Open Banking and SWIFT: The Future of Real-Time Settlements

The push for real-time settlements is driving significant change in treasury operations for buy-side firms. As financial institutions embrace digital transformation, open banking promises faster, more transparent, and more efficient transactions. But how does open banking—fueled by the rise of APIs—stack up against established systems like SWIFT (Society for Worldwide Interbank Financial Telecommunication)? Is open banking a replacement or simply a complementary solution? This blog explores these questions, shedding light on how open banking APIs could enable real-time settlements and exploring the broader implications for buy-side firms.

The Role of Open Banking APIs in Real-Time Settlements

Open banking APIs essentially fulfill three roles with respect to real-time settlements.

1. Enabling Real-Time Data Access and Improved Liquidity Management

Open banking APIs have revolutionized how treasury operations function, providing immediate access to critical financial data. This is especially valuable for buy-side firms that need up-to-the-minute information on transaction statuses, account balances, and cash flows for effective liquidity management. This real-time data equips fund managers with the insights needed to optimize cash reserves, reduce idle capital, and respond quickly to market changes.

For example, a hedge fund manager monitoring multiple accounts across various banks can leverage open banking APIs to track cash positions in real time. If excess cash is detected, it can swiftly be redirected into higher-yield investments to maximize returns. Private equity firms managing complex workflows like capital calls or distributions can also benefit from real-time data, which helps reduce administrative overhead and enhance transparency with investors. In both scenarios, open banking improves decision-making by giving fund managers a comprehensive, real-time view of liquidity.

2. Streamlining Settlement Processes and Reducing Costs

One of the standout advantages of open banking APIs is their ability to streamline settlement processes by automating and standardizing data exchange. For buy-side firms, automation means fewer manual interventions, leading to fewer errors, faster settlements, and lower operational costs. Traditional settlements—which typically involve days of back-and-forth processing—can be completed in mere minutes with open banking APIs. This allows firms to react to market shifts with much greater agility.

With the conventional system, the settlement of trades can stretch out over several days, leaving funds and securities stuck in transit, increasing counterparty risks, and temporarily immobilizing capital. In contrast, real-time settlements done with open banking APIs empower buy-side firms to complete transactions in minutes, which frees up more capital for immediate reinvestment and reduces exposure to settlement risks.

3. Enhancing Transparency and Compliance

Real-time settlements facilitated by open banking APIs bring greater transparency to financial transactions. Treasury teams can access detailed transaction information instantaneously, reducing the risk of discrepancies and improving compliance with regulatory requirements. This increased transparency not only fosters trust but also enhances the auditability of financial operations, a critical factor for buy-side firms managing large portfolios.

For instance, a pension fund manager might use open banking APIs to access transaction details for audit purposes, ensuring compliance with regulatory standards and maintaining transparency with stakeholders. This capability can also support more accurate and timely reporting, which is crucial for maintaining investor confidence and meeting fiduciary responsibilities.

Can Open Banking Replace SWIFT?

While open banking APIs present a compelling case for improving real-time settlements, the question remains: can they replace SWIFT, the global system for financial messaging and cross-border payments? The short answer is no. Open banking and SWIFT serve fundamentally different purposes. However, they can be combined within a more robust, versatile solution.

1. Different Purposes, Different Strengths

SWIFT has long been the backbone of the global financial system. Its messaging network connects more than 11,000 financial institutions worldwide, ensuring secure, standardized communication for international payments and financial transactions. SWIFT’s global reach, reliability, and universal standards make it indispensable for cross-border transactions and large-scale financial communications, which are essential for buy-side firms with global portfolios.

Open banking, on the other hand, focuses on data sharing and enabling new financial services through APIs. While it promotes innovation and competition in financial services, its scope is primarily domestic and tailored to enhance customer experiences and operational efficiency within specific regions.

2. Complement, Not Replacement

Rather than replacing SWIFT, open banking APIs are more likely to complement existing financial systems. For instance, while SWIFT remains the standard for international transactions, open banking can enhance domestic payment systems, improve consumer-facing services, and foster fintech innovations. For buy-side firms, leveraging both SWIFT and open banking APIs could result in a comprehensive solution that covers both global and local financial needs.

For example, a global asset manager might use SWIFT for cross-border payments and trade finance while using open banking APIs for domestic cash management and liquidity optimization. Together, they allow the firm to benefit from both systems, ensuring efficient operations across all markets.

3. Future Developments and Integration

As the financial ecosystem continues to evolve, we may see greater integration between traditional systems like SWIFT and emerging technologies like open banking APIs. Collaborative efforts, such as SWIFT’s Global Payments Innovation (GPI), already aim to enhance the speed and transparency of cross-border payments. Meanwhile, open banking APIs could further streamline these processes by providing real-time data and reducing reliance on batch processing.

For buy-side firms, these developments present an opportunity to optimize treasury operations and enhance client services. By staying ahead of these changes and exploring how best to integrate new technologies with existing systems, firms can maintain a powerful competitive edge.

Conclusion

While open banking and SWIFT serve different purposes, their roles are complementary rather than mutually exclusive. Open banking APIs offer significant opportunities for buy-side firms to enhance real-time settlements, optimize liquidity management, and improve operational efficiency. At the same time, SWIFT’s global reach and standardized messaging capabilities remain critical for international transactions. While open banking intends to ease integration between corporates and banks, SWIFT will likely remain the backbone for bank-to-bank communication. By leveraging both systems, buy-side firms can position themselves for success in the digital age.

 How IVP Can Help

The comprehensive and fully customizable IVP Cash Management Solution provides automated cash settlements, balance monitoring, and straight-through processing (STP) via the SWIFT or host-to-host payment process. It centralizes all balances for unified control of cash management risks and regulatory compliance, with full transparency and multi-level access control for efficient cash management.

Learn more about the IVP Cash Management Solution or contact us at sales@ivp.in to schedule a live or online demo.