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A Quick Guide to…..APIs

Technology has changed the landscape of Treasury and cash management in recent years, including Application Programming Interfaces (APIs) and real-time payments. This has led to new possibilities and new business models.

What’s an API?

APIs are a set of rules for how software applications speak to one another, facilitating interfacing data with real time capabilities. Although we may not notice them, API are already used in our everyday lives.

An example of API usage is the log-in using functionality “Google/Facebook” you see on so many websites. This functionality is very convenient as it saves time avoiding creating accounts on additional websites or platforms.

This is a perfect example on how API technology can facilitates interfacing different systems or platforms:

Signing in with your information from other platforms such as Google on websites/applications requires an API to connect the two platforms together, Financial Times and Google’s platforms on this example. 

Applied to banks and corporates ecosystems, APIs will change the game for banks and financial institution, and their connectivity with their corporate clients.

Currently, Corporates Treasurers have 3 main channels to interface their IT system to banks, with the 2 main data streams being bank statements/reporting (bank à corporate) and payments files (corporates à bank):

1.   Multi-banks connectivity:

o   SWIFTNet for an international scope

o   EBICS for Germany/France

o   ISABEL for Belgium.

Multi-Bank protocol is useful in case of company with multi-bank relationships, in such case, it is a better choice to consolidate sources of data coming from multiple banks or to reach several banks.

2.   Mono-Bank connectivity - Host-to-Host (H2H) connectivity such SFTP (Secured File Transfers Protocols) or HTTPS/FTPS. Frequently used when corporates are single-bank or have few bank relationships. In this case, the web banking system from the banks can be used as main interface with the banks, without TMS (Treasury Management System) or Banking Communication system. However, the H2H connectivity implementation is specific for each bank and cannot be reused for other bank partners.

3.   API – API is still recent as connectivity solution with banks, but it brings news possibilities and advantages:

o   Real time information or processing

o   Possibilities of new services such as real time payments tracking, beneficiary bank details verification etc.

Also, API won’t limit to bank-to bank or corporate-to-bank connectivity, but also enables companies to open their applications to external third-party and business partners (Vendors, clients, Fintech etc.)

Even today, corporates with a multinational banking landscape are often confined to use a combination of Host-to-Host connections, disparate banking portals and SWIFT services to manage connectivity.

Using technology to improve cash management processes

APIs are paving the way for a new era of payment solutions, following the implementation of the second Payment Services Directive (PSD2). Since September 2019, PSD2 allows banks to provide authorised payment providers with access to customers' bank accounts in Europe, mostly via APIs. This legislation can be seen as a step towards the open banking paradigm, which should bring new business models and additional revenue streams to banks and financial services companies. The customers of these financial institutions will in turn benefit, through an increasingly personalised service.

Real-time payments will also have a profound impact on cash management. It will lay the foundation for real-time cash management that can facilitate faster and more streamlined processes across the enterprise. While this is still a long way off, many of the modules are already in place and treasurers can already benefit by exploring fundamental solutions such as intra-day pooling and real-time (or near real-time) FX conversion and hedging.

While corporate clients are willing to use real-time to optimise collections, many questions remain about the potential impact on payments and the management of cut-offs and flows during weekends and after hours.

Challenges in exploiting this technology - From wild west to API standardisation with SWIFT

APIs are all about interoperability, but one of the key challenges was the promotion of standardisation within the banking industry. Initially, a lack of concertation at the bank level has complicated the integration that corporates can achieve with their systems from API.

If there are differences in the way institutions describe and apply data elements (account data, for example), it will be harder and more expensive to consume services, because customisation is required for each provider. Hence, standardisation is crucial if we are to fully exploit the benefits of open banking, particularly when it comes to ensuring seamless access to accounts.

From the outset, the SWIFT community has worked to define data models for standardised APIs based on the international ISO 20022 standard

Standardised processes and data will also provide huge efficiencies and opportunities when migrating to and scaling up an API-driven enterprise architecture, which is the future direction of travel for many financial institutions. Application functionality exposed through standardised APIs can be re-used within the organisation for solving internal challenges or for building new and innovative bank services offerings.

Despite this transformational growth, there are still technology gaps from our legacy systems that limit the use of APIs: most of the current ERP reconciliation processes are built on end-of day statements. Frequently, to integrate real-time information, ERPs are “tricked” by integrating this real-time information through an end-of-day statement format.

Example of API use cases of tomorrow's treasury

An important part of banking services on API uses cases are focused on real-time visibility or real-time payments, however new types of services also start to emerge.

  • ·       Real time visibility and faster closing

For instance, it will be possible with API to reconcile the bank flows in date D instead of D+1 with end-of-day statement. A powerful tool for companies under important pressure for accounting closings.

APIs and real-time payments do not exist in a vacuum. In fact, their impact is multiplied when they are used together.

  • ·       Instant payment + API: an alternative to card payments and cheque

On retail activity in USA and France, cheques payments remain a frequent payment mean of payment. There is now the possibility for the retailers to send a link on the client phone and create a “push payments". The client simply opens the notification received on the mobile and validates the transaction to pay instantaneously.

  • -          Advantage for the client:  seamless experience.
  • -          Advantage for the merchant: lower cost of transactions.

Combined with Fractioned Payments services or “Buy Now Pay Later”, this service could be clearly a competitive advantage for retailers.

On-line payments: “push payment” concept can also be applied for on-line merchants, as it offers a cost-effective and efficient alternative to online card payments. When a consumer purchasing on-line chooses to pay via push payment, the merchant's bank connects directly to the consumer's account via APIs. This allows the bank to verify that there are sufficient funds in the account and then make an instant payment directly to the seller's account, avoiding more complicated and expensive card acquisition processes.

For merchants, this means significant cost savings, enhanced security, reduced risk of fraud, faster and more efficient collections, reconciliation, and improved working capital.

These are just 2 examples of how banks and businesses are evolving and combining the virtues of APIs and real-time payments to generate new benefits and efficiencies. Together, the new tools at our fingertips are making banks and treasuries work better, generating new savings, but also leading companies to evolve the way they do business.

Others uses cases

Naturally, the first uses cases with APIs for cash management were for payments cash visibility and real-time payments. Nevertheless, there will be plenty of other possibilities offered by this frictionless technology. For instance, there could also uses cases to check beneficiary bank details before sending payments (to prevent frauds or errors), or eBAM (electronic Bank Account Management), using APIs to open/close or modify signatories on accounts in a fully digital and streamline process.

To conclude

At the moment, APIs are mainly used by few early adopters on Corporate Treasury. However:

  • §  the recent standardisation of file formats driven by SWIFT
  • §  the new services provided by banks and Fintech
  • §  And the trend of having a real-time Cash and Risk Management

will accelerate the adoption of this game changer technology from Corporates Treasurers in the coming years.

Interested to learn more about API?

Useful Articles

Standards: the key to making APIs the new normal in banking




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