Open banking: quo vadis?
Open banking initiatives were started around the world to increase innovation and safety in payments. For example, the Payment Services Directive 2 (PSD2) by the European Union and the Customer Data Right Act (CDA) in Australia. Under these initiatives, the banks grant registered players with access to their customers’ bank accounts through Application Programming Interfaces (APIs). This is accompanied with modern multi-factor authentication methods.
Legislators and supervising authorities created the open banking rules primarily for retail consumers. However, corporate treasuries will also be impacted mid-term. In this blog post, we will cover:
- What is open banking
- Initiatives for open banking
- Effects of open banking on corporate treasury
What is open banking?
Open banking is an umbrella term for banks facilitating access to the bank accounts they manage on behalf of their customers via APIs. There’re two use cases relevant for corporate treasuries and their cash and liquidity management:
- They want to gain access to their accounts by retrieving bank account balances and transactions.
- They want to initiate payments from these bank accounts.
Technologically, this is possible via RESTful APIs- a widely used modern technology that enables two applications to interface. In contrast to file-based interfacing technologies, API interfaces provide real-time data when retrieving and sending bank account and payments information.
You might think now open banking is just another interfacing technology. But the ecosystem supporting open banking makes all the difference. As banks are required (either by regulation or by market pressure) to open their serviced bank accounts, registered bodies in the marketplace benefit from:
- Multi-banking: Bank accounts from different banks can be aggregated within one system, allowing you to interact with multiple financial institutions.
- Financial transactions in real time: With the new open banking interfaces, initiation of payments, collection of bank account balance, or transaction information (typically via bank account statements) can be executed in real time.
What is new about Open Banking?
You might ask, what is new here? Products that process data in real time already exist. That is true, but many use screen scraping methods to avoid going into contractual agreements with each bank. These techniques can be questioned from a technological point of view. But they also pose security and data privacy threads, as users are often required to hand their credentials to third-party providers.
Regulations, such as PSD2 in Europe or CDA in Australia, are designed with the clear objective to improve data security. APIs do not only provide a way to connect and retrieve information. They also offer a secure environment to manage consent and put users in full control of their data by applying proper authorization workflows.
Which initiatives exist around the word?
Besides PSD2 in Europe and the CDA in Australia, the Hong Kong Monetary Authority (HKMA) also introduced a regulatory framework for bank APIs. Other jurisdictions like the US omitted to introduce obligatory regulatory requirements. They mainly follow a market-driven approach. There are also hybrid models. In this case, authorities do not publish compulsory requirements, but playbooks and guidelines facilitate easy data exchange via APIs. Examples for hybrid models include policies in India, the API playbook from the MAS in Singapore, or the FAS in Japan that encourage banks to collaborate with third-party providers.
What’s the impact on corporate treasury?
Currently, most open banking initiatives are focused on retail banking. But the API technology can be a game changer for commercial banking. It helps with the disintermediation between bank clients, FinTechs, and banks and increases security and speed in data exchange. This way, the technology would enable commercial banks to offer new, value-added services and potentially real-time cash management.
Today, commercial banking is behind retail banking in adopting API technology. The COVID-19 pandemic is causing further delays, but there is no way back. Open banking environments are evolving around the globe, and we expect more emphasis on open APIs in commercial banking soon.
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