There are few untapped opportunities out there for the corporate treasury community to exploit, but open banking is one we think is worth revisiting. In this article, our specialists give a refresher on the basics of open banking and set out five ways your company could make the most out of this innovative technology.
Many myths still exist around open banking, not least the notion that it is simply a regulatory initiative that applies only to consumers and small businesses. Although it originated from the UK’s retail banking market report in 2016, it has a much broader scope.
As treasurers continue to embrace digital solutions, sparked on by the many operational challenges of the pandemic, open banking has benefits to open your eyes to. We think treasurers and their teams need to think of it much more as a digital framework and in the current fast changing environment, can make all the difference to meeting your future goals.
Open banking: a recap
Open banking is a technological infrastructure that enables financial information and payment instructions to be shared securely through open application programming interfaces (APIs).
It provides businesses with various benefits. By using the digital infrastructure created by open banking, companies can capture data as it is created in real time and exploit new ways to make and collect instantaneous payments. Ultimately, it enables them to enhance the efficiency of their processes and reduce costs. What’s more, using open banking can help companies to limit fraud, enhance their sustainability credentials and improve their relationships with their customers, suppliers and financial partners.
1. Embrace the broad set of opportunities it provides
Open banking was developed in response to a 2016 report by the UK’s Competition and Markets Authority, but it’s no mere regulatory initiative. And neither is it only aimed at consumers and small businesses. It is the digital infrastructure that enables financial information and payment instructions to be sent and received securely – and it provides huge potential for companies to exploit.
There is clear scope for firms to leverage the digital environment that open banking creates to solve the pressing business challenges that corporate treasurers are faced with and to exploit opportunities to innovate. It’s important to remember that APIs are a tried-and-tested technology. Open banking is simply opening up new ways to use this technology that could help you increase the value of your business.
In short, those organisations that appreciate the current and future potential of open banking within treasury and their wider business could enjoy huge benefits by building out digital ecosystems that bring them closer to their customers, suppliers, and business partners.
2. A payments revolution
You can use APIs to collect payments from customers in real time, straight from their bank account. And you can do so without having to find out their account details or pay any expensive fees. APIs can also be used to make instant payments – once again, without the need for bank account details. Payments APIs provide a number of benefits, including improved cash visibility, greater efficiency, and reduced costs, potential for fraud and data compliance risks.
Open banking solutions represent a new way for corporates to send and receive online payments. While payment initiation used to be a secondary consideration on the back of an underlying commercial transaction, payments are now becoming – thanks to open banking – an integral and seamless part of the underlying e-commerce transaction journey.
3. A transformation of trade
The transformational potential of open banking is not just restricted to the world of payments – it could also revolutionise trade, which has historically relied on paper-based processes. This involves many challenges – not least of which is slowing down transactions. But we are now seeing the development of a large number of digital platforms, many of which are collaborations between banks and fintechs, that are facilitating the digitisation of trade workflows and trade finance instruments, such as letters of credit.
While the digitisation of global trade processes still has a long way to run, it is possible to use APIs to create a digital trade ecosystem using shared data. This can help speed up trade transactions. APIs also enable companies to manage their financial supply chains almost in real time. For example, a treasury department could receive an alert about incoming funds from a client through an API, and then pass on this information to credit control so that the customer can have their goods released to them, or even plan an additional order, almost instantaneously.
As well as providing greater transparency about the financial flows linked to trade, APIs also offer the scope for greater clarity and data sharing when it comes to ESG measures.
Sustainability is becoming an increasingly fundamental part of corporate life, and organisations need to understand the ESG impact of their supply chains (read more on this topic here). APIs are a great way of ensuring ESG transparency.
4. Making real-time treasury a reality
As well as speeding up global trade processes, open APIs are also reducing the time taken for the delivery of multibank cash positions, without the need for SWIFT connectivity. APIs enable treasurers to make a real-time connection with their banks, providing an immediate and precise illustration of their cash positions. One of the main potential benefits of using these digital platforms for treasurers is that it provides them with a single view of trade-related transactions and trade finance arrangements.
APIs provide information in an instant, and form the basis of real-time treasury. But to make the most of this real-time data, treasurers need to make sure their treasury management systems and enterprise resource planning software are up to speed. Moving away from batch-processing and next-business-day mindsets will also be important to maximise the benefits.
5. Take a holistic view
The benefits of open APIs are not limited to treasury or payments. Inter-departmental collaboration could help companies identify problems in other areas of their business that could be solved using the information obtained from a treasury API.
A partnership approach within the company is the best way to make the most of what APIs have to offer. Open APIs are all about ecosystems: the treasury does not operate in isolation, so to reap the full benefits of APIs, it must work closely alongside other business functions such as IT, procurement, sales and marketing.
Open dialogue within the company can also help you identify areas where APIs and open banking will not add value: using open banking for the sake of it is unlikely to add value. The internal reflection that is necessary to extract maximum value from open APIs is arguably the hardest part of the process.
To find out more about the impact of Open Banking on the Treasury, get in touch with your NatWest Corporates & Institutions representative or contact us here.