Your IndustryApr 4 2018

Open banking is set to ruffle a few feathers

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Open banking is set to ruffle a few feathers

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.

Key Points 

• Open banking allows companies and individuals to share their banking data with third-party providers.

• It could be a way for advisers to build more frequent communication with the customer.

• Large networks can work with account information service providers to integrate information into their own software.

Niral Parekh, head of retail asset and wealth management at tech consultancy Capco, says: “Rather than being product sellers, advisers can become even more advice focused.”

Mr McKenna and Mr Parekh pointed to firms like SJP that would benefit greatly from open banking because of the size of their adviser and client pool.

On the flipside, the experts say that if IFAs do not take advantage of open banking they risk being disintermediated.

This is because open banking can still provide greater opportunities for banks to regularly contact their customers and cross-sell them, or try to develop financial planning services.

Boosting customer engagement

Mr McKenna says: “Advisers may choose to say that banks never do financial advice well, but these apps, when they work well, the level of customer engagement they get is high.

“One bank found that when they rolled out personal financial management tools to their best high net worth customers, the customers went from accessing their online banking information two or three times a month to every other day, which is a very significant increase in contact.

“Open banking is a way for the advisers  to build more frequent communication with the customer. The contra to that is if the advisers don’t, the banks will. The banks are going to use open banking as a big bridge into the financial advice market. 

“Some advisers might say, ‘Banks do not do financial advice very well,’ but why put yourself at risk? Why not offer a similar or indeed a better service?”  

Amira Brakenhielm Hilmy, management consultant at Capco, says: “It could go a multiple of ways. It could exclude them, but given the amount that is going into various tech solutions I think the advisers will have a different avenue to be able to use technology to interact with their clients.”

Those different avenues could be in the form of using software houses or adviser networks.

Gemma Harle, managing director of the mortgage arm at Intrinsic, says open banking is still in its early days, so in general there is a lack of understanding as to what it is. Additionally, both advisers and consumers are still getting to grips with the impact of open banking and the risks and opportunities it brings.

But she adds that large networks, such as Intrinsic, can work with mortgage providers and AISPs to integrate information into their own software.

She says: “For instance, Intrinsic is looking at how Xplan, our technology platform, can be adapted to help advisers be as efficient as possible.

“In the case of mortgages, this means advisers can help ensure that initial borrowing calculations are based on data that is up to date and easily shareable between banks, lenders and other institutions. This means lender decisions on mortgages are likely to be correct from the start and clients can avoid disappointment.

“Brokers will also be able to utilise software that enables them to have sight of the customer’s account activity, with the customer’s consent. This will allow them to streamline their administration processes as they won’t have to spend time sifting through paper bank statements.”

Considering advisers

The risk of advisers being pushed out is also on her radar – a factor that is driving the network to see how it can assist advisers.

Ms Harle adds: “As a result of open banking, organisations who are able to operate as AISPs will have access to detailed financial customer data, which means they can push products to the customer based on what they are seeing in their spending and saving activity.  

“This could include financial services products currently provided through advisers. However, this can also be seen as an opportunity, because it can lead to a conversation with an adviser about the product and there will still be a need for mortgage, tax and wealth advice.”

When Financial Adviser spoke to rival network firm Tenet, the company said it was too early for them to have something meaningful to say at this stage.

SJP says it was something they are looking at but declined to comment further.

Open banking may still be in its early days, but those who get a first bite of the cherry may find themselves in a good position.

Mr McKenna says: “The adviser should be encouraging customers to use personal financial management and open banking services, so that they are getting that information and service through the IFA and not the bank.

“A lot of the personal financial management tools out there will give the customer better information than they will get from the early open banking services, but that will change quickly. But now is the time for advisers to look at the organisations that can help them deliver this information to customers.

“Open banking will be predominantly delivered by apps to mobile phones, so advisers working with those software companies will be able to offer a similar experience to what people can get in open banking from their banks to their customers, but add to it all the long-term savings products that the adviser helps the client with.”

Ima Jackson-Obot is a features writer at Financial Adviser