When it comes to trading globally, banking access and reconciliation can be remarkably complex. Not only do businesses interact with a range of financial institutions to track funds across multiple bank accounts, they are also required to reconcile accounts receivable and payable transactions throughout the global supply chain. Funds may get lost in transfer and invoices can be difficult to reconcile – forcing valuable personnel to deal with unnecessary complexity rather than driving progress.

 

Introduced in January, the UK’s Open Banking initiative changes this. The launch of Open Banking is set to radically change the way consumers, businesses and banks pay and get paid, and how they manage their data. The introduction of a unified Application Programming Interface, or API, across financial institutions creates a foundation in which data can be seamlessly and securely shared in real time.

 

The beginning of an era

While the UK regulations are only mandatory for the top nine banks in the country, the initiative is gaining wider traction. A growing number of UK financial institutions outside the mandated nine banks are volunteering to open their APIs to Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), recognising the open approach will enable them to offer new services and become more competitive pre settlement funding.

In the new world of Open Banking, an AISP can consolidate reams of bank account statement data and deliver it to the customer in a single interface, making it perfect for treasurers of multi-banked organisations. Payment service users – whether they are individuals or businesses – are now able to instruct their banks or payment service providers to share their bank balance and transaction information with regulated AISPs. In addition to displaying this information on a user-friendly dashboard, the AISP can convert all this transaction data into the required format and send it to the customer’s ERP or Treasury Management System.

Similarly, before the introduction of Open Banking, businesses and consumers would have to log into each bank separately to initiate payments, using different workflows and security protocols. With the advent of Open Banking, individuals or businesses are now able to mandate their multiple banks or payment service providers to accept payment instructions via their PISP’s app.

 

Making things easier for suppliers

Through initiatives such as Open Banking, as well as the New Payments Architecture which aims to modernise the UK payments infrastructure, we’re likely to see the development of modern Inheritance Loans payment services. One innovation to look out for is Request to Pay.  This will see the introduction of sophisticated electronic invoicing into the payment system, making it easier to pay and get paid, with more flexible payment options in terms of timings and partial payments.

Instead of a Direct Debit, where money is simply taken from a bank account, the Request to Pay mechanism will issue a request to the payee. They will have the option to pay in full immediately, pay later or arrange a payment plan. Designed partially to accommodate the trend towards more flexible work and the rise in the ’gig economy’, it offers greater flexibility to individuals and is likely to reduce the risk of non-payment or default.

Where cash flow once existed in a complex ecosystem of different financial systems, businesses will now be able to enjoy greater simplicity. The potential for a single dashboard that unifies all accounts in real time while securely and effectively reconciling invoices with seamless, integrated incentives will help maximise supply chain value.

 

Beyond UK borders

The innovation potential of Open Banking does not stop here. In London, unprecedented levels of collaboration between banks and FinTech providers highlight the mutual benefits of combining a bank’s scale, large customer base and economic muscle with the fast-moving and innovative skills of smaller FinTech firms.

Innovations under way include apps to help consumers find the best investment or borrowing offers in the market, and tools for businesses to manage their cash more efficiently or forecast working capital requirements more effectively. And this is just the start. Competition will intensify with new entrants, offering innovative value propositions and new business models.

Other markets are also directing an API-driven open banking agenda. In Europe, the revised Payment Services Directive, PSD2, was also launched in January 2018 and comes into effect from September 2019. Australia will introduce Open Banking in June 2019 for the country’s Big Four banks. The Hong Kong Monetary Authority has announced an Open API Framework which paves the way for banks to share data with third-party providers. Similarly, Canadian authorities are exploring the introduction of Open Banking soon after the launch of its Real Time Rails programme. The Monetary Authority of Singapore is also encouraging banks to adopt a voluntary transition to Open Banking. And in the US, a number of the large banks already voluntarily offer open APIs to third parties, pre-empting the regulators by using APIs as a competitive advantage, rather than mere compliance with a mandatory change.

 

We are seeing the early stages of a seismic industry migration that will come into full force over the next five years. The emergence of innovations with the potential to drive simplicity and increase flexibility are turning a once complex web of financial institutions into unified tools to maximise value creation. At Bottomline Technologies, we thrive on maximising the benefits of innovation, leveraging the UK’s head start to help our global clients fully realise the immense potential of open banking.