TechnologyConnectivity/Interfacing“Destroy or democratise” – how Open Banking will impact connectivity

“Destroy or democratise” – how Open Banking will impact connectivity

“PSD2 is either going to destroy or democratise the connectivity world within banks,” says Tom Leitch, vice president and COO of TreasuryXpress. “I believe it will be the latter.”

“PSD2 is either going to destroy or democratise the connectivity world within banks,” says Tom Leitch, vice president and COO of TreasuryXpress. “I believe it will be the latter.”

The UK’s Open Banking and Europe’s revised Payment Services Directive (PSD2) will stop banks from being able to charge for MT940s thanks to the regulation allowing a range of companies to provide APIs that can extract and submit the data for free.

“Treasury is the last bastion of finance that hasn’t been broadly touched by actual real disruption until the API. It’s a very exciting time for corporate treasury,” Leitch tells GTNews.

Ian Rand, Barclays CEO of business banking, argued that open banking is in the “interest of big banks” in recent a panel debate at the UK Business Banking Forum 2018 in London.

“If all I do is sit there and wait for the fintechs to provide APIs and to take market share off me, my business is only going in one direction,” he explained.

When will treasurers reap the rewards?

Despite the regulation coming into effect in January, it will be several months before treasurers start to reap the rewards.

“This only allows banks to start building APIs,” says Leitch. “It will take most banks a few months to publicly release them, as they need to go through a rigorous testing phase once the APIs are built.” says Leitch.

“We are seeing the global banks take great strides and many have their APIs ready for early testing,” continues Leitch.  However, he says the benefits of these APIs are still only likely to reach treasurers towards the end of 2018.

TreasuryXpress has been at the forefront of innovation, pioneering the use of APIs in their TMS solution since 2015.  Based on the adoption of TreasuryXpress’ API-driven on-demand TMS model, APIs are a “reliable and secure means of connectivity for treasury,” Leitch added.

“Having been aware of the open-banking movement for some time now, our strategy at TreasuryXpress was early API innovation in order to enable early-adoption of the PSD2 regulation,” says Leitch.

This is evident in the market as many early-adoption global banks have included TreasuryXpress in their early-testing programs for their APIs, said Leitch.

“We are really seeing momentum across the board.  Early on, we hedged our bets that open banking and APIs would be the way of the future for a more simplified treasury,” Leitch added.  “It is extremely gratifying to be included in the early testing programs of these major banking players,” Leitch adds.

Open Banking is an entity set up by the UK Competition and Markets Authority to drive Open Banking implementation and innovation in the UK.

Miles Cheetham, head of customer engagement at Open Banking, was also on the UK Business Banking Forum panel. He said: “Nobody was expecting anything dramatic on January 13, 2018, [the date Open Banking and PSD2 were implemented], but what will happen I expect is we will see an evolutionary approach which will start with greater choice for clients and consumers.”

“This I’m sure will drive greater innovation in the banking industry because they need to embrace this,” said Cheetham.

“The interesting stuff starts to happen later when you see how you can combine data from open banking with data from other sources, such as social media, to create really interesting products.”

“The interesting stuff starts to happen later when you see how you can combine data from open banking with data from other sources, such as social media, to create really interesting products. When we get to that point, hold on to your hat – some really interesting things could happen,” he added.

Once banks provide APIs, companies like TreasuryXpress (a treasury management software provider) will be able to plug into them to show treasurers their bank accounts, transactions, balances and payments.

The real benefit for treasurers will be a drastic reduction in the cost of connecting systems together.

“Currently, to connect to a bank, TreasuryXpress can do this with a direct connection to it or via SWIFT,” explains Leitch.

“To set up those connections, banks are currently charging between anywhere from £1,500-£2,000 to build the connection and then they charge monthly per account. APIs will effectively remove the cost,” he says.

With the use of APIs, Leitch predicts treasury management systems (TMS) will continue to become increasingly low cost.  Additionally, the regulation will also “set new expectations for treasury teams as TMS systems should be easier to implement and connected to banks in just a few days,” says Leitch.

“We feel that the market is ready for this.  For the past three years we have seen a triple digit increase in adoption of our TMS model and API readiness. Now that it is supported and fueled by regulation, the technology adoption lifecycle of on-demand tech will certainly accelerate amongst treasurers.”

Five years ago, Rand assessed all of the existential threats to the Barclays business model. “There were lots of consultants saying that it would be blockchain that would change everything,” he said.

However, Rand decided it would be open banking regulations and APIs that would fundamentally change business banking.

Leitch takes a similar view: “Three years ago, everyone was talking about blockchain and how exciting that was. No one was really focused on APIs or PSD2, but we knew this was coming and prepared for it.

“That is why all our systems are on technology that allows us to flip the switch and start using APIs, saving our clients a huge amount of money,” says Leitch.

Treasurers understanding of PSD2 is “pretty thin”

The average treasurer knows what an API is in relation to how it connects them to a system, but they aren’t aware of the bank connection, according to Leitch, who says this is true across Europe and the US.

“Industry knowledge of the PSD2 is pretty thin,” argues Leitch.

“Most of the time when we are having discussions with treasurers, APIs tend to be a grey area”

“Most of the time when we are having discussions with treasurers, APIs tend to be a grey area,” says Leitch.

“We have to do quite a lot of client education on what the effect of PSD2 will be. Unless they come from a very large company operating in an industry such as technology, most treasurers on a day-to-day basis only have a high-level understanding of what an API is.

“Most knowledge surrounding the regulation is based on risk or new legal structures that have to be complied with when it comes to tax or company structures, not necessarily around technical aspects,” he explains.

For this reason, Leitch says he often finds treasurers have not had to gain a deep understanding of PSD2. It is often the chief technology officers and chief information officers that have.

“In the US, not many treasurers know what APIs are at all unless they’ve heard of it being used to link something like accounting software via API. When you have a conversation with the treasurer’s IT team they, of course, know what it is and are very excited by APIs,” says Leitch.

“I think it is coming down the day-to-day knowledge of a treasurer,” he tells GTNews.

When will open banking come to the US?

Almost every global bank is present in the UK and in Europe, for example, Bank of America, from the US and ICBC from Asia.

As PSD2 and Open Banking is being pushed out in Europe, these global banks have to provide APIs to remain competitive and to remain compliant.

Leitch also believes that the benefits of APIs will not just be limited to the current jurisdiction of the PSD2 regulation.

“The major players are all launching APIs, so whether it is globally or in Europe they are ready,” says Leitch. “Banks will roll that technology back to the US.”

Market competition is expected to push all major banks into adopting APIs as the early adopters will be able to reduce some banking service costs from several hundred dollars a year to zero.

Competitors will be forced to do the same to retain their client base.

There is currently no implementation date for banks to introduce APIs for Open Banking services in the US but Standard Chartered, Bank of America and JP Morgan are reportedly in the testing phase right now.

“I predict they will be on the same timeline as they are in Europe. This means that they will be able to provide them in the US when they go live Europe, which I believe will be in 2019,” Leitch argues. “Similar to the global banks we are working with, we have also been invited to participate in early testing by two US banks as well.”

What will the biggest concern for treasurers be?

The security of APIs are likely to create the biggest cause for concern to treasurers when it comes to PSD2 regulations, comments Leitch.

“Nothing of this nature has ever really been tested at scale. In the end, the benefits will far outweigh the fears as the cost of connectivity comes down and corporate companies will finally be able to look at things like liquidity or what cash they have,” he concludes.

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