Open banking and its promise to usher in competition and a swathe or new products has done little for corporate treasury. It is time for banks and treasury to adopt a new mindset.
For Pedro Madeira, Group Treasurer at UK telecoms group Arqiva, open banking – the UK version of Europe’s PSD2 – and its drive to encourage banks to open-up their precious data isn’t really on the radar. “Open banking doesn’t affect us. We would be interested in exploring the opportunity to access other banks from our main bank platform, but it’s early stage and I can’t see how it would change how we do business,” he says, reflecting a muted interest in open banking’s promise of competition and innovative financial products and services that is shared by many other treasury teams.
For enthusiasts, however, the technology that allows banks to securely share information with their customers’ consent via application programming interfaces (APIs) with regulated third parties (TPPs) may be complex, and driving deeper, widespread adoption still a way off, but the benefits are undeniable. And signs of progress, like industry body Open Banking Implementation Entity (OBIE), recently reporting a record number of API calls, or requests for information, between systems, shows banks are finally responding to increased demand from treasury teams to develop corporate APIs.
Challenges
Still, everyone agrees progress is slow. One key reason remains a lack of corporate demand. Treasury teams with little downside risk from ignoring open banking have little enthusiasm to explore its opportunities. For example, Arqiva uses an HSBC banking platform that already embeds strong customer authorisations and security protocols, says Madeira. For large corporates using SWIFT or similar third-party applications that already offer multiple banking information, the push for open banking is similarly lacklustre.
With no pressure from clients, corporate banks have been slow to innovate. On one hand, some of the physical infrastructure isn’t fully in place yet, explains Hakan Eroglu, Global Open Banking lead at Mastercard Advisors. Banks need to introduce APIs for TPPs to access customers’ accounts, and the speed at which banks systems respond to API calls is crucial. “At the moment, not all banks have compliant APIs available or working the way they should. Speed and availability are important in the API business,” he says.
Retail focus
Banks have been equally slow to roll out products for corporates to take advantage of the ability to share information. Their focus has been on retail customers, primarily around encouraging switching to stop money languishing in current accounts not earning interest. “I haven’t seen much effort being put into corporate solutions,” says Arqiva’s Madeira. “Some banks are evolving solutions but it’s sporadic. Open banking is something targeted at retail customers, and corporates have been an afterthought.” He’d like to see innovations that could help Arqiva’s B2B business like greater concentration of the company’s bank accounts, tighter security and centralised cash management. “The ability to have all this without using SWIFT would be significant for a mid-sized corporate like Arqiva.” The problem is compounded by the lack of regulation pushing corporate innovation, says Eroglu. “Most of the focus is around online banking. Corporates have much more complex needs that are not covered by PSD2 – or other regulation,” he says.
Like banks, fintechs have also prioritised retail over corporates, says Professor Markos Zachariadis at the Cambridge Centre for Digital Innovation. However, he does observe that fintechs have developed an increasing ability to offer corporate solutions in the last three years. “There is a lot of accumulated knowledge and experience in the fintech industry that can be re-purposed or transposed to develop business banking solutions,” he says.
A next step would involve fintechs partnering with banks. But this depends on corporate banks integrating with innovative fintechs leading in the space, and role models are few and far between, says Zachariadis. “Fintechs are not great at customer acquisition and banks won’t necessarily do much to provide them with access to their clients. The emergence of platforms that can connect the dots and integrate fintechs and banks into corporate systems may be the way forward for corporates to benefit from fintech innovation.”
Regulatory barriers
Regulatory disparities between different markets don’t help. In Europe, despite overarching regulation, there is no uniform adoption of open banking between European countries. Some banks are embarking on automated onboarding processes; others are pushing manual registration or asking TPPs to register on a development portal. “There are different interpretations in different countries, and it is also a question of whether the regulation has been implemented properly,” says Eroglu.
Brexit is adding to unknowns for the UK’s financial services industry around PSD2, one of many pieces of legislation within the European directive. “Who is going to take charge of the implementation of this post Brexit?” questions Madeira. “It feels that regulation might be taking a back seat.”
The problem is compounded by the lack of regulation pushing corporate innovation.
