Contemplating API connectivity with your banks? Here’s what to consider before deciding whether APIs should be on your radar
One of the most exciting and challenging things about the treasury world today is how technology has the potential to revolutionize a treasury team’s process. From implementing a TMS and no longer forecasting in Excel to using APIs to directly connect to your banks, there is always a new and exciting technology just around the corner.
What is an API?
As treasury teams become more aware of them and banks push the benefits of connecting via API, it’s important that we understand exactly what they are. APIs, or application programming interfaces, are the links between two systems that allow information to pass smoothly. In fact, it’s very likely that your IT team has already built APIs between your internal systems. This is what makes it possible to change a user’s access rights by updating their role in your HR system, for example.
On the consumer side, open banking regulations and API connections have already made a huge impact. I can go to the App Store, download an app, and connect all my banks and credit card accounts within minutes so that I can open an app like Mint and get a real-time view of my accounts in one place and track my overall financial health. Instead of connecting directly to each bank or credit card I use and aggregating the information myself, I can create one connection to the app, and it can use any number of API connections to pull information from every data source.
API vs. other connectivity
Now, this is a revelation for consumers, but treasury teams have been using their TMS to do this for years. What’s new about APIs? How do they differ from, say, a SWIFT connection?
From a reporting standpoint, the only significant difference is rather than waiting on prior day and intraday reports being sent at pre-determined times, users are able to ping their banking system via the API and get up-to-the-minute reporting. Otherwise, there is no real difference. You are still getting the same MT942 or camt.052, it’s just traveling through a different channel.
Making payments via API carries a similar promise to Real-Time Payments – the payment request would travel from your system to your vendor in seconds. Making quick one-off payments could potentially be significantly simpler as they may not need to be batched and so could be sent as soon as they are ready.
The benefits to your AP and AR team are potentially more significant – imagine being able to send and receive invoices directly to your ERP and instantly reconcile them — however, today we want to focus on payments and reporting since that is the first place banks will look to implement APIs with their customers.
We all know that real change in the banking industry can be a slow process. New technologies are invented all the time, or, as with APIs, teams find new uses for old technologies, but it isn’t until a few major corporations demand these new developments that the banks adopt those changes on a large scale. Right now, the benefits that APIs promise – from the lowered costs to increased productivity – are attracting a lot of our clients’ attention. Some large companies are looking to move from SWIFT to API connections, while others are making it a requirement for their new banking partners but maintaining the connections they already have with their current banks.
But which is the better strategy: to jump in with both feet, or wait and test the water?
Here at Redbridge, we think there are two key topics to consider before deciding whether APIs should be on your radar:
1. What is your company’s bank relationship strategy?
If APIs are on your radar, there is a good chance that at least one of your major banking partners can support them. But being an early adopter of APIs means that there is not a lot of harmonization between banks’ approaches to API connectivity, and so you would have to implement multiple APIs. And that’s understandable – after all, even connecting to your banks via SWIFT or with host-to-host connections requires individual connectivity with each bank.
But it’s not just that you would have to have a separate API per bank like you would with any other kind of connectivity. There are some banks, like JPMorgan, that have a consolidated approach where one API would let you access all funds you hold with them. Others, like HSBC, take a decidedly more regional approach and would require multiple connections in order to achieve the same results. So if these are your two main banking partners and you do business in five different countries, you would need up to six APIs instead of just two.
Adopting APIs early means that banks have not had a chance to fully flesh out their strategy. If your treasury team sees API connectivity as part of a longer-term plan, however, this is a great time to pause and take a holistic view of your banking environment.
It’s crucial to have banking partners that will set your company up for growth, and by taking APIs into consideration as you evaluate your partnerships now, you can ensure that you have the right partners for your business as the market matures.
Redbridge understands the appeal of investing in new technologies when they show early promise, but adoption and implementation has been somewhat piecemeal in banks across the globe. Because of this, your banking partners may not be able to support a full API strategy right out of the gate, and adopting early may mean running a hybrid solution while banks continue to develop their products.
Given the ease of connectivity that APIs promise, they become more appealing as your banking landscape becomes more complex. It is important to take time now to think about the benefits your treasury department hopes to achieve through API connectivity, which leads us to our second topic:
2. What is your company’s current process and what would have to change?
For the treasurer who is eager to get started with APIs, it is also important to consider what your current systems are capable of. How experienced are your TMS or ERP vendors with API connectivity, and what kind of support can they offer during the transition? APIs are not standardized the way that SWIFT messages are, and it is important to work with partners that are capable of easily supporting both your current and future states.
Additionally, what does your reporting environment look like right now? Which banks are sending intraday statements and how often? How is your team using that to make strategic decisions? Is the workflow set up at a consistent time each day or could there be multiple times per day when they need to be able to see their position? Of course, host-to-host or SWIFT connections can be adjusted for all of these needs, but they require a stricter adherence to a schedule and don’t give you a truly real-time view into your cash position.
If your team is only receiving statements once or twice a day, being able to see your exact position at specific points in your process would mean you can make informed choices with the most up-to-date information. If you’re receiving statements frequently throughout the day, it could mean cost savings to limit API calls to only when the data is needed instead of receiving multiple reports.
It’s also worth considering what payments are you currently making, and how many of these could be transitioned to instant payments via a banking API. Invoicing via APIs is possible too, and the benefit that open banking can bring to AP and AR departments is significant. As you explore APIs and open banking, are you making sure that your banking partners are set up to accommodate not just reporting and payments, but potentially helping improve processes throughout your finance department?
Given what we see with our clients, we are not convinced this is the time to change your connectivity if you have already linked your TMS or ERP with your banks. Those connections take significant time and IT resources to implement, and while APIs could be a good solution if you are setting up new connections, we do not see significant value in changing your connectivity when some simple process and timing changes could ensure you get the most up-to-date view of your cash position.
If you are looking to change your banking landscape and would like to consider API connectivity with your new banks as a part of that change, Redbridge is committed to helping you work through these questions and make sure the banks can clearly show the value of their API solutions for your business. As your trusted advisor, we will help ensure that the decisions you make now will set your team on the right path to modernize your systems and processes.