Impacts of open banking on business financing

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Next Generation Commercial Banking January 2022 - Find out how commercial banks are embracing open banking to keep pace with third-party financial service providers

The pandemic has forced many consumers and businesses to rethink how they make payments or perform other previously routine banking functions, sparking rapid growth in the adoption of online banking tools. One report suggested that the health crisis has pushed digital adoption forward by five years.

This expansion of digital banking has followed familiar consumer trends, with advancements in mobile payment technology occurring much faster than expected as retailers and financial institutions (FIs) pivot in response to consumer demands for contactless ways to shop and pay bills. What companies expect from their relationships with their FIs has also moved irrevocably away from previous norms.

Open banking, which is powered by third-party FIs accessing corporate and individual financial data with their permission, is gaining momentum with the help of innovation. The increased use of application programming interface (API) technology, which allows computer systems to exchange and process data quickly and transparently, has facilitated the exchange of financial data without the physical intervention of the bank.

The bank itself becomes non-essential in this style of financial transaction, and this can benefit both businesses and their customers by saving them time and money. APIs reduce the risk of human error, freeing up treasurers for more strategic tasks. Bank statements and notifications can easily be received 24/7, and payments can be issued automatically and directly from internal tools, such as enterprise resource planning (ERP) programs .

APIs are certainly nothing new. According to a reportsome 80% of banks are already using them to connect internal systems or provide customers with features that don’t require banking portals, such as accessing an account or making cross-border payments through a customer’s ERP system.

Entities around the world use APIs, but their use appears to be most widespread in the Asia-Pacific region, according to a report, which revealed that some 69% of Chinese companies use them. Thai businesses come in second at 55%, and around 54% of UK businesses are currently using APIs.

Feeling the need to compete with their counterparts as open banking becomes more popular, FIs have started implementing APIs. One report estimated that the percentage of banks and credit unions that have invested in or developed APIs increased from 35% in 2019 to 47% in 2021, and an additional 25% plan to invest in or develop APIs in 2022.

Growth and Future Uses of Open Banking

The benefits of open banking are staggering, and they include more efficient cash management, as it allows real-time banking to be done with more visibility – giving treasurers the ability to move money strategy to avoid shortages and optimize surpluses. Access to loans becomes much easier through open banking, as financial information and necessary documents are instantly available and processing time is significantly shortened. Armed with the ability to view consolidated and aggregated accounts across banks or regions, commercial banks become advisors who can have data-driven conversations with customers to recommend strategies and solutions.

Open banking is expected to become ubiquitous in a short period of time. According to a reportthe number of global open banking users is expected to grow annually by around 50%, from 25 million in 2020 to 132 million by 2024. Most of this growth will occur in the European market, which had already more than 12 million users in 2020 and is expected to reach 64 million.

What could these developments mean for the future of open banking? One change could be that FI startups and third-party business entities could attempt to become banks. The proliferation of APIs has given rise to Banking-as-a-Service (BaaS) models that allow licensed banks to integrate digital banking services directly into their business customers’ products. A company could therefore offer debit cards, digital loans or payment services to its customers via an application or website without the need to acquire a banking license.

A world powered by open banking is also a world in which banks will have to compete to win and retain business as corporations shift their financial activities in-house. One report said more than 35% of companies are considering third-party providers for advanced financial services or have integrated these functions in-house to enable self-service. Another one report found that $416 billion in banking revenue is at stake as the transition to an open data economy increases competition with third-party financial services. Organizations that embrace open banking will be better prepared to thrive in this competitive future.

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