The brewing partnership
A fresh approach to connectivity through APIs
EVERYWHERE and yet nowhere to be seen, application programming interfaces (APIs) covertly play a significant role in our day-to-day lives, whether we know it or not. Although APIs aren’t new, the technology is now being applied in finance, including to help facilitate treasury operations.
Corporates are among the primary beneficiaries. Service providers such as banks are racing ahead to introduce APIs as part of their capability and as a differentiator. In a survey by technology firm Finastra, 80% of banking executives say APIs will be one of the most important technologies to impact their corporate customers in the next five years.
What is driving the use of APIs in corporate treasury? In part, banks perceive API-based solutions not only as a competitive edge they also redress the age-old challenge of implementation. Asset Benchmark Research’s ongoing Treasury Review 2018, a survey of Asia-based CFOs/treasurers, identified speed of implementation of a solution (including banking connectivity) as the number one quality that defined a “great transaction banking partner”.
APIs also hold the possibility of transforming the way corporates interact with banks. For a large number of corporates, especially SMEs, the most cost-efficient way to manage their day-to-day cash is via the e-banking platforms. Logging on to a bank’s e-banking portal, the treasury team can view account balances, receivables and execute payments.
Multinational clients, which have multitudes of payments and receivable flows, can opt to connect with their core banks host-to-host (H2H), a single interface that supports the processing of various payment transaction types using file formats that fit the corporates’ own ERP (enterprise resource planning) system. It enables the treasurer to enjoy seamless transfers as files are directly linked to the ERP. Transmission is also sent via security protocols ensuring a higher degree of confidentiality.
The problem with e-banking portals arises when a corporate has a multi-bank requirement, which often is the case for those operating in a number of international locations. One treasurer The Asset spoke with as part of the Asset Benchmark Research Treasury Review 2018 shares his agony: “I carry a shoe box around with 30 different tokens of the banks we work with.”
Despite the advantages, H2H was seen as burdensome to implement and often can take months to complete. For smaller companies too, the cost of maintaining the connectivity is well above the throughput of transactions processed by the bank.
The emergence of APIs is also partly due to the proliferation of fast-growing new economy companies, such as ride hailing companies, which have similar needs for cash visibility and control as the traditional corporates. As agility is their battle cry, they demanded a better connectivity solution than what banks until recently were prepared to offer. APIs, which are well understood by them, became the quicker and cheaper alternative to connect to their systems, requiring a much lighter technical infrastructure.
Corporates also see the value APIs bring as they enable them to connect to their customers for payments and collections. Governments in the region pushing for digitization and new payment platforms such as WeChat in China, Paytm in India or PromptPay in Thailand all point to the possibility of accelerating the cash conversion cycle achieving a higher level of operational efficiency.
This trend is not lost on a number of service providers. Standard Chartered, for instance, over the last few years has partnered with several e-wallets in the Asia-Pacific, most notably WeChat in China, and has leveraged that partnership to help businesses with their collections. The bank works with China-based Juneyao Airlines in facilitating WeChat payments from the airline’s customers.
Similarly, DBS has integrated itself into the app for several eateries in Singapore including Old Tea Hut. This allows DBS retail customers to directly interact with the ordering system of an eatery through the food app, which then communicates via an API to DBS.
In trade finance the emergence of supply chain management platforms such as GT Nexus and funder platforms including DEMICA have encouraged banks to examine API connectivity to third-party platforms. Enabling an API connection to a popular third-party vendor could make or break a deal. A transaction banker speaking to The Asset recently mentioned that the inability to link to a client’s third-party supply chain vendor cost the bank a key supply chain finance mandate.
The push for further API connectivity between corporates, banks and third-party platforms spells good news for trade finance platforms such as TradeIX. As an open trade finance system hoping to consolidate various elements of the trade finance eco-system into a single touchpoint, APIs have been a crucial part of the platform.
Last year AIG, the insurance multinational, Standard Chartered and TradeIX worked together on an integrated solution based on blockchain for the benefit of a global logistics company. The combination of financing and insurance was able to guide the company in its invoice financing programme thereby helping the company’s clients extend their payment period.
“I don’t think I would talk to a CFO about an API. I would talk to a CFO about what an API gateway could do for them. Some corporates today are working through 50 different portals both banking and non-bank to manage trade finance activity,” explains David Sutter, head of platform of strategy at TradeIX, in an interview with The Asset.
