With the arrival of open banking, the era of real-time financial data and the end of banks’ monopoly on their clients’ account information is at hand.
Open banking puts data at the heart of financial management, supplying users with a network that consolidates their data at different financial institutions through application programming interfaces (APIs). Data is securely shared between institutions, making it easier to transfer funds and compare offerings, in turn forcing large banks to compete more directly with smaller, specialized institutions. Corporate clients—not to mention consumers, pension funds and banks—will be scrambling to keep up. Those that can may find themselves in a new, more profitable environment; those that cannot may be left behind.
“The open-banking movement is happening around the world and is being driven by enabling customers to own their data and use it as they see fit,” says Andrew Steadman, vice president of product management and marketing at Fiserv, a US-based provider of financial-services technology. “Multinationals have a lot more data in a lot more places than most, and this opens up countless opportunities.”
The center of gravity will shift from banks and their internal data networks to the cloud and APIs. “APIs and the cloud will enable corporates to easily and quickly access their banking information across multiple banking relationships and initiate transactions on a real-time basis from multiple sources,” says Sonny Singh, senior vice president and general manager of the Financial Services Global Business Unit at Oracle. “This will enable corporates to make better working-capital management decisions.”
Adapting to Change
Bank of America Merrill Lynch launched an API gateway in January to coincide with the implementation of the revised Payment Services Directive (PSD2) in the EU. PSD2 facilitates open banking by letting merchants retrieve account data directly from banks (with consumer permission), bypassing intermediaries like Visa and PayPal. Hubert J.P. Jolly, global head of financing and channels at Bank of America Merrill Lynch, says the bank’s clients can see their cash balances in real time with the click of a button instead of manually pulling reports.
Since launching the API Gateway in January, Jolly says, feedback from clients, technical-service providers and emerging-technology companies indicates that they found the gateway user-friendly: They could easily see the treasury services available and know which steps to take.
“We have as many clients connected to our API gateway in production as we do service providers,” Jolly adds. “Clients are [embedding] our APIs into their workflows to replace legacy software. Service providers...will be making our APIs available to mutual customers, so that no additional development is necessary by the end user.”
For most banks, joining the new open-banking environment is a bit like jumping aboard a freight train that’s already pulling out of the station. In June, Citi became the first corporate bank to join the UK Open Banking framework as a Payment Initiation Service Provider, enabling its corporate clients to receive payments directly from the accounts of the CMA9—the nine largest banks and building societies in the UK that were mandated to launch an independent Open Banking Implementation Entity in 2016. The OBIE sets open API standards and a security framework aligned to PSD2.
Steadman believes Citi will not only get first-mover advantage, but also learn useful lessons about how open banking helps meet compliance requirements. “Banks need to learn that it is not all about being compliant from day one,” Steadman states, “but requires a capacity for continuous change and staying compliant as things evolve.”
He says many bank IT departments wanted to assemble everything themselves—with little thought to the regulators’ deadlines—then found that they had to “un-plumb” everything. If they had made better use of fintechs—viewing them as third-party partners rather than competitors—they would be better positioned.
Banks update their online endeavors quarterly, at best; but if merchants such as Amazon and Netflix can update daily, banks will be forced to speed it up, Steadman argues: “Banks need to adopt a different operational paradigm, where they are continually updating bit by bit via APIs.”
A Bouqet of Benefits
While continual updates will be demanding, an API ecosystem, Singh says, will deliver a bouquet of treasury services for canny corporates—“a blend of the bank’s own offerings and those from other banks, seamlessly tied together, ready for direct integration into the corporate ERP [enterprise resource planning].” These include real-time consolidated visibility into account structures, intuitive dashboards, analytics and automation that address companies’ financial and operational risks.
Open banking can help financial-risk oversight by providing real-time reporting on counterparty exposures, automatically calculating liquidity positions, forecasting scenarios, and supporting foreign exchange. “It should also help corporates mitigate operational risks by providing fraud-detection alerts, systematizing and automating processes and staying compliant with all global policies,” says Singh.
Nick Cerise, chief product and marketing officer at Travelex, a provider of international payments and foreign-exchange solutions, believes open banking will result in the evolution of new best-of-breed solutions, particularly for small to medium-size enterprises (SMEs).
“Many will focus on visibility and reporting, taking data and driving insights from that reporting and moving it into action,” he says. “Over time, data visualization ... will allow people like us to aggregate different service providers, provide corporates with connectivity into their international-payments capability, enable people who are very afraid of hedging or derivatives to see how it works based on actual insight and provide options for various levels of protection versus participation. It’s not giving advice, but allowing the client to see the data and make decisions.”
Open banking may also help SMEs address their challenges. Steadman predicts that fintechs will be the source of innovative solutions for both cash-flow and paperwork pain points. “If someone comes to fit a skylight in your house,” he explains, “they should be able to issue an invoice there and then on your phone, and you pay [it] directly on an invoicing platform.”
Open banking’s near-instant data helps companies make on-the-spot invoice-factoring decisions, such as whether to offer a discount on an invoice with 30-day terms. “This allows them to maximize their capital usage and minimize loans while also applying for the right type of loans to fuel business growth,” says Singh.
Timely data also allow more effective planning for future strategic initiatives. “Gathering real-time data from corporate customers can enable banks to participate more effectively in day-to-day business operations,” Singh says. “Banks can interface with corporate customers’ ERPs to gain real-time insight into their customers’ business operations.”
The DIY Debate
While many banks have strong technology-development capabilities, Steadman says third-party platforms let banks focus on their strengths. “We undertake the continual updates,” he explains, “and let our clients worry about how they can [use open banking to] create value.”
At the same time, Steadman recommends that banks look to design new APIs that create value through partnering with fintechs or by harnessing their own data. “They should really start thinking about the API as a product in itself,” he says. “If they can get their heads around the idea of an API as a product, and manage it as product, they can add value and charge for it. A lot of banks think of open banking as being lost in compliance.”
Steadman suspects there are more opportunities to add value on the corporate than on the retail side. “Banks can differentiate themselves by creating new products that are exposed to an API and adding intelligence to it,” he says. “Their clients will happily pay for it.”