This article was first published in The Paypers which features thought leadership editorials from ecommerce and payments industry professionals.
The concept of Open Banking and its potential grows steadily on corporate banks. PSD2 has been an important catalyst for banks in opening up, however, it forced them to focus on complying first, leaving little leeway to innovate beyond PSD2.
PSD2 compliance has proven to be a challenge for banks. The interpretation of PSD2 has been complex and, even though the agile way of working is introduced into the banking industry, its legacy infrastructures, low levels of digitisation and siloed operating models are still barriers to innovation. As a result, change is costly, risky and takes time.
To develop new financial services that go beyond PSD2, incumbent banks would like to start from scratch. Preferably start small and scale up while building experiences with clients and Third Parties, innovating their organisation, digitise business processes and manage risks accordingly.
With Open Banking, banks are offered exactly this. By designing a fully digital and customer-centric corporate onboarding process for Third Parties banks can start with a clean slate. Third Parties are a new client segment for the industry and thus banks can use it to create a “testing” environment and innovate one of its core and most differentiating client processes - corporate onboarding. Corporate onboarding is about creating a customer identity for a new legal entity and charging it with all things required to deliver the requested product or service.
Third Parties play an essential role in creating customer value
For corporate banks, the primary customer relationship is essential in maintaining a profitable and future-proof business. However, current corporate onboarding processes are time-consuming, costly and deliver a poor customer experience. Already in 2014, Forrester research showed that the onboarding experience correlates with the profitability of practically all (98%) customer relationships. Deals are lost and business development rates are low. A successful onboarding experience will improve conversion rates, increase revenue with cross-selling and upselling and thus contribute to customer value. With the financial industry opening up, this will become even more relevant as new players will try to disintermediate existing corporate client relationships.
PSD2 allows newly introduced regulated roles to access bank customers’ payment accounts for Account Information Services (AIS), Payment Initiation Services (PIS) and Confirmation Availability of Funds (CAF). With explicit customer consent. Open Banking goes beyond PSD2 and enables banks to create customer value by sharing customer (data) resources with Third Parties in a secure way, through the use of open application programming interfaces (APIs). Consequently, banks need to onboard Third Parties and since they can have all kinds of corporate identities (f.i. Financial Institutions, BigTech, FinTech, Retailer, Corporates, SMEs) several corporate onboarding processes will apply.
For regulated PSD2 services, a standard procedure for identifying Third Parties is prescribed in the Regulatory Technical Standards (RTS), i.e. using eIDAS certificates. However, for Open Banking services this does not apply. The diversity of Third Parties and functionality of APIs is unfamiliar territory for banks. As this impacts the risk profiles, Know Your Customer (KYC) obligations and attributes needed to charge the corporate Third Party identity, banks tend to be hesitant and fall back on their existing processes.
However, instead of onboarding via the existing siloed, cumbersome and costly processes, banks should seize this opportunity and design a modular, digital and secure Third Party onboarding process. As the functional scope of APIs exposed via developer portals is still very much focused on complying with PSD2 , the number of Third Parties wanting to use these APIs is not expected to grow very rapidly. This will allow banks to innovate at a slow but agile pace.
How to best seize the opportunity and innovate corporate onboarding
Future proofing will be key to innovating corporate onboarding. The new process should consider the types of Third Parties (i.e. Third Party segmentation) and APIs offered. Therefore, it is important to start with ‘the end in mind’ and go for flexibility. Where current onboarding processes are often static, new processes should consist of generic building blocks that can be deployed depending on f.i. identity of the Third Party, type of APIs consumed, services offered and the risks involved. This results in a flexible onboarding architecture as depicted below:
The onboarding process should aim for convenience and ease of use, while gathering all attributes required, reducing risks and adherence to KYC obligations where needed. Consequently, a flexible architecture comprises of:
- Variation in the order of steps: offer a relevant and tailored onboarding experience;
- Adjustment to local flavours: f.i. KYC requirements could be a quick check against sanction and PEP lists, but could also include full identification procedures;
- Leaving out steps: when you onboard a Third Party that offers APIs with limited risk exposure, f.i. finding the nearest ATM, there is no need for building blocks 4 –7. When a Third Party offers PSD2 APIs only, only building block 1 is allowed on a voluntary basis (i.e. without requiring additional authorisations and registrations in addition to those provided for in PSD2).
In short, by designing future proof onboarding for Third Parties, still a relatively small but divers client segment, banks will have the opportunity to start from scratch, innovate and digitise some of the most complex business processes in corporate banking. A great testing environment that enables banks to scale up their onboarding capability across the organisation and to Third Parties. An important leap into Open Banking.
 Client-Centric Onboarding, Hopes And Realities For Global Banks – Forrester (2014)