Why Open Banking will be better for corporate treasurers
05 Jul 18
Open Banking will present a host of benefits to corporate treasurers. Matt Packer listens in on a discussion between finance experts to find out how
According to a straw poll at the recent ACT Annual Conference, 44% of the audience had not made any specific preparations for Open Banking. So it was just as well that the event contained a lively and informative session on that very topic.
The open-banking era is very much upon us, with the European legislation behind it – the Second Payment Services Directive, or PSD2 – having gone into effect in January. But what does that mean for corporate treasurers in practical terms?
To explore that question, the conference session included a panel discussion between a group of finance experts who sketched out the essential improvements that Open Banking is set to make to corporate lives.
The panel included Tim Decker, Lloyds Banking Group head of payment products development, Nadia Sultan, senior cash manager, LyondellBasell, Lloyds Bank API and Open Banking commercialisation specialist Yogesh Sholapurkar, the Ardonagh Group’s group treasurer Pedro Madeira and Warwick Business School associate professor of information systems Dr Markos Zachariadis.
In the following, two-part article, we present some highlights from the panel discussion outlining the primary benefits that Open Banking presents to treasurers; then Dr Zachariadis widens the lens to explain how the fintech sector fits into this game-changing equation…
1. Primary benefits
Small treasury teams
Open Banking potentially provides smaller treasury teams and SMEs with access to technology benefits previously only available to larger, well-resourced corporate organisations. A case in point is bank and data access.
Madeira “You can obtain multiple banking information via a SWIFT solution, but Open Banking gives you alternatives for accessing multiple bank accounts with one platform. If you are in a small team, and SWIFT doesn’t offer the cost benefits it presents to larger teams, you could utilise an open-banking application programming interface (API) to look at four banking portals, plus four ways of downloading your statements, all at the same time.”
The potential integration of APIs with existing treasury technology will bring real-time functionality and greatly enhanced visibility, the panel agreed.
Sholapurkar “The key with an open-banking API, compared to other mechanism, is that it’s real time. Typically, around close of business, I will get my MT940 – which is my end-of-day statement from yesterday – and my MT942, which shows transactions from the beginning of the current day up to now. Your TMS has to pick up the latest figures, add it all up and give you the cash position.
“But with an API, you could go to all of your banks at once and say, ‘Give me all my transactions and balances,’ and receive that information instantaneously. So you could effectively have a view not only of your entire dollar position, but your sterling and yen positions, too, all in one go.”
The introduction of APIs will speed fulfilment of transactions with great potential upside in terms of enhancing customer experience and relationships.
Sholapurkar “Faster payments are real-time transactions – but open-banking APIs represent a move towards real time business. As a corporate, you could build propositions that in the past you couldn’t, because the payment can now be part of the customer journey. For example, look at car dealerships. Traditionally, the interaction is between them and the finance company, with the transaction taking place the following day – so the customer can pay, but can’t drive away. But with an API, they could transact instantaneously.”
The enhanced access to data via alternative information service providers will give bank credit committee the ability to make quicker, more informed decisions.
Sholapurkar “Through these technologies, your bank could have quick access to your main account, or your accounts-payable (AP)/accounts-receivable (AR) data. The better the access, the easier it will be for the bank to make a credit decision on you – and perhaps even offer better terms. When you go in blind, the risk is that the credit committee will just say ‘no’. But if the AP/AR figures are in your TMS, and you allow access to your bank via your integrated API, it could boost your credibility. Then the credit decision becomes stronger.”
Supply chain finance
Madeira “Open Banking certainly presents an opportunity if you are heavily involved in supply chain finance and working capital management, and your organisation is a major user of those types of services. It will take a lot of complexity out of the process.”
Dr Zachariadis “To address KYC issues, you could have a sort of ‘passport API’ that would send all your information from a bank where you are already set up to a new one you want to join. It should be more than enough for that bank to look at your information and say, for example, ‘If Lloyds is satisfied, and has had accounts with this customer for all these years, then I can feel secure with bringing them on-board.’”
Sholapurkar “The open-banking API system will allow your bank to monitor you with your consent in real time – which means that the bank may be more willing to give you an ongoing, rolling credit.”
2. The fintech dimension
Dr Zachariadis looks at the part that fintech has to play in this time of change, choice – and opportunity…
It’s hard to believe, but when the financial crisis hit, there were no smartphones or tablets. In the wake of the crisis, those innovations were released onto the market – and, as time went on, fintech start-ups emerged, too.
What’s crucial about that post-crisis period is that fintechs instantly set their sights on developing convenient products and services that could be accessed through those new phones and tablets, rolling out a host of intuitive and user-friendly financial-management tools.
Meanwhile, banks’ technological progress stalled. They were so busy bouncing back from the crisis in basic, operational areas that they didn’t have the scope to innovate. And in any case, banks had typically confined IT development to their back offices: innovation had never really been front and centre in their business strategies.
That enabled fintechs to steal a march on the banks.
As a result, banks and fintechs became enemies. But in the past couple of years, they have begun to realise that they need each other: banks can’t innovate with the same level of agility that fintechs can – and fintechs can’t merchandise and distribute products or services with the same impact as banks. So they have begun to collaborate.
The advent of PSD2 and Open Banking has paved the way for a deepening of those collaborations. Many observers have described fintechs' effect on the relationship between banks and corporates as disintermediation, but that’s too simplistic.
In the open-banking era, banks will be able to present customers with an increasingly extensive and diverse menu of options.
I use the analogy of the iPhone: when Apple released the phone, it didn’t sell a device, so much as a platform. It gave app developers a forum in which to market their own innovations. Now, there are at least 2.2 million apps.
Similarly, with Open Banking, fintechs will have access to the same pool of data as banks, and many of them will strike deals to base their products and services on particular banks’ APIs. Then customers will be able to select from that range of offerings to build the banking arrangements that suit them. It’s a more tailored approach.
I use my analogy with caution, because it’s imperfect.
The difference between Apple and the banks is that iPhone apps reside in a centralised venue accessible from anywhere in the world. However, fintechs may need licences to operate in jurisdictions other than the countries in which they are based.
Even more importantly, under European regulations, banking brands are unable to centralise their operations in the region. Banks are required to set up new entities for each country in which they wish to do business.
So, based on those two factors, the iPhone comparison has its limits. Also, there are nothing like 2.2 million fintech offerings ready to go for the open-banking era! But all the conditions are there for a climate of healthy competition – and it seems likely that the kind of user-feedback and ratings functions that are so common in the apps world will eventually grow up around fintech products as banks’ API platforms build their audiences.
That will certainly keep fintech players on their toes, as they look to impress not only their customers, but the banks that are hosting their products.
About the author
Matt Packer is a freelance business, finance and leadership journalist