce one another in Europe’s rapidly evolving fintech landscape.
Open Banking vs Embedded Finance in Europe
How they differ and how they work together
| Category | Open Banking | Embedded Finance |
|---|---|---|
| Definition | Regulated access to bank data and payment initiation through secure APIs. | Integration of financial services into non-financial platforms and apps. |
| Main focus | Data sharing Payments | User experience Convenience |
| Regulatory basis | Driven by PSD2 in Europe, supervised by the EBA and national regulators. | Market-led, enabled by open banking and financial partnerships. |
| Typical providers | Banks, API aggregators, licensed third-party providers. | Retailers, platforms, fintechs, mobility and healthcare apps. |
| Use cases | Account aggregation, account-to-account payments, data-driven insights. | Buy now pay later, embedded lending, in-app insurance, subscription billing. |
| Value creation | Enables access to financial infrastructure for third parties. | Delivers financial products at the point of need for customers. |
| European strength | Mandated API access under PSD2 creates level playing field. | Rapid growth thanks to open banking pipes and consumer trust in regulation. |
| Best thought of as | The “pipes” and infrastructure of modern finance. | The “front-end” experiences built on those pipes. |
Europe’s Regulatory Advantage
Europe has a unique position in the global embedded finance race because of regulation. PSD2, introduced in 2018, forced banks to open up their data and services, accelerating the development of APIs. In addition, the European Banking Authority (EBA) and national regulators created licensing regimes for third-party providers, ensuring a secure and standardised environment.
Other regions, such as the United States, have open banking driven by market competition rather than regulation. This has resulted in slower adoption and more fragmentation. In Europe, regulation provided the baseline, giving fintechs the confidence to build products on top of a mandated infrastructure.
As embedded finance expands, this regulatory foundation continues to provide Europe with an edge, encouraging innovation while maintaining consumer protection.
Technological Foundations
Several technological developments make the link between open banking and embedded finance possible:
- APIs: Standardised interfaces allow third parties to connect directly with bank systems, enabling seamless data sharing and payment initiation.
- Strong Customer Authentication (SCA): Under PSD2, two-factor authentication ensures that access to accounts and payments is secure.
- Cloud computing and microservices: Fintechs can build scalable, modular solutions that plug into bank APIs and integrate with partner platforms.
- Data analytics and machine learning: Once data is accessed via open banking, it can be analysed to provide insights, assess creditworthiness, and personalise offers.
These foundations make it possible for embedded finance to operate reliably and securely across Europe.
Use Cases of Open Banking in Embedded Finance
Embedded Payments
One of the most widespread applications is embedded payments. Open banking enables direct account-to-account payments at the point of sale, bypassing card networks and reducing transaction costs. Merchants benefit from lower fees, while customers enjoy faster and more secure payments.
Embedded Lending
Platforms such as accounting software providers or e-commerce marketplaces use open banking data to assess small business cash flows. This allows them to embed lending products directly within their platforms, offering tailored financing without lengthy application processes.
Embedded Wealth
Investment platforms and neobanks use open banking to provide customers with consolidated views of their accounts. They can embed robo-advisory or investment services into everyday banking apps, making wealth management more accessible.
Embedded Insurance
Mobility platforms or gig economy apps embed insurance products tailored to user needs. Open banking data can inform risk assessment and enable flexible, usage-based policies.
Subscription and Billing
Streaming services or digital platforms can use open banking to manage subscriptions and billing, reducing reliance on card-based recurring payments. Account-to-account payments ensure lower costs and fewer failed transactions.
Case Study: Klarna and Account-to-Account Payments
Klarna, one of Europe’s leading fintechs, is known for its buy now, pay later services. Through open banking, it has expanded into account-to-account payments across European markets. By embedding payment initiation into its checkout solutions, Klarna reduces reliance on card networks and passes cost savings to merchants.
This case highlights how open banking infrastructure enables embedded finance providers to innovate and scale across borders.
