The potential of open banking for businesses

Open banking has been around for longer than most people realise. And while its impact in the B2C arena has become increasingly visible, the surface has hardly been scratched when it comes to B2B potential. However, the pace is starting to pick up exponentially.

At the end of 2023, four experts from various aspects of the open banking ecosystem came together in a webinar hosted by Finextra to share their experiences, thoughts and predictions on what open banking means for the corporate world.

The panellists

• Mark Munne – Domain Lead for Payments at Ponto (part of Isabel Group)
• Dr Michael Salmony – Founder & CEO at Payment Innovations (independent consultancy with global perspective)
• Nik Batheja – Senior director of Open Banking at Bank of New York Mellon.
• Jürgen Suls – Product Lead at Yuki (accountancy software product from Visma)

A simple analogy

To put context around open banking in terms of what it means for those who use it, Michael drew an analogy with the advent of the smartphone. Comparing these with traditional mobile phones, he explained that while traditional mobile phones can only do what’s programmed into them by their manufacturers, smartphones are capable of doing anything that third party apps offer.

The invention of the smartphone thereby unleashed a huge amount of creativity, with millions of third parties developing innovations for users to download. This is what’s now happening with open banking. Instead of banking apps just doing what banks program into them, millions of fintech companies are now able to develop and integrate new services that add to these apps. 

Extending the field of play

Continuing this thought, Mark pointed out that the field of play has already extended beyond the fintech sector, giving the example of Tesla who are utilising open APIs to integrate car insurance products in their own app. In doing this, Tesla are combining financial and non-financial services products via the open finance ecosystem.

Nik added that the advent of Apple Pay and Amazon, which also work via API technology, demonstrate how open banking has enabled entire markets to be created around financial services infrastructure.

From European concept to global phenomenon

Michael summarised how open banking has risen from its conception in Europe, around 20 years ago, to an internationally adopted phenomenon that he expects will fully conquer the world in 2024. He explained that different regions are at different stages, with the UK currently doing very well in the regulated space, while the US is driving things ahead in a less regulated environment.

Nik elaborated on this, explaining how open banking in the US was fuelled by an explosion in private market funding, a lot of which flowed into startups at the infrastructure layer. This enabled technology companies to realise their financial aspirations by partnering with others, rather than having to build everything themselves, and paved the way for e-commerce marketplaces.

In the US, Europe’s open banking implementation is perceived to be slow, due to waiting on regulations. Yet those in the EU and UK view the PSD2 and PSD3 directives as positive, preferring to have boundaries defined by regulation than by market-driven practices, as is the case in the US.

Mark supported this point by citing Ponto’s exponential growth (consistently 30-40% each year) since its launch in 2019 as demonstrating that, while the EU has been slower to get going, open banking now has an unstoppable momentum.

Progression

Mark explained that although multi-banking was already possible over 20 years ago, open banking really brought things to life by adding reach and standardisation. He noted that dramatic improvement in API stability and user experience since 2019 is the reason B2B open banking opportunities are coming to the fore now. Previous to these improvements, systems were only capable of handling very simple transactions such as consumer purchases, and it’s only now that they are good enough for more complex B2B tasks.

Looking ahead, PSD3 will significantly broaden the scope of possibilities. Expected to come into force in the next few years, this directive will add savings and investment accounts to the ecosystem [PSD2 only includes current accounts] and extend the range of services to include things such as guaranteed and variable recurring payments. And by allowing banks to charge for premium APIs, PSD3 will encourage them to develop better offerings.

How businesses of all sizes can benefit from open banking

Jurgen reminded the audience of how open banking not only means companies don’t have to build and maintain different integrations with every different financial entity, but that they also now benefit from a much greater volume and range of data being automatically fed into their accounting software. This makes both bookkeeping and forecasting much faster and easier.

Michael agreed that the greatest corporate opportunities, especially for SMEs, exist in the mundane things like invoice reconciliation, liquidity management and forecasting. He pointed out that, despite accounting for 90% of most economies, SMEs did not have the necessary resources to benefit from technical integrations with banks until open banking came along. But now, the “API-ification” that facilitates open banking has removed this barrier, in a move some are referring to as “the democratisation of digital finance”. It means that, rather than needing in-house programming capabilities, SMEs can participate in open banking via off-the-shelf accounting software such as Yuki, Xero, Quickbooks and Zapier.

