Have SWIFT and Similar Systems Become Old Hat?
The term “open banking” has been all the rage in the financial sector for some time now in various constellations. Sometimes it is seen as a risk to the banking sector, sometimes as an opportunity for the same banking sector and its customers. Where there is no disagreement, is that it is definitely an innovation for the financial sector.
Open banking means that banks are opening up to third parties and their own clients. However, for this to work, they have to give up control over the data that they have been managing on their own up to now. Customers should thus obtain the possibility to make available their personal financial data to third parties, using an open interface provided by their house bank. The third parties could be other financial institutions, FinTechs or Treasury Management System (TMS) vendors.
Open banking is no longer a few-and-far-between phenomenon but a global trend that was triggered mostly by regulatory framework conditions. In Europe, it was the second Payment Services Directive (PSD2) of 14 September 2019 that set things off. With PSD2, the legislators intended to encourage competition and innovation in the digital eco-system of payment transactions. This will happen by having banks provide Application Programming Interfaces (APIs). Third-party providers recognized by the regulators are to have access to customer accounts through APIs and offer services based on these (e.g. releasing payments or closing a bank account).
On the one side, banks have recognized that they have to act in this regard, on the other side, few of them have actually done anything specific to introduce such APIs. Therefore, the BaFin has given a transition period until when this regulation must be adhered to. Only few financial institutions have made available such services to the market over the past few weeks and months. However, in the near future, the remaining banks will come under pressure as the transitional period granted by BaFin will not last forever.
Using open interfaces has already been possible for many years and in some cases is quite common outside treasury departments. In treasury departments, the use of APIs was not of great relevance because TMS providers hardly supported these functionalities to date. Up to now, communication consisted of exchanging data through file directories or other transfer protocols in payment operations, such as host-to-host, EBICS or SWIFT. Whether this will change anytime soon will also depend on the value added by the APIs. But: banks as well as potential third parties must offer functioning and above all secure APIs. The current status quo indicates that it is precisely the standardization of these interfaces that poses a problem. At this time there is no generally accepted standard for APIs in payment operations, as each provider has its own design. This makes the whole thing highly complex and bogs down the IT architecture of treasury departments, thus slowing down the process. However, SWIFT is currently defining a uniform standard for APIs in payment operations in order to solve precisely this problem.
In view of the current status quo, it is legitimate to question open banking’s usefulness for treasury departments in the future. Is open banking a useful enhancement or is it just the latest hype as there have been so many since the beginning of the age of digitalization?
Let’s take querying account balances: Account Information Service Providers (AISPs) are currently considered to be services regulated by the PSD2. AISPs enable the querying of data from different accounts, which are then made available to the customer in aggregated form and in real time in a TMS or another system (e.g. a reporting solution). Specifically, a third-party provider can thus communicate with the various house banks of a treasury department through these APIs and then access the relevant data. Access is in real time and may be initiated by Treasury anytime. This would be progress in regard to the current status quo, where banks only provide an end-of-day balance or an intraday account statement (in a previously defined frequency). Currently it is not possible to query account balances in an ad-hoc fashion.
Apart from simply querying account balances, it is also possible to make payments directly through the APIs provided by the Payment Initiation Service Providers (PISP). Customers can make centralized payments themselves from their bank accounts using a third-party provider or in their own TMS. The PISP can access the company’s accounts and effect the wire transfers through the bank’s API.
In both cases (AISP as well as PISP) it will depend on whether and when the necessary APIs will become available at the banks and integrated into the software providers’ systems (i.e. FinTechs, TMS, etc.). As such, it is unlikely that there will be replacement of the tried-and-true communication channels such as host-to-host, EBICS and SWIFT, especially as these have already been anchored deep in treasury processes and IT solutions and a change would require considerable efforts. Most likely, APIs will complement the already known channels. On an everyday level, they still have to prove their usefulness as far as the smooth and efficient functioning, as well as the maintenance by IT is concerned.
Nonetheless APIs may indeed bring an added value for cash management and payment operations, for instance by making it more transparent and processing it faster. It is precisely in regard to cash management and instant payments (which will come inevitably and which we highlighted in the September 2019 newsletter) that APIs will become indispensable. It will be interesting to see what will happen when this hits the ground and how it will affect treasury and cash management departments around the globe!
Source: KPMG Corporate Treasury News, Edition 95, October 2019
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