The future of Open Banking
When it launched in January 2018, the EU’s Second Payment Services Directive (PSD2) was met with resounding indifference by consumers and many in the financial services industry.
But while PSD2 itself wasn’t the most exciting slab of legislation to emerge from Brussels, it paved the way for the roll-out of Open Banking. Four years later, there’s little doubt that Open Banking has left its mark on the financial services market, driving increased collaboration and greater innovation and creating a point of difference for advisers through fully informed, truly holistic advice.
Humble beginnings
The concept of Open Banking originally emerged in the UK from the Competition & Market Authority’s 2016 remedies for improving competition in the retail banking market. The broad idea was that Open Banking would allow consumers and small businesses to share their banking data with other companies electronically, directly and securely.
By requiring financial institutions to open up their data to third parties, provided the customer had given explicit consent, PSD2 was an important step towards Open Banking. At the same time, advances in Application Programming Interfaces (APIs), which standardise connections between different systems, allowed firms to access and exchange financial information more easily.
It’s estimated that four million UK consumers and half the UK’s small businesses now use services powered by Open Banking technology [1]. Momentum has particularly increased over the past 18 months due to our greater use of digital channels driven by Covid-19 lockdowns and restrictions.
More than half of UK lenders adopted Open Banking technology in the 12 months to February 2021, according to Experian. Its own Open Data platform took more than 188 million data sharing requests in February 2021, up from 47 million in the same month a year earlier [2].
Opening up
Of course, Open Banking isn’t just about banking. The possibilities offered were demonstrated early in the pandemic when a group of UK fintechs created the Covid Credit platform [3]. This used Open Banking data to help self-employed and ‘gig economy’ workers prove their incomes so that they could access the government support they needed.
For financial advisers, greater access to customer financial data can be used to deliver truly holistic advice. By using Open Banking tools, advisers can gain a clearer picture of the client’s finances. It can reveal held-away assets to provide a better understanding of the client’s total wealth: in the first three weeks after the launch of intelliflo’s Open Banking service, advisers uncovered £20m worth of hidden client assets! Advisers can also get up-to-date banking and credit data for clients such as mortgage applicants, and gain an accurate, up-to-date view of clients’ incomings and outgoings from current and savings accounts as well as credit cards, while seeing fluctuations in client assets or income can initiate conversations about potential implications and solutions.
The obvious advantage for advisers is the reduced hassle and increased efficiency, creating additional time for direct client work. With Open Banking data to view alongside the investment and pension information already available to advisers, clients can be given a genuinely holistic view of their full financial portfolio. By giving clients that perspective it also encourages greater engagement with the advice process and the wider management of their finances.
Open Banking data can feed into tools such as cashflow modellers, supporting the accuracy of the scenarios developed. For instance, advisers know that the figures that clients provide for details such as regular outgoings and monthly spending are often broad estimates, whereas Open Banking provides easy access to the actual day-to-day picture.
A sharing economy
The possibilities for advisers will increase as consumers become more comfortable with sharing their financial data. The recognition of those advantages helps explain why clients have proved largely willing to allow their adviser access to their account data. They are also reassured by the fact that they can choose which accounts advisers can access, and that they don’t need to share any security information.
Advisers can also choose how proactive they want to be in using client data. The incentives are certainly there: easy access to data allows advisers to process transactions more quickly, produce accurate, up-to-date reports and provide a detailed overview of the client’s financial position. These benefits will grow, with greater transparency and the ability to share information securely, lowering the barriers to entry and innovation. It paves the way for fintechs and other providers to deliver better customer experiences and for advisers to further demonstrate the value of the service they provide.
As the FCA continues to consult on Open Finance – essentially an extension of Open Banking – we expect to see more developments in the long-term savings and pension space. Open Finance will be a slow evolution, due to valid regulatory and data protection concerns, but it underlines the importance to advisers of engaging with the Open Banking possibilities that already exist.
[1] https://www.gov.uk/government/news/update-on-open-banking