One of the most significant benefits this delivers to SMEs is the amount of time they can save. As Jurgen highlighted, even simple things like checking when invoices have been paid is tremendously time consuming when done manually. With open banking, this is no longer necessary.

Mark gave an example of how access to data through open banking is also reducing the time for assessing corporate loan applications. Instead of lenders having to manually go through three years of annual statements, their open banking software can instantly identify cashflow patterns. Decisions can now be made in five minutes, instead of three weeks.  

Michael added that full adoption of open banking could eliminate the sending of, and manual data entry related to, 57 billion pieces of paper around Europe every year. He also highlighted the cost-saving opportunities in using tools such as IATA pay – an open banking-enabled platform integrated with the IATA app for paying airline bills – which speeds up the process and could save businesses an annual total of 8 billion dollars in credit card fees if they all adopted it.

Resistance to change

Even though open banking means companies no longer need to run their treasuries in Excel, Michael stated that a surprising number still elect to do so. Nik explained that this is because these companies still prefer to have their cashflow forecasting done by human subject matter experts, even though open banking is used for other functionalities.

Michael also explained that people, in both their business and personal capacities, are naturally resistant to change. In another reference to the airline industry, he recalled how it took 10 years longer than necessary to do away with paper tickets, because old habits die hard and trust in digitisation has to be established. In terms of open banking adoption, while PSD2 forced banks to open up their APIs, they weren’t necessarily bothered about the quality and this led to some bad experiences. But PSD3 will enforce quality and performance standards and documentation of these APIs, which will result in better reliability. And then open banking will really take off. Returning to his smartphone analogy, Michael believes once trust is established in open banking, nobody will want to go back, just like they don’t want to go back to using traditional mobile phones.

Current challenges

When asked about key challenges open banking is currently contending with, Mark noted the inconsistencies between the many different banks’ APIs and onboarding schemes, together with Ponto’s ability to resolve this problem for its customers. He said there are still improvements to be made in terms of stability in many banks’ APIs, but progress, especially among the banks with the most traffic, is good.

However, a big outstanding challenge for businesses’ bookkeeping departments is the lack of transparency in payment reporting from credit cards and payment service providers. These entities are still sending batched figures, with fees already deducted, meaning that payee reconciliation still needs to be done manually.

For Michael, the thing he’s most missing is governance to make sure everything works properly and is updated as necessary to fix problems. He said the UK is doing a very good job where this is concerned, but it’s a bigger challenge for the EU, where 27 different countries need to be brought together in agreement.

Jurgen countered the aforementioned challenges with his view that, from the software company perspective, all he sees are opportunities due to open banking being lower maintenance, with superior security and providing access to a greatly increased amount of data, compared to traditional banking. This means software companies’ time is freed to offer more tailored advice.

Potential for the future

Nik relayed a concept he’d read about in which the open banking mechanism doesn’t only facilitate financial exchanges, but could be used to transfer other value assets such as crypto currency or carbon credits.

Michael looked to a future of “API-ification”, where everything from phone bills to healthcare and education is managed by sharing data over APIs. With adequate security and privacy measures in place, of course. This would eliminate many time-consuming administration tasks, and lead to a mash-up of data across lots of different industries which will open up all kinds of possibilities. By way of an example, he pointed to Uber, which is essentially made possible by utilising fours APIs – the customer’s location, the driver’s location, the map and the payment. Michael then threw out a challenge to imagine what else will become possible once more and more industries’ data can be “mashed-up” via APIs.

Mark supported this with a prediction of APIs being used for things such as insurance, loans, investments, instant payments, digital currency, as well as mandated instant payments in Europe and a Central Bank digital currency, within 10 years. He did also throw out a caveat by saying that people tend to overestimate short term change and underestimate long term change.

Jurgen sees a world where everything is automated, with enhanced data access and integrations enabling companies to be more proactive and offer better services. Nik translated this into efficiencies which will mean SMEs can switch their focus from operational matters to strategic ones.

In summary

Thanks to the automation and availability of data made possible by open banking, there is already a fantastic range of opportunities for businesses of all sizes. And looking to the future, there will be a brave new world for businesses and corporate treasurers, with healthy global competition to be the best in this space.