Benefits of Open Banking: How it Helps Small-Mid-sized Businesses Improve Cash Visibility and Transaction Reporting

Banking And Financial Messaging

Richard Ransom

Richard Ransom

Feb 13, 2018

What are the benefits of Open Banking and what does it mean for your organization?

Open Banking in the UK got really interesting as of January 13, 2018. If you are an individual or small-midsized business (SMB) with an account at one of the largest 9 UK banks, you can give your permission for a regulated third party to make payments or collect account information from your account on your behalf (larger corporates, depending on their bank, will be able to leverage UK Open Banking within the next year as the service aligns with PSD2). Arriving nearly two years before PSD2 comes into force across Europe, it will be worth watching the UK to see how new third-party services develop in this new API-driven environment. Initially I had imagined that payment initiation would be the area of most of interest to businesses regarding Open Banking. That assessment would be proven wrong, however, when I recently presented at a few well attended (350+ organisations) webinars on Open Banking, where the audience was polled on their experience with cash visibility and transaction reporting.

My assumption had been that only multi-banked businesses would have any particular interest, and that single bank customers would get what they wanted from their bank’s e-banking application. In the first question asked – how many participants had more than one banking relationship – it was revealed that 55% routinely used more than one financial institution. Not a huge surprise, since that figure has been consistent with our customers for quite some time. The next question assessed whether participants were happy with their bank’s ability to provide an acceptable and timely view of balance and transaction information for their business. I expected the response to be a subset of initial 55%.

However, more than 90% of all organisations, multi- or single banked were looking for improvements in accessing and using this vital data. Concentrating on the transactional data -- this is key to a business’ ability to reconcile and apply incoming payments against open invoices, commonly known as ‘cash application’. The process of doing this today, (unless your business is large enough to use SWIFT corporate to bank connectivity) is typically pretty manual and involves logging into e-banking, downloading statement data, and -- if you are lucky -- importing this into your accounts system or ERP without any file reformatting or manipulation. With one bank that process is laborious. With two or more it becomes much more difficult as banks don’t tend to share the same process for download, let alone the same data format. Why is cash application so important? There are four key areas of impact on a corporate finance function:

  • Days Sales Outstanding (DSO) – On average how long does it take someone to pay
    • Unapplied items will impact DSO, which means
    • Perception of poor performance against internal KPIs
    • Perception of an inability to deliver or quality issues
  • Aged Debt Report – How much money am I owed over what time period
    • Unapplied items will create more aged debt than exists in reality
    • Perception of poor performance against internal KPIs
    • Perception of an inability to deliver or quality issues
  • Credit Control
    • Unapplied items are a headache for Credit Control
    • Chasing the wrong customers – which leads to attrition
    • Not focusing efforts on real debtors
    • Perception of poor performance against internal KPIs
  • Unallocated Cash
    • You can’t use it if you don’t know what it’s for
    • Cash flow impact – can’t buy goods / services

So how can Open Banking help businesses become more efficient? Outside of the banks impacted by UK Open Banking and PSD2, we are seeing banks across the world start to provide APIs to allow account data access because of the business benefits it drives. Open Banking in the UK and Europe will compel account servicing banks to provide secure API access to bank account data, with permission, to a regulated third party. This access would enable automated access to statement data, allowing the third party to download, normalise, and potentially even automate the formatting and upload of data to ERP systems. This access will also enable the third party to access balance information to provide consolidated cash position across accounts and banks, without multiple e-banking logins. There’s no doubt that Open Banking is a huge change in how banking is done, but the impact it will have on the ability of organizations to be effective will be a game changer in the industry.

Richard Ransom

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Richard Ransom

With 25+ years of experience, Richard Ransom has been involved in some of the most impactful innovations the payments industry has experienced. His specialties include ACH, real-time Payments, Open Banking, SWIFT, and emerging business payment methods and schemes.

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