Kanika Hope, Chief Strategy Officer, Temenos

The success of open banking is pivoted on the tangible business value delivered to end-customers whether they are retail consumers or small to medium enterprises (SMEs) or larger corporates. Open banking was first adopted by retail banks but also has great potential in the corporate and SME banking sectors where compelling use cases are emerging based on the efficient and secure sharing of banking data between banks and third parties through the use of open APIs as opposed to host-to-host connections or SWIFT gateways.

The inherent complexity of products, processes and transactions in corporate banking has resulted in relatively lower levels of digitization compared to retail. Corporate treasurers and finance staff routinely complain about their banking relationships – multiple online portals for different product lines like lending vs. cash management, problems in reconciliations, lack of timely, accurate and relevant data, and lack of industry or business context in the services offered. Today’s corporate users are millennials who want the same experience from their corporate banking relationships as they get in their daily lives. Corporate treasurers also want simple holistic experiences which are embedded into their business processes and value chain.

Corporate bankers themselves realize these challenges. In our global Temenos Value Benchmark Survey of 135 banks, the level of importance given to open banking within the corporate sub-vertical is slightly lower than for retail (66% versus 78%). However, 90% of corporate bankers also want to provide their corporates with a contextual user experience and personalized products and recognize the importance of analytics to achieve this. Open banking data obviously boosts analytics and in this age of AI that we are all experiencing, data is gold. Open banking is the means for banks to access non-financial as well as external financial data to build and deliver compelling value propositions to their business clients.  Thus, there is a structural need for corporate banks to access open banking data.

Unlike in retail banking where challengers, fintechs and platform giants are giving incumbent banks a run for their money, competition and disintermediation levels are much lower in corporate banking. This is due to the inability of fintechs to serve the complex, personalized and relationship-based needs of large corporates or afford the large balance sheets required. Therefore, banks are in pole position to up their game in the corporate space. The use of Open Banking APIs is an important technology lever to help them exploit this opportunity.

Small to medium enterprises – caught between retail and corporate?

Digital and open banking are all about democratisation in the industry – about broadening access to underserved segments like SMEs who seem to have fallen through the cracks between retail and corporate as historically banks did not consider this segment attractive or profitable enough – credit risk and cost of servicing were deemed to be too high.

SMEs want an experience at par with retail and products at par with corporates. They stand to benefit most from open banking as it allows them access to the banking products and services that were previously only available to larger, well-resourced corporate organizations. 

Innovative SME use cases are emerging often driven by non-traditional players who are starting to capture market share. The UK challenger, Revolut has launched multi-currency accounts, expense management and accounting software integration for 500,000 SME customers globally.  Quickbooks, the accounting software company, offers businesses a checking account, debit card and AI-powered cashflow planner for complete cash flow management all in one place, in partnership with Green Dot Bank.

In most countries, national regulators are creating frameworks with established terms and standards. They have a clear imperative – promote competition and innovation, accelerate digital transformation of a traditionally conservative sector, but most importantly, from an ESG perspective, ensure financial inclusion and access. SMEs represent 90% of businesses and more than 50% of employment worldwide according to the World Bank. 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments.

Benefits of open banking for businesses

The intended benefits of open banking for businesses are around personalization, better experience in terms of convenience and responsiveness as well as about automation, transparency and easier access to funding and other banking needs.

Open banking allows corporate banking apps to become autonomous and self-sufficient finance management and aggregation platforms, bolstered with value-added features, such as payment tracking, cash management reporting, forecasting, and actionable insights. The single interface or app can offer experiences embedded within accounting, ERP and treasury workflows, spanning payment initiation, invoice financing and dynamic discounting, tax administration, expense management, payroll and even logistics and inventory management. This is based on real-time integration of the core banking platform with these ancillary systems.  

Open banking apps can solve real world problems for businesses. Corporate treasuries of larger enterprises benefit from a 360 degree view of all financial positions (transactions and balances) such as cash flow, accounts payables & receivables, and working capital from one platform, as well as the automation of these processes. SMEs can pay taxes, utilities and salaries from their business accounts in their accounting or government software. Yapily enables SMEs to pay salaries through the bulk feature in their business bank account saving them up to 77% of processing time. Car dealerships can use open banking APIs to allow their clients to instantly pay and drive away with the car in the same interaction rather than wait for the payment to clear until the next day.

There is tangible evidence from the UK’s Open Banking Implementation Entity that open banking enabled services have benefited the 11% of SMEs that have adopted them – about 600,000 out of 5.5 million. More than 70% of SMEs reported improved decision making and insights, and more than 80% reported enhanced productivity and efficiency.

Banks vs Fintechs  - who wins?

While in its initial stages, open banking might seem like an all-give, no-take model for banks, the real potential manifests once the majority of the ecosystem has been connected, when participants can reap the mutual benefits of consent-based open data flows.

Banks can then evolve from being just sources of data to utilising data from non-bank networks to build personalised products for their customers. This is an unprecedented opportunity to get real-time access to the digital footprints of their business customers.

Access to open banking data enables banks to improve lead generation, onboarding (identity verification through a KYB passport API), credit decisioning , monitoring and collection processes for their business finance products. It enables them to offer better advice such as Canadian Western Bank’s SmartAdvisor app for SMEs and the Barclays SmartBusiness dashboard with peer comparison to companies on market share or utility spend. They can go beyond banking into areas like insurance, logistics, transportation and real estate. Many banks are already offering sustainability tools to their SMEs.

Open banking allows banks to go after niche segments such as freelancers, sole proprietors, and micro-enterprises that were not cost-effective to serve earlier and which some of the fintechs like Holvi, Tide, Coconut are already disintermediating.  

For larger corporates, say operating in multiple markets, banks can offer Premium APIs on request that are designed for high volumes, highly secure and enhanced with rich data such as remittance data to clear down invoices in real time for quicker reconciliation. These Premium APIs can be further monetised by offering them to third-party developers to build and test innovative products together like DBS Bank’s Developers launch in Singapore. This opens up new revenue streams and boosts innovation at the same time.

By investing in open banking, banks can orchestrate banking-as-a-service (BaaS) as well as banking-as-a-platform (BaaP) business models:

• BaaS: Platform giants like Amazon are offering business checking accounts, credit cards and loans in partnership with banks like Bank of America and JP Morgan Chase, and Shopify is providing checking accounts and debit cards for merchants via Stripe Treasury which in turn has partnerships with various banks like Goldman Sachs, Citi and Evolve.
• BaaP:  Citibank has launched a digital lending platform for SMEs, on loans for up to $10 million with seamless connectivity with local and community banks to enable improved access to credit and a superior user experience.  Idea Bank in Poland has also built an SME eco-system providing accounting, cash flow analytics, marketing support and even book-keeping for Uber drivers.

Both incumbent banks and fintechs stand to benefit from the collaborative models engendered by open banking.

Conclusion

Within five years, the SME segment could be transformed by open banking with embedded accounting, credit, expenses, tax and payroll and even sustainability action tools available seamlessly from super apps.  For corporates it would be a longer play but inevitably, the use of external data and aggregation and analytics will become commonplace. Cross-border and cross-industry financial pathways will become more streamlined. Open Banking together with CBDCs and other payment innovations will contribute to the longer-term transformation of the industry.