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What does open finance mean for the wealth management sector?
Open banking has begun, focusing on payments and linking current accounts. But the wider story of open finance is just beginning. For forward-thinking wealth management firms, it offers exciting new opportunities.
Open banking has begun but it has yet to revolutionise the financial services industry. To date, most firms have merely focused on the PSD2 regulatory requirements to ensure compliance.
But the technology and ideas behind open banking have huge potential for those who seize the opportunities it offers to deliver real value for customers.
Although few consumers are currently aware of open banking by name, there is clearly an appetite for useful money management features and help with managing finances across digital channels increasingly used by Millennials. As the thinking about use cases widens, so does the terminology: increasingly, what has begun as open banking will be termed open finance.
There is enormous opportunity for open-minded wealth management firms to use what open finance has to offer to create new cutting-edge integrated services and partnerships.
The holistic personal balance sheet
First, let’s consider the accounts and data that consumers will expect to connect under the broad idea of open finance. The existing open banking requirements apply to payments, current account banking and e-money firms, which creates possibilities for more integrated account information and payments tasks.
However, it’s still not clear whether mandatory open banking features are meant to extend to savings accounts, foreign currency accounts and business banking. Consumers might reasonably expect the same level of data access to these as they now get in their current accounts, especially if they use the same app or digital portal to access them. This is one of the first places the open finance expansion will kick off.
Many of the types of financial accounts people want to link together – such as mortgages, student loans, automotive finance, pensions, savings and investments – are still out of scope of open banking regulations. As such, firms involved in providing these products aren’t mandated to have APIs allowing customers to access and aggregate their data in third-party applications. Where providers are offering APIs, the lack of regulation may mean that a multitude of inconsistent, competing data and authorisation standards arise.
These limitations need to be overcome for open finance to fulfil its potential. Open banking is a key prerequisite to enable individuals to build a clearer picture of all their finances, but current accounts and credit card balances alone are far from sufficient for comprehensive personal financial management. Creating a complete view of personal finances is a vision within close reach for most consumers, as well as the mass affluent segment of the market – as much as a third of the UK investor population, which is increasingly a competitive battleground for assets between incumbents and challengers.
Creating this holistic view is considerably more challenging for high net worth clients, given they typically have relationships with many advisors, multiple portfolios and asset types across different jurisdictions, and complex ownership structures including companies, nominees, and trusts.
However, as high net worth clients, like all customers, become accustomed to having secure access to transaction and balance data across their current accounts and payments, they will increasingly expect the equivalent digital access to other parts of their financial lives.
Five open finance opportunities for wealth management
While the end goal of a holistic personal balance sheet may be out of practical reach for a good while, wealth management firms and private banks should consider what kind of open finance features they could start to offer in the short term. Here we propose five major opportunities which are both clearly beneficial for investors, and technically very feasible for financial institutions to develop.
1. Entry-level savings
The first idea to consider – in this case for banks in particular – is to offer complementary saving services, nudging clients to regularly set aside fixed or automatically suggested sums of money which can turn into substantial investment pots over time. Almost half of UK savings are held in cash deposits, representing a significant opportunity cost for both investors and the industry.
Retail banks might implement this type of auto-saving for people to save small amounts, but there’s no reason why such digital savings helpers could not be used by people with more free cash to put aside.
For example, Silo, an app built by investment house Killik & Co, links to a client’s bank account, allowing them to easily save money that is then invested on their behalf. Silo provides a personalised recommendation of how much clients can comfortably afford to put away each month.
A well-integrated app could entice high net worth investors to try digital saving and investment services they otherwise might never have considered. This could be a commercial opportunity for investment management firms to integrate their offerings with banks, bringing on board new customers and increasing assets under management.
2. Trading credit
Now let’s consider the more hands-on side of investing. Typically, stockbrokers and other trading platforms require investors to transfer cash into their account before they can begin investing. However, in many cases, stockbrokers and wealth management firms offer investors credit to be able to trade without necessarily having the full value of their transactions directly available in their cash accounts.
