There is a revolution taking place in banking that advisers and wealth managers might do well to take note of.
Open banking is the use of open application programming interfaces (API) that enable third-party developers to build applications and services around the financial institution.
In a nutshell, customers and small and medium-sized businesses can share their current account information securely with other third-party providers.
The rules were introduced in January, after the Competition and Markets Authority (CMA) found that larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow and access the market.
A wealth of opportunities
While open banking is predicted to reduce the dominance of the banks and create more opportunities for new banks, another group that will benefit is financial advisers and wealth managers.
Ian McKenna, director of the Finance and Technology Research Centre (F&TRC), says: “It is one of those things where it would be very easy for advisers to say, ‘This does not really affect me,’ and I think that would be a huge mistake. What open banking is going to do is that it is already forcing banks to give clients more information about their day-to-day finances and there is absolutely no doubt banks are moving to include information on long-term savings products.”
Mr Mckenna says he was aware of a number of banks that have approached insurers saying they want to include details of life and pension products, in their open banking services.
Open banking is the UK version of the EU’s second Payment Services Directive (PSD2).
One of the main differences between the two is that PSD2 only opens up access to customer transactional data for specific institutions, which must also be regulated authorised payment service providers (PSP), while open banking may grant access to a broader range of third parties through its ‘whitelisting’ process.
A report from Deloitte on open banking last year said: “PSD2’s greatest impact will arguably be the opening up of bank-held customer account data to account information service providers (AISP). If third-party AISPs gain significant traction, banks may lose their ownership of the customer interface.
“As it becomes easier for customers to switch between current account providers and shop around for other products based on price, incumbents are at risk of losing market share and seeing reduced profit margins.
“Moreover, third parties may be able to create new propositions that meet unmet needs, using data to give the customer tangible benefits. As a result, incumbents could lose the primary banking relationship if customers increasingly choose to manage their finances via a third-party interface.”
These developments give advisers the opportunity to really own the relationship with their client even more.
• Open banking allows companies and individuals to share their banking data with third-party providers.