Open banking and APIs: transforming the future of treasury

| 05-11-2019 | treasuryXL | BELLIN

Open banking is about much more than advanced technology. It has an impact on business models, processes and ways of thinking – and it will definitely have a huge impact on treasury.

The EU’s revised payment services directive (PSD2) has forced European banks to set up standardised interfaces, so-called APIs, to enable third parties’ technological access to bank accounts. This is an attempt to break up the banks’ monopoly and boost competition amongst payment service providers.

When it comes to payments, PSD2 APIs are currently limited to single Euro payments area (SEPA) single payments. Simply put, they are generally ill-suited for corporate payment processing. Nevertheless, open access to customer and transaction data for third parties represents a radical change that threatens traditional banking business models.

While in the past, banks reigned freely over their customers’ financial data – often keeping them in the dark about margins, fees and transaction routes – open banking makes banking fundamentally more democratic and gives companies much more freedom and flexibility.

How does a company want to handle its payment processing? With open banking, it will be of little relevance to corporates exactly how their payments are processed. As long as the payment goes from A to B, the back-end technology being used is up to the service provider. What will be more significant for corporate treasury departments when it comes to payments is how quickly this information becomes available to them.

Open banking’s impact on cash management

Today, treasurers are blind when it comes to intraday cash flow movements. Depending on the bank, they only receive balance information a few times a day at specific times. This has always been as real-time as it gets. Treasurers who would like to know their account balance at any time and in ‘real, real-time’ need to request this information. But how can you know when to best inquire about your account balance when you have no idea when money will be credited?

Some companies make use of automated requests, managed in their treasury management system (TMS). The system sends scheduled requests to the bank, for example every minute, to check if any new information is available. An analogy would be sending round a company postman to empty the letterbox every few minutes without knowing if anyone has actually posted a letter. This leads to enormous amounts of data and clogs up communication channels and systems, without really solving the issue.

A much more intelligent solution would be to not request the information until it is actually available. For that to work, there would need to be some kind of signal that data has come in – just like the signal flag on American letterboxes. New technologies, such as APIs and WebSockets, enable this kind of reversed order. The bank signals that a new balance is available as soon as money is credited to or debited from an account, and treasurers and other finance professionals can then take action. The same is true for payments, where status notifications for a transaction would be available straight away.

The future of APIs

What will the future look like for banking communication? Will APIs relegate existing technologies, such as electronic banking internet communication standard (EBICS) or SWIFT, to the sidelines? APIs’ greatest downfall is their lack of standardisation. Conversely, complete and powerful standardisation across the SEPA area is the biggest asset of these established communication channels.

In the context of PSD2, there have been various European initiatives to achieve standardisation, for example those of the Berlin Group. However, there is no comparable global initiative, and when BELLIN recently analysed the open banking offering of the ten most relevant banking groups, the discrepancies were staggering. What is needed are suitable enhancements of established technologies that could then be combined with new technologies, for example combining the EBICS protocol with API technology.

And this future is not far off. Massive changes that will impact treasurers’ day-to-day work significantly are just around the corner. Large retailers have already implemented instant payment solutions using APIs that not only enable them to transfer money, but also to receive notifications when a payment has come in as soon as it does. This has enabled them to fully connect payment processing, real-time balance information and customer service.

Direct communication of data between companies and banks is likely to have other, far-reaching consequences for treasury, for example when it comes to FX and risk management. Real-time corporate-bank communication definitely brings challenges for cash management. Banks will have to solve how cash pooling is handled in the future whilst also determining the time on which interest calculations are based. However, with new standards for speed, efficiency and data quality, open banking will continue to revolutionise treasury far beyond 2020.

Karsten Kiefer, Product Manager Solution Management, BELLIN

Karsten Kiefer

Product Manager Solution Management

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How will Open Banking impact Treasury?

| 20-9-2019 | treasuryXL | BELLIN

Interview with Karsten Kiefer on open banking, APIs and the future of bank connectivity

With financial data increasingly digitized and moved to the cloud, disruptive approaches have become available to fintechs and corporates have gained access to new and revolutionary opportunities. One such opportunity is open banking, also known as API banking. In this article, we take a closer look at open banking and the potential benefits of current trends for treasurers. Karsten Kiefer, Product Manager and Solutions Manager at BELLIN, introduces us to the latest developments and assesses their impact on corporate treasury.