Clearly, open banking creates opportunities to check and prove the cash balances held by clients in third-party bank accounts. This would help reduce the associated credit risk when allowing investors to trade on margin, and unlock more liquidity for active traders.
Looking at this from the other point of view, private banks could also improve their ability to grant credit if they were able to use a secure digital query to confirm the value of their client’s investments held with third parties.
3. Easier onboarding
Wealth managers require a substantial amount of data to bring their new clients on board. A lot of this information is fairly standard and is often already held by the client’s retail bank.
Setting up an open banking authorised request to pull client contact and identity information from banks could eliminate substantial amounts of manual data entry, saving valuable time for front-office staff, and improving the accuracy of client profile data.
Furthermore, as most people are comfortable with the idea of using their bank to verify their identities, a banking identity service integrated into digital wealth services onboarding could significantly assist with AML and KYC requirements – for both new and existing clients.
4. Digitally-supported financial advice
Providing clients with financial advice and consulting about investments still depend heavily on paper-based processes. Client data is often scattered across multiple advisors and systems – manually compiling an overview can result in costly administrative overheads and is an inconvenience for clients.
Open banking could help streamline and digitise these processes, if clients grant their trusted advisors access to all their investment portfolios. Of course, it remains to be seen whether firms will want to give clients unfettered third-party access to their data.
A “halfway house” solution could involve commercial incentives for those eager to take advantage of the opportunities. Investment managers often have close relationships with their clients’ other advisors – accountants, lawyers and private banks – who regularly need access to up-to-date financial data on mutual clients.
With the right partnerships and incentives in place – possibly including paid API access – there are many opportunities for streamlining these processes. Such an approach could support an “on demand” digital financial advice model, which is perhaps a logical extension of where we have reached with some digital services like Nutmeg beginning to offer “premium” services with (online) access to human advisors.
5. Alternative asset marketplaces
Many leading wealth management firms already offer clients digital access to their investment portfolios in some way. But, while they are continually enhancing their online services, most traditional wealth management firms still lack the ability to recommend alternative investment opportunities.
As open finance gains momentum, this is likely to frustrate clients, who may be interested in new types of investments available from a growing field of digital-direct platforms focusing on a single asset class – whether gold, fine wine, art, real estate, packaged corporate debt, or even carbon credits. This is not to mention cryptocurrencies and digital assets, which represent a rapidly expanding market which may grow to rival any of these more conventional investments.
These trends present interesting opportunities for wealth management firms to partner with these new providers, which are typically digitally-native businesses. For example, while investors may want the ability to transact in a new platform’s innovative assets, they may prefer to do so from within their existing wealth management account.
An alternative approach could involve the trusted advisor presenting clients with a curated selection of third-party alternative investment options, for which they can earn referral fees if clients sign up. This might involve taking some of their data with them to make the process more convenient.
Don’t leave open finance innovation to the challengers
None of these ideas are pure speculation: most are already being developed somewhere by early adopters. We can already see several retail challenger banks partnering with pension providers to give clients access to more integrated digital services for retirement savings and investments. It’s unlikely these business partnerships will stop there.
The challengers are working on open banking innovations because they can foresee the benefits for their end customers. And it helps them to differentiate their brands. Even if the early movers tend to be found in retail banking and the mass market, the wealth management industry should be wary of ignoring changes in consumer expectations: high net worth clients are as likely to demand new digital services as the mass market consumer.
The key driving principle behind both open banking and the wider future of open finance is to empower customers to control their own financial data, and to help them use that data to access more convenient and powerful digital services. This is a good thing, both for customers and financial institutions, and it’s an essential strategic principle for the wealth management sector to recognise.
Those wealth management firms that acknowledge and build on this principle are likely to benefit from stronger new client acquisition and improved brand loyalty. As such, they will be proactive beneficiaries of the open finance era, not victims of digital disruption.
By David Joyce, CEO UK, CREALOGIX