PSD2 (Payments Services Directive 2) is a European Regulation that saw the light to ignite innovation and grow competition while strengthening trust in payments through new security and anti-fraud measures. PSD2 would open the market to new innovative FinTech companies with bright ideas to remodel the way people and organisations bank.
Part of PSD2 are the RTS (Regulatory Technical Standards). The RTS define the rules of how payment service providers must adhere to PSD2 to initiate payments or to access account information of their customer’s bank accounts.
Two and a half years after the PSD2’s Regulatory Technical Standards ran into force, the evaluation isn’t favourable for business bank clients. API-based banking, or Open Banking, focused predominantly on retail banking, leaving SME and corporate banking aside. Many will argue that Open Banking wasn’t successful, even in retail banking.
What seemed the “Holy Grail” for FinTech resulted in a missed opportunity of too many APIs that lack standardisation.
Back in 2021, Marc Lainez, Vice President API Marketplace Isabel Group, stated in one of The Banking Scene’s virtual round tables: “Critical mass in terms of what is available at the banks, is a real issue today. Even if one or two banks are the best at delivering a specific feature, a FinTech can’t use it with their customers because, if these features lack support across banks, then it has very little value.”
That is, of course, not only true for a FinTech that builds a proposition on Open Banking, but also for corporates that wish to streamline their internal financial processes through the use of banking APIs.
That is truly unfortunate. Especially for corporates, true bank loyalty lies in banking services being invisible. Banks can make a fundamental change to their corporate clients by having their services invisible, seamlessly integrated in the back-office solutions, accounting packages or ERP systems of their customer’s choice.
Embedded banking is precisely about that. An often-used definition of embedded banking is: “The process of integrating financial services within a third parties’ platform and apps, through APIs. It is the umbrella term that encompasses numerous different financial services.”
Now let’s be honest, which self-respecting medium or large-sized company doesn’t hold bank accounts at multiple banks? So, of course, embedded banking for corporates also means integrating banks as frictionless as possible in a multibank context.
In the ideal embedded banking world for corporates, the finance department has all the tools, all the account information and financial services at their disposal 24/7 in their preferred UX, from every bank relationship.
Unfortunately, there remains a big gap between the possibilities of open and embedded banking on the one hand and usage and awareness on the other hand.
Imagine having banking services embedded to automate the order-to-cash process, like a leading car dealer in the Netherlands who uses Banking APIs to automate the end-to-end processes for their Not only does the customer of this car dealer get a smoother payment experience, but this automation has the potential to enrich the payment with more details to improve future cash management, reconciliation and customer follow-up.
Another great example came from an energy supplier that wanted to grasp the opportunities of Request-to-Pay to send electronic payment requests. By adding an API for the corporate to ask the customer bank account information in the process, the energy supplier can detect the best moment to send a payment request. This way, they reduce the risk of a non-payment and the additional fees of a non-payment.
These are just two examples of corporates that embrace the advantage of embedded banking to improve their services. Unfortunately, this can only work if banks cooperate and adhere flawlessly to the RTS defined under PSD2, meaning that customers of any bank that do NOT provide these APIs are not served accordingly.
Having a seamless platform with access points to every bank and one connection to corporates opens the doors to endless innovation opportunities. These could range from automatic, real-time reconciliation and better data mining across different banks, to improving cash management towards further streamlining to automating finance processes and finding new, lower-cost payment solutions.
In particular for corporates working in an international environment, real-time access to banking data makes a tremendous difference, allowing for better forecasting and in turn reducing exposure to foreign exchange and liquidity risk.
Isabel Connect is a rare example that addresses this issue. Isabel Connect, integrated with the Isabel 6 multibanking tool of Isabel Group, helps a corporate link bank accounts across different banks with their ERP system for account information and payment initiation.
In that respect, embedded banking is yet another step to make the finance department a business partner that can focus on advisory instead of administration. A business partner that can generate money for the company instead of reporting the operating expenses.
I hope by now you understand that we should take embedded banking for corporates more seriously because it has all the potential to completely change the way we think about banking for the better.
‘Embedded banking’ by Rik Coeckelbergs (founder and managing director of the Banking Scene)