Banking and finance, circa 2019:
- Everybody knows large corporates and international firms are the only ones who need more than one bank, right? And for those who do, there are all sorts of customised connectivity options offered by the banks they use, and even APIs to make it work beyond
those in-house systems, if required. So why does any less complex or SME want open banking? How many accounts or services do they really need or use that would really help them?
- Especially since credit lines are often allocated based on ancillary banking business expected (say cash management, trade services, merchant services, or corporate cards), or stated the other way around, where on Earth does open finance fit in the banking
equation for anyone but the smallest corporations? Is it even an option for larger companies, served mostly by their credit providers? Sure, fintechs want a piece of the financial pie, but they’ll just need to work harder for it, as the banks have spent years
and huge budgets to develop their legacy products and connectivity to provide transactions and reporting for their customers, right?
These might have been actual conversations in the not-too-distant past. Now, the questions, and the answers too, are changing for corporates of all sizes when it comes to open banking and open finance.
This is an excerpt from Future of Payments 2023.
Proprietary connectivity
Celent’s 2022 report, Corporate-to-Bank Connectivity: Embedded Finance for Transaction Banking, states just how critical APIs are in the financial world now. They call them: “The most significant addition to the mix of corporate digital channels.” More specifically,
they refer to “APIs that enable real-time, unattended connectivity between financial institutions and third parties.”
In Celent’s analysis, it’s no longer okay for banks to provide only proprietary connectivity to their products and services, and only on set schedules. Instead, they say their research “highlights APIs as a new connectivity channel for bank clients, enabling
real-time, embedded, and automated data flows between corporate clients and their banks.”
But how many channels are we talking about for each bank? That’s a big part of the challenge, as Celent maintains, in that: “Most corporate treasury departments use more than one channel to connect with their banks. Each connectivity channel has unique advantages,
which often leads corporate treasurers and finance teams to use a variety of channels.” They go on to list a few examples, like “web portals to approve payment batches submitted using APIs, host-to-host to aggregate balance and transaction data, and Swift
to initiate large-value cross-border payment messages. With an increasing demand for cross-channel value-added services and use cases, omnichannel transparency and visibility become more critical."
Opening new doors for standardisation
This virtual explosion of banking channels and hybrid, omnichannel connectivity solutions is taking place as many companies are increasing their cross-border activities. They are also likely facing many new requirements that go along with the massive digitalisation
of banking – especially for businesses – as well as new rules of engagement for transaction structure and handling, like ISO20022 standardisation in the payments world, for just one example.
Banks have done a solid job up until now keeping all of their own corporate connections updated, but it’s certainly not a quick process to establish and maintain complex client-to-bank connectivity. The timelines for doing so have also been exacerbated by
slim IT resource availability on the part of the corporate customers, faced with many new technology demands post-Covid-19 especially.
Keeping corporates connected requires new approaches
What does this new, digital-dependent world bring to banks and their clients?
The bank typically is looking for more automated processing of banking data to and from the client, as well as a ‘stickier’ customer relationship. In the client’s view, the first objective is added to providing smooth integration with their internal ERP,
Treasury, and accounting systems, and the only way anyone sees this working well in a multiple-bank, often multi-channel world is through APIs that minimise the customisations required across multiple institutions, products, and reporting lines.
In the past, efforts to streamline such processes have often run smack-dab into resource constraints and the banks’ and their customers’ siloed, overcommitted technology teams. Enter third party providers, and not just to make connections simpler, or faster,
or more efficient. Now we’re talking whole new products and applications, which is why regulators in the UK and elsewhere see open banking and open finance as being not just about connectivity, but also as avenues to increase market fairness and broaden access
to new and emerging competitors.
APIs for open banking and open finance are ‘democratising’ the industry
In one bank’s view, as APIs have steadily emerged from banks, especially in response to the recent pandemic, open banking – the exchange of services and data between financial institutions and third-party providers (TPPs) “has led to the democratisation
of the financial services industry.” Alexandre Maymat, head of GTPS at Société Générale maintains that open finance facilitates new developments in the financial market for both bank customers and third-party providers.
“The rise of both open banking and open finance have led to an increased competitive environment in the financial markets, and competitive markets are the perfect environment for innovation. This contributes to making sure that customers' needs are met to
the highest level, by forcing competitors to offer the best product at the best price, to the benefit of corporates and SMBs.”
Continuing, Maymat offers examples of how open banking has innovated in many fields “from debt reduction to easier credit access. Access to open banking data has resulted in a wide range of new products and services and open finance will take this one step
further, with the use of open APIs, including bank APIs, that enable third-party developers to build applications and services for a wide variety of financial institutions.”
Yves Longchamp, head of research at SEBA Bank, agrees, noting that low barriers to entry for both open banking and open finance are “encouraging innovative financial solutions to emerge and to be implemented alongside existing financial solutions.”
New ways of doing ‘old’ business
Annelinda Koldewe, global head of wholesale banking payments, ING, sees open banking and open finance offering what she calls “a range of opportunities for corporates and SMEs to improve their financial management, gain access to a wider range of products
and services, and enhance their competitiveness in the marketplace.” Included in her list:
a. Enhanced financial access: access to a wider range of financial products and services beyond traditional bank offerings, potentially “including loans, investment opportunities, insurance products, and more.”
b. Improved cash flow management: by integrating financial data with third-party applications and platforms, business customers can gain a “real-time view of their cash flow.”
c. Efficient payments and collections: “Corporates and SMEs can integrate payments initiation services, offering customers more convenient payment options,” and, she says, open banking APIs can play a big role in payables and receivables efficiency by “optimising
the reconciliation process, reducing manual effort and (improving) accuracy”.
Maymat adds a few more examples of how open finance opens new doors beyond payments, noting how it “makes it possible for a trusted and authorised third party to access wider financial data, such as tax, insurance, and pensions. This access to data will
make it easier for financial institutions to offer products and services which have been individually tailored to meet the requirements of a specific customer, all to the benefit of corporates and SMBs.”
Open banking and open finance offer bi-lateral benefits
And it can go the other way too, asserts the bank, as “bank APIs can feed third party financial institutions with accurate data to build their target services, enhancing their offering to include for instance mortgages, savings, pensions, insurance, and
consumer credit.”
Cecabank sums up that businesses will likely be the primary area of their application (and advantage for smart new providers seeing this opportunity), given commercial clients’ need for an “integrated view of their various positions across banks.” They note
cost reductions and other pluses delivered by the move to APIs, saying freely published, simpler bank connectivity options are “expected to enhance reconciliation processes and data aggregation, which currently are based on non-standard and costly infrastructures
and formats for companies."