As clients, we accept the systems and processes that are proposed to us by the service provider – our bank of choice in this case – and modify our own lives to match.
Much of our behaviour in relation to the way we deal with banks is inherited from legacy systems, some of which are direct replicas of paper-based systems that existed even before computing was applied to banking. If it works, we don’t fix it. But this is a recipe for accepting inherent inefficiencies, especially in a world where applications of technological advancements are unavoidable. And in this specific case, one of the most important developments is ‘Open Banking’, which increased the financial efficiency significantly for the institutions that have adopted this system.
The future of banking lies in open banking and, quite happily, it is already available to those who would like to reap the benefits of this kind of banking. Like many other ‘future technologies’, it is available but not widely distributed.
Large corporations that run efficiently are already making use of open banking. Their digital ERP (enterprise resource planning) platforms integrate directly with their banks and they transact without a host of intermediate processes – saving time, money, and virtually eliminating errors.
The most succinct way of describing open banking is to call it API banking. This means that the bank provides an interface between its systems and those of its clients so that many manual processes or processes that should be automated but that still depend on human intervention can be automated.
Let’s take payroll as an example. If a company’s payroll system interfaces directly with the bank, salary payments happen directly via a simple message that is transmitted from the company payroll system to the bank systems, without the need for intervention by a human at either end. This means no errors, no reconciliation, no manual transcoding of payroll data to the bank’s legacy systems, and no delays in paying employees.
Large companies already operate this way, usually across the board. ERP systems interface with the banks at almost every step in the supply chain. As we progress, however, these systems are bringing even more complex solutions to the market in a way that is much simpler to use. This means that smaller companies will start to benefit from open banking and the efficiency that this brings with it.
The cost benefits scale down to the smallest of business entities. A small business that can avoid trips to a physical bank branch, that can do without reconciliation of payment runs, and that can receive payments directly into its bank account can run a more efficient operation.
As things stand, all details pertaining to the company financials – receivables, balances, dues, etc – are present in the accounting system and need to be replicated at least once for them to be presented in a way that can be useful to their banking. With open banking, all of this replication and effort is done away with.
Extending open banking to small businesses is just one use case that shows off the remarkable flexibility of advanced banking systems. Corporate Services Providers, for instance, are an excellent example of how these technologies can harmonise systems for efficiency and reliability. CSPs often handle hundreds of individual clients, all with their specific banking needs. A single system at the CSP side that’s linked directly to their banking partner is fast becoming the standard for best practice.
The future of banking is open, mainly because the future of banking is almost entirely digital. Some refer to the ‘digital branch’ to give this notion a more tangible shape. In essence, however, banks will reward clients that don’t require a physical presence inside a branch for their banking needs.
While this might sound like a leap, we only need to consider that much of what we call banking is actually messaging. Payments and transactions, a vast majority of what is today carried out by banks, are in fact a simple message between systems that request a transfer of funds. This is increasingly tedious and expensive for banks to handle and is, as a result, shifting towards the EMI/PSP and away from the banks.
And as this happens, banks can focus more on financing and asset/wealth management, areas where they deliver value.
In short, the future of transactions will be, in the most part, handled by interconnected systems, a future that is rapidly coming closer to the smaller enterprise and even the sole trader. There remain technological hurdles, but the past has shown us that we’re quick to overcome those when evident efficiency, reduced costs, and minimal errors are the clear benefits to all involved.
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