Hakan Eroglu, Global Open Banking lead at Mastercard Advisors
Outside Europe, the pace of implementation is equally disparate – and slower. For example, Hong Kong’s Monetary Authority (HKMA) began its open banking journey in 2018 launching four phases of regulation, but banks have yet to really open up account data and enable the initiation of transactions by third parties. In Singapore, “by far the most advanced country in Asia in terms of open banking and APIs” according to Eroglu, there is no regulation in place and utilisation remains comparatively low. “The reasons are a lack of market-wide standardisation of APIs and a lack of common infrastructure and processes. A fintech will be reluctant to invest time and money in developing apps that will only work with a certain bank in a relatively small market like Singapore,” he says.
Nevertheless, he believes that despite the lack of regulatory stick, open banking’s benefits will ultimately drive take up. “When we talk to banks outside Europe about their strategy around open banking in the corporate space, many are not under regulation. But they still want to understand its merits and learn how to build their own ecosystem and business model around it.”
New approach
The lack of innovation and interest in all open banking offers, requires a new narrative to capture the industry’s imagination. And now is the time as transaction banking grows more competitive, and treasury teams take a tooth comb to costs. Moreover, the pandemic has highlighted the wider importance of APIs, forcing banks to prioritise and drive their digital offerings and explore new technologies to meet increasing client demand for digital solutions.
Because it is real time, open banking can transform working capital and liquidity management, says Eroglu, in an enthusiastic reminder of all open banking’s benefits. Companies can carry out instant payments from one account to another or pause payments at the touch of a button. It allows treasury to access all their transactions and balances instantaneously, giving a window into the entire dollar, sterling and yen positions in one go. By connecting to multiple banking relationships, companies can streamline and optimise invoicing, putting all their transactions into one place or paying them at the best time to optimise cash management. “There are things you can do much better when you have a 360 view of financial situation in real-time,” he says.
Open banking promises easier digital onboarding. Imagine a ‘passport API’ that sends all your information from a bank where you are already set up to a new one you want to join, easing a complex process frequently cited as a pain point for corporates. Similarly, it would allow bank credit committees to make quicker, more informed decisions to boost credit lines by sharing data.
Nor is any business too small or large to benefit. For large corporates, the technology can feed data directly into their Enterprise Resource Planning (ERP) systems, providing treasurers with insights on cash flow trends that can help them improve financial efficiency, suggests Andrea Melville, Managing Director and Head of Commercialisation and Propositions, Lloyds Bank Commercial Banking.
As for smaller companies (which find SWIFT too expensive and in excess of their needs, yet still need multiple bank accounts) it enables information sharing across one centralised platform as opposed to managing three or four separate banking relationships, a benefit that has crossed Madeira’s radar. “In this respect, open banking could ward off cyber security concerns and manage multiple authorisations and mandates. It would simplify processes and also keep things tight, centralised and secure,” he says.
Elsewhere, Lloyds is currently testing an intelligent book-keeping solution for small businesses that combines data gathered from open banking with companies’ own invoices and expenses data. “It will help reduce the administration load for small and medium businesses and enable them to make better financial decisions through real-time cash forecasting and profit and loss information,” says Melville.
Lloyds is also using open banking technology to become a Payment Initiation Service Provider (PISP), a type of TPP authorised to make payments in and out of accounts. It creates a new receivables proposition that will allow its largest clients to improve the payment experience for its end customers. “On top of this, we’re developing new applications for APIs that corporates are starting to integrate directly into their own systems. A good example is an API that speeds-up the ‘time to decision’ for asset finance credit requests,” she says.
Investment
It’s the kind of product innovation and new customer propositions that are finally starting to trickle. But banks’ journey to becoming API-driven organisations, shifting to innovation and monetising open banking doesn’t just require a new mindset. It also needs investment, says Eroglu, who urges treasury teams and their banking partners to view open banking as an opportunity rather than a regulatory must. “Banks need to invest, especially in the regulated market. It means investing in technology and finding their way with the help of strategic and consulting advice. Banks need to make themselves open and agile and change their business models.”
Only then will they begin to think about distributing new products in different ways, rethink their target operational model and put themselves between multiple business models as a service, a platform and as third-party service provider – a position already grabbed by the tech groups and other API driven companies. In short, banks need to focus on corporate clients, and grab the opportunity to innovate in a win-win for banks and treasury. “We would consider changing bank accounts if we found that a bank starts racing ahead in terms of developing open banking tools we could take advantage of,” concludes Madeira.
