At an uncertain time for UK businesses, the collaboration between regulators, banks and third-party providers are blazing the way to a new banking revolution through Open Banking. Combined with the Faster Payments scheme and innovations such as virtual accounts, businesses can be more agile and adaptable to the needs of a changing and challenging business environment.
It is a time of exceptionally rapid change for the UK banking industry. Although Brexit may be stealing the limelight in the UK press, there is a new industrial and technical revolution that is quietly emerging in the background which is disrupting the status quo. More broadly, accelerating changes in technology are fostering new, disruptive business models. Meanwhile, the world’s trading relationships are evolving fast as major economies diversify and pivot to enhance their competitiveness.
Tom Wood, Managing Director and UK Head of Global Liquidity and Cash Management (GLCM) at HSBC described the challenges UK businesses face, “Think of an accelerated industrial revolution, with all the associated business disruption and social upheaval compressed into a short space of time. Then add in Brexit creating potentially the greatest disturbance to the country’s trading relationships in a generation, and you have what could be a perfect storm of challenges and opportunities.”
This can thus be an uncertain and challenging time for corporates, and one in which the treasurer will have to play a critical supporting role. Dynamic companies that are able to navigate, strategise and adapt early on can potentially gain immediate competitiveness. Lance Kawaguchi, Managing Director and Global Head of Corporates for HSBC GLCM pointed out however, that this can only happen if the corporate treasurer can lead and drive initiatives to improve cash management efficiency, and create a treasury function that is agile enough to support business and operating model changes. “The good news for treasurers is that several new innovations are coming together to transform their landscape. New technology and tools enabled by the UK’s Competition and Markets Authority Open Banking remedy are equipping the modern treasury to establish greater control and ownership of their cash flows on a real-time basis,” said Kawaguchi.
The introduction of Open Banking, in conjunction with existing financial and payment infrastructures like Faster Payments and the re-emergence of bank solutions like Virtual Accounts allow the treasurer to view all of a company’s accounts together, getting a real-time view of cash positions, and to make immediate strategic and tactical decisions.
At the same time, Open Banking encourages better and more meaningful collaboration between financial institutions and Fintech companies, enabling the industry to be more creative and innovative. Kawaguchi added, “New partnerships between banks and Fintech firms are resulting in new and more meaningful tools, products and services for the benefit of retail and corporate customers. It’s encouraging the creation of new functionality that banks, traditionally encumbered with regulatory compliance costs and constraints, have been hardpressed to develop and roll out.”
Wood further explained, “In a post-Brexit world, where UK businesses may seek a greater proportion of future sales from fast-growing developing economies, this will lead to greater flexibility, adaptability and creativity, enabling them to enter and compete in new markets.”
Treasurers will be able to adapt to an accelerating digital economy, which will only be hastened by the advent of Artificial Intelligence, machine learning and big data. In a new world that’s constantly adapting and consuming information, the efficient and fast consumption of data and the ability to immediately react in a mobile and less restrictive environment are critical. They enable treasurers to achieve greater operational efficiency, and free up time to focus on strategic initiatives.
Emerging opportunities for treasury
1. Open Banking:
UK Open Banking went live in early 2018, making the UK the first nation to do this globally. The Open Banking Implementation Entity (OBIE), the organisation behind it, was set up in 2016 after the Competition and Markets Authority (CMA) concluded an inquiry and decided that increased competition and openness in the UK banking industry will be the best way to bring innovation to an industry it felt needed shaking up. The motivation behind Open Banking is to both improve the competitive environment and to drive customer-centric innovation. The intent is to provide the industry with greater agility to innovate and develop solutions that respond to the needs of both individuals and corporates.
The CMA tasked nine banks with setting up and funding the OBIE. Open Banking has mandated banks to build an infrastructure for accredited and licensed third-party service providers (TPPs). These TPPs will either be able to access a bank’s customer data or to initiate payments (or both), with the customer’s consent. There are two types of TPPs:
Account Information Service Providers (AISPs) are licensed TPPs that create applications and channels, aimed at consolidating a customer’s account information across all their banking relationships within a single bank-agnostic platform. AISPs then enhance this data by extending their services beyond data aggregation by building analytical tools for forecasting and payment information analytics, thus providing a consolidated view of a customer’s real-time cash position. With greater access to information, individuals and businesses can make more informed decisions on cash flow and operating cash management.