The European Payment Services Directive 2 (PSD2) sets rules for access to payment accounts but it has also caused great uncertainty. Is this the beginning of open banking for everyone in Europe? And what does the directive mean for treasury?

One of the provisions of PSD2 forces European banks to provide a standardized access interface, known as API, to third parties, which enables technical access to the bank’s customers’ accounts. This is an attempt by the regulator to break up the banks’ monopoly on account information and to boost competition amongst payment service providers.

The directive clearly stipulates the type of information banks have to give access to and the scope of services associated with it. For example, when it comes to payments PSD2 API access is restricted to SEPA single payments. Few banks, if any, will support bulk payments, FX payments etc. as additional services. This is why for the time being this technology is only of limited use to corporate treasury. It is definitely in no way comparable to established channels such as EBICS, H2H or SWIFT.

Where do you see the main advantages of open banking for treasury? When will corporate financial departments adopt open banking?

Changes have been flooding the international payments sector, and open banking is only one of the waves to ride. Demand is driven by developments in the consumer goods sector, where mobile, real-time payments are rapidly gaining ground, with providers springing up all over the place. 24/7/365 availability of payments services is highly relevant for treasurers. This has also been the driving force behind developments in connection with established channels, such as SWIFT or EBICS, including the SWIFT g4C technology that enables real-time information on payment transactions. For corporates who use a treasury management system with an integrated payments platform, open banking has already become a reality.

How does open banking with a treasury management system work?

A treasury management system with an integrated payments platform, such as tm5 by BELLIN, enables multi-channel access to banks. There are standardized channels for specific regions, such as EBICS, or the BELLIN SWIFT Service that provides access to the global SWIFT Network. Another connectivity option is direct host-to-host connections to specific banks and their networks. APIs represent an additional technology to connect banks and corporates, and in the future, this will become more and more relevant. Today, the BELLIN Payment Gateway enables access to real-time payment transaction information and a company’s global financial status.

Are there any challenges associated with API interfaces?

Many of the banks today that can connect via two or even three channels are working on APIs. So this will become an additional bank connectivity option. However, we need to bear in mind that such an API must bring added value and additional benefits. Otherwise, you are better off using one of the more established channels. Looking at the API specifications of several major banks in more detail, you will realize that there are minor standardization options at the moment. Everyone is talking about APIs but in fact, every bank has their own! Ultimately, it is irrelevant for the customer or the user which technological options we have available to connect a financial institution.

What new aspects does API connectivity bring and what makes it special?

The main difference is the way in which information is made accessible. Intraday account statements are a perfect example. Many banks provide this information at least once or twice a day, some more often. The times vary according to bank, which makes it difficult to gain a complete overview of your financial status at any one time. For EBICS and H2H connections, BELLIN has to actively retrieve this information for clients, while the banks send the data to a company’s BIC in the case of SWIFT Service customers. Corporates have little or no insight into any fluctuations outside these times.
API technology enables two systems to communicate directly. In theory, any API request to a bank requesting intraday account information or the current financial status could be processed and responded to in real time. This would be a huge leap towards the concept of an “instant treasury:” It would enable treasurers to trigger information directly and to receive the latest data at the touch of a button. Unfortunately, few banks are able to offer such a service, as it would require not just an interface but also powerful and modern banking systems.

So the flood of information triggered by APIs very quickly hits a wall, reined in by banking systems. Do you see any solutions to this problem?

So-called WebSocket interfaces are a step up from APIs. This technology would see a bank notify a client as soon as any relevant data has become available. Corporates could retrieve this information promptly and would always have the latest information. This is a very intelligent reversal of the logic described earlier and would get rid of any redundant data communication. Customers or their service providers would only ever communicate with a bank when the bank has notified them of available data. You could compare a notification that money has been credited to your account to notifications sent by LinkedIn or YouTube: As soon as something new happens, it’s shown to you and you’re notified.

Will these new technologies mean the end for existing solutions such as EBICS?

