New Fixes for Old Problems: Bank Connectivity

FinLync | February 11, 2022

It’s no secret that bank connectivity has moved on in the last few years. While old connectivity models may have served their purpose, they also have some notable shortcomings. Fraud risk is one, as older ways of connecting can include avoidable points of vulnerability. In addition, legacy processes can result in delayed information and payments.

In contrast, new processes based on free-flowing API-powered bank connectivity can minimize fraud risk, while giving treasury real-time access to data and payments. What’s more, automating tasks not only makes communication more seamless, but also speeds it up. In other words, it’s time to look at a new connectivity model that eliminates superfluous intermediaries between the corporate treasury and the bank.

Read the free ebook: The Essential Guide to Bank APIs

The old way

So what’s the old way of doing things? Traditionally, companies have relied on electronic file-based communication with banks. For example, host-to-host connectivity allows banks and corporates to send files such as bank statements and payment information via SFTP (Secure File Transfer Protocol) communication.

While this involves sending encrypted information and files over a secure connection, it still involves several steps. A file has to be generated, saved in a designated folder in the bank or organization’s network, and then sent to the recipient’s folder inside their network, where it is picked up and processed. Here’s an example of a typical process with a host-to-host connection:

Step 1:  a file is sent from the corporate to the bank

Step 2: the bank picks up that file from the file server, and then

Step 3: the bank processes it in their downstream systems.  If they process it successfully, the bank will generate a second file of data  — an acknowledgement — to confirm receipt.  The process continues with…

Step 4: The acknowledgement being sent to the bank’s fileserver and pushed back to the corporate.

Step 5: the receiver at the corporate constantly checks if it has arrived, then picks it up….and finally,

Step 6: they move the file to its next destination

This  lengthy process doesn’t provide confirmation that the file has been sent successfully in the first place, nor that it successfully arrived to the recipient.  It’s common to not receive an acknowledgement, leaving corporates in the dark, wondering if the bank actually got the file in the first place. And if a file needs to be re-sent, the company has to manually call or email the bank to request it.

So while there is a direct connection between bank and corporate, there is an added risk that someone will manipulate payment files – for example, by changing account numbers.

Another option is to connect through SWIFT, which enables companies to communicate with banks around the world. But as with a host-to-host connection, communication is based on files that need to be transported between networks. One challenge here is that SWIFT adds a layer that is not very transparent to the corporation – so if something happens to your payment file, additional research will be needed to identify the right intermediary.

Additonally, a SWIFT connection is not “plug & play.”  There is a significant investment of resources, time and cost in order to build a secure and automated end-to-end interface between your ERP and banks because each interface required will typically have nuances in things like the data set up, configuration, in-country requirements/regulations, local clearing systems, etc.

Read the free ebook: The Essential Guide to Bank APIs

The way forward

More compelling is a treasury solution that offers connectivity using Bank APIs – meaning that connections are pre-established, and messages are sent in real-time. By setting up a direct link between the corporate and bank, APIs enable a two-way conversation in which the connectivity channel and the data are one and the same.

From the start, APIs were designed for real-time data exchanges between 2 counterparties — allowing each counterparty to remain in control of their data by requesting what they want, when they want it. Bank APIs work on a synchronous data exchange so, you’ll instantly know if the counterparty received a message or not, and the progress of the payment is updated in real-time until it reaches its final destination

Unlike SFTP, API connectivity is not file-based, which brings a number of benefits. Bank APIs create a secure and traceable process, which enable the CFO, treasurer or finance  to control who has access to information within a treasury solution. In addition, Bank APIs eliminate the need for files which do not track changes to dollar amounts or account numbers – and they also reduce the number of hands that touches a payment.  There are no bank files, so nothing goes missing and nobody is left wondering if a file was successfully received.

There’s little need for maintenance, since connections rarely break. In addition, Bank APIs put you in control of when you receive the data you need. Because a host-to-host connection requires a request for data to be exchanged between your company and the bank on a pre-determined schedule, the data is only as current as when that request is scheduled.

Why is that distinction important?

Because if you are dealing with different time zones, sudden market fluctuations, urgent payment or cash flow issues — basically any situation that requires you to have a clear understanding of your cash position at a moment’s notice — you are hamstrung by the inability of a host-to-host bank connection to give you the most current data available so that you can make the best financial decision for your company.

Bank APIs put treasury & finance teams back in control. No more waiting on the bank to push the data on their schedule. To obtain an up-to-the moment account balance, simply request the data, and the API responds instantly.

As a message is sent, the bank API responds in the same action at the same time with the response.  It’s no longer 2 separate actions within a one-way data exchange, but a single synchronous message – request and response — all at the same time.  So nothing goes missing and nobody is left wondering if a file was successfully received.

Data can be requested at any time, again and again just by hitting refresh. No more phone calls to the bank to resend a file. No more missing bank statements.

The same holds true for payment status – APIs connect payment data directly to your ERP for viewing and confirmation. Treasurers get end-to-end, instant payment visibility and immediate confirmation of payment status.

So instead of having communication scheduled at specific intervals, you can request information on your available cash balances, or send a payment in real-time, whenever you want. You become the driver of your data vs the bank.

To summarize: file-based connectivity is the old way of connecting to banks. While these methods do allow companies to connect to their banks directly, they also have a number of shortcomings – and Bank APIs are the solution. It’s time to embrace the new connectivity model and move forward.

Essential Guide to Bank APIs