As corporate treasury departments juggle multiple critical priorities like managing liquidity, optimizing cash, financing, controlling risk and managing bank relationships, timeliness to decision and action becomes more critical.
Host-to-host (H2H) has been the default channel for bank connectivity for more than 20 years. But technology has improved in those past two decades, and the use of multi-bank API connections is now a reality. Independent experts like the Hackett Group and Strategic Treasurer agree that host-to-host connections will soon be rendered obsolete and thanks to open banking regulations, there are now plenty of banks that offer API connections for corporate clients.
But some treasury teams are skeptical. Why bother to make the change to bank API connectivity? What is the business reason to move away from host-to-host? Let’s discuss the 6 disadvantages of host-to-host connectivity, which includes SWIFT.
1) Lack of Control
In host-to-host, files are a one-way push from the sender to the receiver, and both parties typically rely on fileservers to store the files until the receiver picks it up. Once a file has been sent, the receiver needs to constantly check if a new file is waiting for them in the fileserver, then when it finally arrives, they have to pick it up and move it to its next destination.
This entire process is done on the bank’s timeline, not yours.
Though you can schedule statements with your bank, the bank remains in control of everything. You are dependent upon the schedule and don’t have the ability to adjust the timing or content of that data on the fly. It’s pre-determined, regardless of the daily situations you face for which you need the data. What’s more, the bank has additional slices of data and new information that is only made available via bank APIs, you cannot access it via statements.
How bank APIs are different: 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.
2) Labor intensive work with H2H – that isn’t needed with bank APIs
For the initial setup, host-to-host connectivity channels have a very labor-intensive setup. The interfaces of host-to-host channels often come with an extra charge to get up & running, or with mandates requiring use of their proprietary system. For those that decide to outsource host-to-host connectivity to a third party, additional time and money for purchasing and implementing the solution should be expected.
On a day-to-day basis, host-to-host connectivity requires a great deal of file management. Missing bank statements, payment confirmations and status updates are a headache that nobody wants to deal with, and fileservers need ongoing maintenance.
How Bank APIs are different: With bank APIs there are no bank files to manage, just a stream of data designed to naturally flow between systems. This eliminates the need for file management or ongoing maintenance of fileservers. As for maintaining your bank APIs connections? Your multi-bank API aggregator handles that, not you.
3) Lack of traceability
For every file sent through host-to-host, there’s a 6-step process involving the bank and the corporate. Here’s an example:
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
Sound complicated? It can be. This lengthy process doesn’t provide confirmation that the file has been sentsuccessfully 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.
How bank APIs are different: 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
There are no bank files, so nothing goes missing and nobody is left wondering if a file was successfully received.
File-based connectivity, like host-to-host, is vulnerable to fraud. Because host-to-host connections accept file formats of any type, there are no forced data or security standards, leaving it vulnerable to data manipulation or malware injection attacks.
Then there are the fileservers. At some point in the life of the file, an administrator will need access to it. Because host-to-host connections separate the interface and the files, the data in that file could be manipulated before any encryption occurs.
Now, setting up a host-to-host connection is no easy task, so corporates often purchase a 3rd party system with pre-built host-to-host connections. These third parties act as middlemen, cobbling together host-to-host connections that relay data onwards to other host-to-host connections, Swift, or to the bank. This adds yet another insecure link in the connectivity chain, further increasing the security risk.
How Bank APIs are different: APIs are today’s most secure form of technical communication between two parties. They leverage the latest and greatest in technology and enterprise security standards. The security is built into the channel and the data – since they’re one in the same – and includes multiple types of security like certificate exchange, user credentials and data encryption. With bank API connections, there are no files — which means it’s secure, has a lightweight set-up and comes with little to no ongoing maintenance. Yes, it’s true – there are no files to manage when using bank APIs. That means there are no fileservers that are vulnerable to security breaches and no way to intercept or compromise the data.
5) Stale Data
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. Period.
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.
How Bank APIs are different: 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. Bye-bye 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.
Host-to-host connectivity channels require a heavy set-up, and fileservers need ongoing maintenance. The interfaces of host-to-host channels often come with an extra charge to get up & running, or with mandates requiring use of their proprietary system. For those that decide to outsource host-to-host connectivity to a third party, additional time and money for purchasing and implementing the solution should be expected. Should you need changes made to your host-to-host connections, treasury teams are reliant on IT’s limited time and resourcing.
Though host-to-host is still widely used today in corporate finance, it will soon be rendered obsolete by the newer, faster and more secure technology provided by bank APIs.
Bank API’s are considered a “lower lift” technology because they work with real-time data, are easy to install, less costly, provide richer data and are easier to use by the business.