Benefits for Consumers
For consumers, the combination of open banking and embedded finance in Europe provides:
- Convenience: Financial services are delivered in the context of platforms they already use, reducing friction.
- Transparency: Open banking ensures that data access is consent-driven and regulated.
- Lower costs: Account-to-account payments and improved credit assessments reduce fees and interest rates.
- Personalisation: Data insights allow for tailored financial products that better match consumer needs.
Benefits for Businesses
For businesses and platforms, embedding finance through open banking offers:
- New revenue streams: Companies can monetise financial services as part of their ecosystem.
- Customer loyalty: Providing financial services deepens customer relationships and increases stickiness.
- Operational efficiency: Open banking APIs streamline processes such as credit assessment, payments, and reconciliation.
- Cross-border potential: PSD2 standardisation allows platforms to expand services across multiple European countries.
Challenges and Limitations
Despite the progress, challenges remain.
Fragmentation of Standards
While PSD2 mandated access, API standards vary across banks and countries. This creates complexity for fintechs building pan-European solutions.
User Experience
Strong Customer Authentication, while vital for security, can add friction. Ensuring smooth experiences while complying with regulation is a delicate balance.
Data Privacy
Managing consent and ensuring data protection is critical. Consumers must trust that their data will not be misused.
Competition with Banks
Some incumbent banks view open banking as a regulatory burden rather than an opportunity, leading to slow adoption or limited functionality in their APIs.
Regulatory Evolution
The upcoming PSD3 and the creation of a broader financial data access framework (FIDA) will reshape the landscape again. Businesses must remain agile.
Europe vs Other Regions
Europe’s regulatory-first approach contrasts with the market-led model in the United States and the hybrid approach in Asia. While Europe benefits from standardisation and consumer trust, it sometimes moves slower due to regulatory complexity.
The US has seen rapid growth in embedded finance through partnerships and data-sharing intermediaries, but without the same regulatory guarantees. Asia, particularly markets like India, has implemented government-led infrastructure such as UPI, which accelerates account-to-account payments at scale.
Europe’s balance of regulation, innovation, and consumer protection has created a fertile ground for the convergence of open banking and embedded finance.
The Future of Open Banking and Embedded Finance in Europe
Looking forward, several trends will define the next stage.
- Beyond payments: More sophisticated use of open banking data will power lending, wealth, and insurance embedded services.
- Expansion into SMEs: Small businesses will benefit from embedded financial services tailored to their cash flow and financing needs.
- Integration with digital identity: Linking open banking with digital identity frameworks could streamline onboarding and compliance.
- Open finance and open data: PSD3 and FIDA will extend access beyond banking to include pensions, insurance, and investments, broadening embedded finance possibilities.
- AI-driven personalisation: Combining open banking data with artificial intelligence will enable hyper-personalised financial products embedded into daily platforms.
Strategic Considerations for Platforms
For platforms in Europe considering embedded finance, open banking raises several strategic questions:
- Partnerships: Which open banking providers or aggregators offer the best coverage and reliability?
- Regulatory compliance: How will PSD3 and FIDA affect requirements?
- Customer trust: How to communicate clearly about consent, data use, and security?
- Integration strategy: Should financial services be white-labelled, co-branded, or fully integrated?
- Value proposition: How will embedded financial services create differentiation and drive engagement?
Conclusion
Open banking is not just a regulatory framework; it is the foundation upon which embedded finance is being built in Europe. By unlocking access to data and enabling secure payments, open banking allows platforms to integrate financial services directly into consumer and business experiences.
The result is an ecosystem where financial products are no longer siloed in banks but are instead seamlessly available within the platforms people use for shopping, mobility, business management, and more. Europe’s regulatory leadership has accelerated this trend, putting the region at the forefront of global innovation.
As PSD3 and broader open finance initiatives unfold, the opportunities will expand further. Embedded finance in Europe will not only enhance convenience and efficiency but also reshape the competitive dynamics of the financial industry. The winners will be those platforms and providers that harness open banking infrastructure to deliver secure, transparent, and tailored financial experiences at scale.
