How Can Asset and Wealth Managers Take Advantage of Open Banking?

Open banking has arrived, but why should asset and wealth managers care? The second Payment Services Directive (PSD2) means that financial institutions across Europe have had to provide consent-based access to current accounts, certain savings accounts, and business accounts via application programming interfaces (APIs). Given there is currently no mandate for this access to be required for investment portfolios and pensions, the immediate impact on asset and wealth management has been limited. However just because there is currently no regulatory requirement, does not mean these firms should rest on their laurels. There are opportunities to take advantage of this new ecosystem, and the reality is that new challengers will use this space to erode the client base of traditional asset and wealth managers by acting first and fast.

What is happening and why this is a threat / opportunity for traditional asset and wealth management

There are several reasons asset and wealth managers should be thinking about taking advantage of this opportunity sooner rather than later:

• Competition – New FinTechs like Wealthify and Nutmeg are taking advantage of technology and data to provide new distribution methods and better services to customers, opening up saving and investment products to the mass affluent and improving customer experience with more efficient services and greater speed to market.
• Changing consumer habits – As generational wealth changes hands, and with new younger investors, there is an increasing expectation of digital experiences. Developing these now is imperative to retaining and growing customer bases.
• Digitisation – There is a cost that comes with digitisation and enabling new customer experiences, from investing in scalable infrastructure to ensuring you have the right skillset to deliver the change. Open banking use cases provide a compelling component of a digital business case, helping to demonstrate the potential revenue gains to be made by investing in becoming a truly digital organisation. This can also help expand and improve distribution, and significantly increase speed to market.

What are the opportunities for asset and wealth management?

At its most fundamental, open banking means that more customer data is available to support (and improve) organisational processes and decision making. The objective for the banking industry is to encourage competition and put customers in control of their financial lives. The premise is that third parties and challengers can use the available data to provide competitive and customer centric services, with the traditional banks having to respond in kind or lose customers.

What this means for asset and wealth managers is that customer data is theoretically available to be collected and used in order to provide improved or new services to clients, whether they are retail, high net worth individuals, institutions, brokers or platform providers. New and innovative ways of using the APIs are constantly appearing, but there are some interesting use cases already apparent, primarily in the retail sector:

1. Optimise onboarding and customer KYC – A simple opportunity is to use open APIs as a means of gathering customer information automatically, verifying identity and financial viability. Making it possible to validate identity via a client’s bank and having access automatically to basic financial information could significantly improve the process and customer experience. Combine this with basic digital processes like e-signatures and you could have a frictionless onboarding process for clients, that could also reduce operational costs. With similar open banking roadmaps progressing internationally, the AML potential of this kind of open data will also rise significantly going forwards.
2. New products for the ‘mass affluent’ – Open banking can enhance distribution by enabling innovative products that attract and engage a wider customer base. Taking the example of Moneybox, one option is using access to customer current accounts and credit cards to roundup transactions, automatically saving that money in an ISA as a means for regular small savings. This could be a way of broadening customer segments out to the mass affluent and provide customers for the future as they progress and have more equity available to invest.
3. More bespoke advisory services based on a broader understanding of your clients – With access to a client’s finances and transaction information, it is possible to build up a more comprehensive (and automated) picture. This could be used to provide richer savings and investment advice if combined with mature analytics and automated advice, potentially changing investment strategies and tailored advice based on spending patterns. Coutts have begun to look at this as part of their Wealth Portrait offering, with Investec and Fidelity among others connected to open banking already.
4. Become a marketplace that integrates different advisory services digitally – Using the additional information available via open banking, asset and wealth managers could direct their clients to appropriate products that may be outside of their current product range. Offering customers a “one-stop-shop” for financial services with in-built advice and guidance and integrated offers from partners who specialise in different products, would be a differentiating offering to customers. Asset and wealth managers face a similar existential crisis to the banks in this space, whereby open banking enables new FinTechs to operate as a platform that integrates services and becomes the relationship holder. This will increasingly span the financial product set and will present a significant challenge for an industry often heavily based on owning the customer relationship. However, asset and wealth firms’ natural position as a platform to distribute funds should put them in a strong position to understand this opportunity, open banking just presents another potential channel to achieve this and increase the speed to market of those products.

What are the challenges and considerations?

The need to combine with broader digitisation could represent a barrier to taking advantage of these opportunities. It is important to begin with an assessment of the digital maturity of the organisation before focusing on customer facing products. Any new products or services could also mean substantial changes to the existing operating model, particularly in terms of how advice and guidance is provided. Finding the right balance and flexibility between automated and face-to-face advice is a crucial part of setting up your organisation to cope with the changing industry.

Having said this, speed to market is key, which typically means building the technology in house is less of a viable option. Partnering with vendors who can provide the technical ability to utilise open banking APIs is a crucial aspect of delivering new products to market quickly. The banking sector has started to accelerate this approach, but have frequently come up against any number of second line risk concerns and a heavy dependency on the preparedness of procurement to deal with smaller companies.

Finally, it could mean getting a head start on future regulation that is likely to arrive through ‘Open Finance’. The expansion of the API product scope to asset and wealth management is highly likely in the next couple of years and familiarity with the API standards out there now, and the third-party ecosystem and developer requirements, will all help the ability to respond to these future demands.

Open banking is one part of a broader set of paradigm shifts across financial services, and whilst the impact has largely been felt by the banks to date, asset and wealth management will not be far behind. There are lessons to be learned around how to fully take advantage of this newly available data, what providers are out there to support these opportunities, and the typical pitfalls to avoid when implementing a potential solution. At BCS consulting we are in a great position to combine our experience of delivering open banking in banks, with our broader delivery experience and knowledge of asset and wealth management. If you would like to talk more about any of these topics or themes, please do get in touch.