Last month Token, a turnkey open banking platform provider that enables banks to generate revenue from PSD2, announced a $18.5m Series A funding from investors including Octopus Ventures, EQT Ventures and OP Financial Group.
Token’s CEO and founder, Steve Kirsch, has lead inventions behind a myriad of ground-breaking technologies which have had billion dollar exits. Steve’s previous inventions include the optical mouse, company Frame Technology Corp, which develops the desktop publishing software currently sold by Adobe, and one of the first Internet search engines Infoseek, which was acquired by Disney.
Steve spoke to bobsguide exclusively about the latest funding round and his strategy behind growing Token.
You recently closed a $18.5m Series A funding, what was the main purpose of the funding round?
The main purpose of the funding round is to continue the development of our software. When you’re starting a business on this scale it requires a massive amount of development before you start to see revenues coming in. It’s expensive and complex to develop software that runs inside banks and that keeps things very secure and very easy to use. For us it was about funding operations.
Securing the backing from such world-class investors allows us to grow and execute faster on our mission to reinvent the world’s payment systems by providing common, secure access to all banks and a modern, bank-centric payment ecosystem.
Our investors include Octopus Ventures and OP Financial Group. OP Financial Group is the largest bank in Finland, and they’re doing some very aggressive things in open banking, so it was a very natural fit to invest. There’s no question that banks will move to open banking, and Token offers a single API that banks can support. This is great for developers, as from a developer’s standpoint you only want to write to one API. Those were the main factors that drove the decisions to invest.
Additionally, as a US company, getting investment from European firms was a great achievement. Whilst the problem we’re addressing at the moment is PSD2 that solely affects Europe, it’s very clear that the move to open banking is a global trend.
How will PSD2 change the banking sphere?
It’s a substantial change for banking, and bankers don’t like change; it’s hard. However, it’s clear that it’s a change for the better. There will be some issues implementing the changes in the short term in terms of making the transition, and banks may face breaches and problems, but in the long-term, I think it’s the best thing to happen to banking in its history.
It’s really going to open up the banking system to new applications that weren’t possible before, and to improve applications that exist today. It’s going to be a huge benefit, but understandably it’s hard for people to see that right now.
The analogy that I like to use is the mobile phone: When it first came out, the mobile phone was the best thing ever and perceived as the ultimate device. And then when we really couldn’t imagine anything better, the smart phone came along, and in just seven short years the mobile phone has disappeared. What was perfectly fine and wonderful disappeared in just seven years because new technology came out that was simply, better.
We’re seeing a similar case with retailing on the Internet; traditional retail stores are closing and businesses are moving their commerce online. And yet, we didn’t have this technology years ago. It’s going to be the same thing for banking.
If you’re a bank and you’re not on open banking, it will lead you out of business. I don’t know if that’s going to be in five or 10 years, but in 20 years from now I believe that every single bank in the world will be ‘open’.
What will be the biggest challenges for the traditional banks?
I think there are several challenges, but the biggest one is change. When you’re in talks with a big bank, you need a lot of people to support the change.
PSD2 requires that the pricing given to customers is the same as the pricing given to qualifying third-party providers. So, if banks are giving out free payments to consumers, that means that they have to give out free payments to these third-party providers. Banks aren’t making any revenue on payments, which is a huge concern.
When we talk to large banks, we introduce our businesses and show them how banks can give out free transactions to their customers whilst avoiding having to give out free transactions to third party providers. Conversations like that are very rarely happening in banks because PSD2 is a complex directive.
PSD2 is sort of this great unknown in the sense of how it’s going to affect businesses, with people and different opinions in banks thinking it’s going to take a while to really implement. So there’s a lot of fear, uncertainty and doubt, which leads to decision paralysis. PSD2 isn’t going away. The banks that will proper in the era of open banking are the banks that embrace change and aggressively take advantage of the change. We’re focusing on banks that are interested in aggressively exploiting PSD2 and the opportunities that come with it.
It’s rare to find a bank that is ready for PSD2. There’s a lot of work to do to become PSD2 compliant, but there isn’t a lot of time and I think that a lot of banks are behind in terms of getting to the state where they are compliant. Our message to the banks is that partnering with third parties is a way to get there much faster and easier, and without having to give transactions away for free to third parties.
What can we expect to see from Token in 2017?
In February we went live with Fidor bank, about a week after they gave us access to their APIs. It’s available on our website where users can transact with money in real time with Fidor. Almost a year before the PSD2 deadline, we have a solution that is compliant.
We’re at various stages in the sales cycle with over 90 banks across Europe. We help banks monetize the open banking opportunity and pay banks a fee on every transaction, so it’s all incremental revenue to a bank. This is a win for everyone: banks make more money and have higher security, developers get a rich set of APIs to banks that is very easy to use, consumers get frictionless payments and greater control and security, and merchants get greater conversion, lower fraud, no chargebacks, no card declines, and no PCI requirements or liabilities.