Payment Initiation Service Providers (PISPs) on the other hand, build tools that allow individuals and businesses to move payments from any of their existing bank accounts through a centralised tool (sometimes in conjunction with, or linked to, an AISP app/channel), eliminating the need to log on to each and every internet banking channel from each of their banks. It simplifies the access to money and the ability to move money, thus improving operational efficiency, and provides a centralised view and control over all of their accounts.1
For businesses, this means that they can now use bank-agnostic channels to view transaction information across multiple accounts, and quickly instruct any of their existing banks to move money to specific beneficiaries from a single portal. These new services – Account Information Services (AIS) and Payment Initiation Services (PIS), are seen as extensions of banks’ current e-channel and/or internet banking services. While the programme was initially created in order to certify Fintech firms as TPPs, some innovative banks, such as HSBC, have also been certified as AISPs and PISPs. For example, HSBC has launched Connected Money, an aggregator that allows customers to see all their accounts from multiple banks in one place and analyse their cash positions.
As each month goes by, more providers of one type or another make Open Banking-related services available to customers. At the end of September 2018, there were 77 regulated providers, comprising 52 third-party providers and 25 account providers. Of these, some six were live, offering customers services.2 But momentum is strong, and the number of live service providers is expected to grow quickly.
2. Faster Payments:
But what good are Open Banking functionalities and tools offering real-time information and the ability to immediately initiate payments, if actual payment processing is slow and unpredictable? This is where financial infrastructures like the UK Faster Payments scheme come into play.
The UK Faster Payments scheme was launched in 2008, almost 20 years since the last time a UK payment infrastructure was introduced into the market. With Faster Payments, treasuries can make immediate payments 24 hours a day, seven days a week. Payments are practically immediate, with payment confirmations (of receipt of funds or payment failure) within a matter of seconds from payment initiation and authorisation. This is a significant improvement over BACS, where payments are processed in batches, and which can take from two working days to move money.
“With Open Banking tools providing real-time visibility and payment initiation, and Faster Payments guaranteeing practically immediate payment processing, businesses can become more agile, efficient and have greater control over their cash flow,” Kawaguchi noted.
3. Virtual Accounts:
A third innovation is providing yet another means of creating greater transparency and control. Virtual account services offer treasurers the ability to further improve their payables and receivables process by providing counterparties with their own virtual account number. This allows businesses to better segregate payments and receivables information on an entity, customer, or supplier basis, while keeping the funds in a single “parent” account. Firms can structure their virtual accounts on a self-serve basis, allowing for a high degree of customisation and control. Furthermore, the rich data provided by virtual accounts enables more accurate reconciliation, deeper analysis of cash flows and supply chains.
With the right virtual account structures, firms can reduce the need to move cash physically to concentrate into the parent entity. If their bank has a virtual account offering that also includes intercompany tracking capability then virtual accounts effectively form the basis of a new and viable liquidity management solution.
Used alongside traditional liquidity structures, it can provide treasuries with greater flexibility when it comes to cash optimisation.3
Additionally, with virtual accounts, firms can significantly reduce the number of physical bank accounts they need to manage, reducing the administrative burden and resulting in cost and operational efficiency.
Putting it all together
“If all of this is put together, suddenly the world is transformed for the UK treasurer,” said Wood. “Working with banks that can offer the benefits of Open Banking, Faster Payments and virtual accounts makes a treasury more agile, giving the business greater versatility when exploring new models. There is more clarity into cash positions. Payments can be accessed quickly, accounts more accurately reconciled, forecasting is improved, and liquidity is optimised. The cash management process becomes much more effective and optimal.”
Helping to adapt and innovate
In such a time of uncertainty, having an agile treasury gives the whole business greater flexibility to adapt to changing circumstances. Whether it is preparing amidst the uncertainty of Brexit, managing through economic and market volatility, or adapting to new business models, having such versatility is critical.
It is also the case that more and more UK companies are doing business not just in the EU but further abroad, and this trend may well accelerate depending partly again on the outcome of Brexit. The Business of Treasury 2018 survey by the Association of Corporate Treasurers cite that 80 per cent of the treasurers that responded to their survey work in multi-site organisations with more than one-third active in three or more continents or 40 or more countries. Of the UK respondents, 83 per cent are from multi-site organisations.4 As economies overseas pivot and diversify their economies, so too will UK firms need greater versatility.
Wood summarised, “For UK businesses today, one of the greatest certainties is uncertainty. So much is fluid – whether existing business models, operational models or international trading relationships. This means that businesses must react fast and innovate energetically. In this testing environment, the flexible treasury is a strategic asset, an aid to quickly adapting the business or seizing new opportunities.”
2Openbanking.org.uk Open Banking September Highlights 01 October 2018.
3Doherty and Evans Optimising cash and liquidity management with virtual accounts
4"The Business of Treasury 2018", Association of Corporate Treasurers, May 2018
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Published: November 2018
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