Not at all. EBICS is a great example. The EBICS standard is long established and thousands of corporate clients use it. Banks have invested a lot of money in these systems. Intelligent updates to these standards will be the key. The German Banking Industry Committee, the industry association of the German banking industry, is planning specifications for 2020 and working on introducing technology that will enable banks to notify corporate clients as soon as relevant data is available to be retrieved from the EBICS bank server. From a technological point of view, this will be a combination of the established EBICS protocol and the latest API technology. I think this is the perfect combination of old and new standards and brings enormous advantages to customers with little or no adjustments required.

What would you recommend treasurers do right now?

My advice would be to remain calm and wait it out. At the moment, APIs and the opportunities associated with them are being hyped up. But in reality, very few banks have actually developed new services.

At BELLIN, we develop and integrate APIs every day, whether it is to communicate with transaction repositories, to integrate SAP systems or to connect our BELLIN Connect app. We have decades of experience when it comes to banking communication and have just launched API projects with three major international banks. Our aim is to create viable use cases that add value to our treasury clients.

Authors:

Author picture ofKarsten Kiefer

Karsten Kiefer
As a Product Manager and Payments Specialist, Karsten Kiefer is responsible for any payments topics at BELLIN. The main focus of his work is on enhancing software functionality, supported payment formats and communications channels. Karsten has a background in IT and has over 20 years’ experience in the payments sector.

 

 

 

Author picture ofAnja BiehlerAnja Biehler
Anja has a PhD in German Philology and trained in a business communications agency before gaining valuable creative and marketing experience in a number of advertising agencies. For five years, she was in charge of the communications department of a renowned, private financial service provider. Her last position before joining BELLIN’s Global Marketing & Communications team in November 2014 was with Freiburg University where Anja was responsible for the marketing efforts of the EXIST business start-up program.

PSD2: The Disruption and Innovation of Open Banking

| 11-8-2017 | treasuryXL | The Paypers |

PSD2 is a recurring topic which is of great concern to financial institutions and other payment service providers, as well as finance professionals at corporates all over the world. We read an interesting article about the disruption and innovation of open banking at The Paypers and want to share it with you. The article is part of the Open Banking & APIs Report 2017, aimed to provide necessary insights to help readers understand the latest developments on the topic, as well as practical examples and best practices in Open Banking. Alisdair Faulkner of ThreatMetrix states that innovation, enhanced security and the drive for greater competition are the golden triptychs at the heart of PSD2.

PSD2: Game changer, opportunity and challenge

PSD2 is a game changer for digital payments and commerce in Europe and will have a significant global impact. It requires financial institutions to make changes to their platforms and systems, while making strategic decisions on how they want to play going forward. These changes will require significant investment as well as a strategic shift, as banks are forced to consider how they can safely open their banking platforms to external third parties. While this may negatively impact the revenue of large banks, it can also level the playing field for smaller fintechs, as well as provide opportunity for new product innovations.

Not only do banks and other PSPs need to work toward compliance, but they also need to define their strategy to position themselves competitively in the market. They will also need to align the somewhat competing demands of rapid innovation while maintaining vigilant security as the cybercrime war continues to rage.

Innovation and Disruption

Digital transactions have had a huge impact on the evolution of the fintech industry as niche products and services have emerged to fill the crevasses left by larger financial institutions. These include services for the unbanked and underbanked, instant insurance, crowdfunded loans and global online remittance. Fintech operators have been able to rapidly innovate for many reasons: a lack of legacy back end systems, lower regulations and less online scrutiny, for example. On the other hand, large financial institutions have unwittingly become the enablers with minimal benefit.

However, PSD2 and Open Banking regulations are set to create more opportunities as both financial institutions and new providers compete to drive smarter revenue from payments. With open banking, the financial institutions would be increasingly at risk of losing their direct relationship with the customer and becoming a back end utility. On the other hand, new providers could emerge, enabling customers to access their banking services from a common portal, without having to ever log into their bank. These portals may also enable the customer to get services à la carte from a menu of banks. As such, businesses are contemplating the path forward as they wait for new payment platforms and ecosystems that lead to new business models to emerge. It will be critical for established providers to decide how to take advantage of the opportunity and not be left behind.

What are the threats and possible solutions to navigate the future according to Alisdair Faulkner?

Please read more by referring  to the original article on The Paypers.