“What a corporate trade finance API gateway could do is allow them to manage all their trade finance activities through a single interface. I have definitely seen CFOs, treasurers, financial controllers and corporate IT staff thinking long and hard about how they can leverage things like blockchain and open APIs to their advantage. It’s been a big and noticeable shift,” says Sutter.
Sutter credits corporates for taking the initiative in pushing APIs in trade finance. “Our first major deal was actually us working with a large corporate helping them automate and streamline their trade finance processes and liking our value proposition. They then went to their core banks and persuaded the banks to work with us. Now we are providing technology directly to their financial institutions,” he says. “Trade finance, despite being one of the largest sectors in the financial services, is still one of the most manual intensive processes.”
For Sutter further integration to different entities is the way to go for corporates when it comes to trade finance. “Most of the time they (corporates) want to be as integrated as possible because they can get more crucial data. That helps the financial institution offer them more types of funding,” he says.
APIs come with several risks. First, there is a dependency risk where multiple systems are all undermined if an API is discontinued, faulty or hacked. The UK’s Financial Conduct Authority reported last year that there was an 80% increase in cyberattacks reported by financial institutions compared to 2016.
This risk is brought into sharp relief in India, where some banks are able to connect to the country’s ID database called Aadhaar. It is the world’s largest biometric database of over 1.19 billion enrolled members as of November 30 2017. The Unique Identification Authority of India gives Indian residents a 12-digit unique identity number based on their biometric data, such as fingerprints and iris scans, and demographic data.
Indian banks are able to connect to the Aadhaar database with the use of APIs, which allows their customers to link their Aadhaar numbers with their bank accounts for the purposes of authentication and identification through the Aadhaar database. The government is also encouraging citizens to link their Aadhaar numbers with other services, such as mobile sim cards, Employee Provident Fund, and welfare schemes.
The potential is that banking activities such as account opening, bank transfers, and identify verification can all be done quickly and securely using biometric data. However, the risk is that if the Aadhaar database is compromised in anyway, either with faulty data or a system failure, it would have knock-on effects for the banks which are linked to the Aadhaar database.
At the same time, risks can originate from the banking side of the equation. While the Aadhaar database allows banks (and other institutions) to connect to government data through an API, banks also use APIs to provide the government with information. For instance, Guangfa Bank is required to send business registration information to the Guangdong Government. The implementation of an API has allowed information submitted to Guangfa Bank to be directly accessed by the government via the use of an API, simplifying the process.
Second, there is the question of what sort of information should be shared in the first place. The European Union under the recently implemented the second Payment Services Directive (PSD2) has already laid the guidelines on what sort of information should be given to third-party payment providers for retail banking transactions. Under PSD2, with client consent banks in Europe will have to share customer data with third-party financial providers via APIs. The move makes it clear that banks in the future of the EU will not have a monopoly on customer data and consumer payment services.
There is also support for APIs from regulators in Asia. The Monetary Authority of Singapore in 2016 began publishing 12 sets of data from their monthly statistics bulletin as APIs on their website, which includes frequently accessed datasets on exchange rates and interest rates such as the Singaporean prime lending rate. Currently the Singapore government is considering launching a centralized API exchange for the sharing of government data between different public entities.
The Hong Kong Monetary Authority (HKMA) is currently consulting the financial industry on open API architecture. The financial regulator aims to gain an understanding on how impactful APIs can be in connecting banks to other industries such as lifestyle and retail services.
“The HKMA believes that open APIs for the banking industry can improve financial services and customer experience by allowing developers to easily connect to multiple internal IT systems and data of different banks,” highlights an HKMA spokesperson. “For example, they may allow third-party websites or mobile apps to obtain information about products and services of banks for comparison and analysis.”
Looking to address some of the challenges of adopting this open API framework, the HKMA shares that in the case of Hong Kong it would be a phased implementation approach starting “with a set of open API functions with lower risks, such as providing product and service information by banks, and putting more complex functions, such as transactions in a later phase, so that issues arising from the implementation can be adequately managed,” explains the financial regulator.
While APIs are yet another way our world is becoming ever increasingly connected, they aren’t new. To a seasoned techy, banks are 10 years late to the party. However, banks have made the old the new, and the impact for corporates will be significant. Like an elderly relative discovering yahoo mail in 2018, banks are for the first time, unintentionally retro.