For many, the focus of open banking and instant payment initiatives seems to be retail banking. The ability for a retail customer to transfer money instantly from an account aggregation app is a powerful one and something many retail customers are now demanding. However, just as the demand side economics of retail customers mean that many banks are looking to realise opportunities from an application programming interface (API) – an interface or communication protocol between a client and a server intended to simplify the building of client-side software – and instant payments in the retail customer space, so banks should be aware of similar demands in corporate banking.
When corporate treasurers begin to use open banking APIs and instant payments for their personal accounts, they will also want to have the same functionality available on their corporate accounts.
They will quickly realise that the use of APIs combined with instant payments will allow a corporate treasurer to request and receive balances and transactions from all their subsidiary accounts in real time without the cost of a SWIFT message. From this functionality they can use their aggregated account position to form a real-time notional cash pool.
Corporate treasurers will want the ability to easily obtain an aggregate picture of all their corporate accounts. They will want to combine data from accounts held at multiple banks, in multiple countries and in multiple currencies, to give a 360-degree picture of their corporate positions. As a result, banks that cannot supply real-time data from the accounts held with them may have problems retaining their corporate customers.
Larger corporates are likely already to have some kind of sweeping or cash pooling arrangements in place. However, the new technology will make these arrangements more efficient and cost-effective for treasurers of medium- and smaller-sized corporates to adopt.
Notional pooling can then be enhanced through the use of payment initiation APIs to provide a payments on behalf of (POBO) service. By using payment APIs to initiate payments across the whole of the corporate landscape, a corporate treasurer can initiate payments at all the subsidiary bank accounts in the corporate structure, so keeping control of money movements and maximising savings of scale. The fact that these are instant payments will allow a corporate treasurer to schedule these payment-initiation requests to achieve just-in-time cash movements, meaning the return on the company notional cash pool can be maximised.
Once they have a clear picture across the whole corporate landscape, a corporate treasurer can use this to free up working capital. Previously, a corporate treasurer needed to keep sufficient balance in each subsidiary to minimise the risk of cash-flow problems. However, by combining a clear picture of all the subsidiary balances with the ability to fund accounts in real time through instant payments, a corporate treasurer can bring all the subsidiary and international account balances together to form a larger capital amount that can be invested for the benefit of the business.
This type of corporate notional cash pooling could reduce the transaction fees-based income from corporate payments for banks. As a result, in the future, banks will have to provide enhanced liquidity management services to corporates. If banks can demonstrate to corporate clients that they can support the type of enhanced liquidity management and notional cash pooling requirements of today’s modern corporate treasurer, then they can continue to make a return from the management of the corporate’s cash pool and receive enhanced fees from the liquidity services the bank can offer.
While the need for instant payments is increasing, a balance is essential between security and convenience. Layered authentication should be built in for the payment to be made, alongside embedded APIs. Permissions and approvals at the appropriate time will boost confidence, an example of which are alert engines (through analytics) that would notify if a payment has not been reached in the correct time frame.
James Buckley is vice president and regional director Europe at Infosys Finacle