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Open banking: a critical step-up for wealth management

Abílio Rodrigues
Written by

Last editedMay 20234 min read

Banking data used to be somewhat inaccessible to the common person, but the introduction of practices like open banking started bringing down walls and democratising the understanding of relevant financial information. 

Around 2018, when open banking began to be heralded for its great deal of potential and started making headlines as a new era for financial products and services, traditional banks basically had a monopoly over account data and payment processing. 

Regulators saw this as oppressive, as innovation was getting suffocated by incumbent institutions. On the other hand, the advent of open banking was set to disrupt this stale environment by giving regulated third parties access to personal account data, as long as there is consent to this sharing of sensitive information.

But after all, what is open banking?

Open banking opens up a whole new slate of possibilities for consumers and businesses alike. New players now have access to data that was previously exclusive property of big banks, and so the gates open for a wider variety of new and more affordable alternatives to traditional financial services. 

This means that banks had to step up their game and improve their offerings, so that they can compete within an increasingly digital and customer-centric space. We can see this evolution in our day-to-day lives, when we use online banking solutions or other kinds of financial applications.

The evolution and technology that was brought about by FinTechs are now a part of bank operations worldwide. Legacy institutions understood the value of embracing transformation, taking open banking as a partner, instead of a competitor. 

But in short, what is open banking, and why is everyone talking about this topic? We can refer to open banking as the process of allowing third-party payment service and financial service providers access to consumer banking information, such as transactions and payment history.  This is possible through the use of Application Programming Interfaces (APIs), and can only be done with explicit consent from the end user. 

A more detailed analysis of this concept allows us to ascertain that it basically describes how banking institutions grant regulated financial providers access to one’s banking data, that can then be used and shared to create personalised products or services. 

Once the user gives its explicit consent, these third-party providers (TPPs) aggregate the data they need, analyse it and start building an accurate consumer profile. 

PSD2: consumers’ most powerful tool

Regulating all of this is the revised Payment Services Directive (commonly known as PSD2). This European Union directive was implemented with the goal to modernise banking, making it safer but also more transparent and less prone to fraud. The PSD2 has three main benefits:

  1. Increased consumer rights;

  2. Improved security;

  3. Permission for regulated third-parties to access payment account information;

The introduction of the PSD2 caused some concerns with traditional banks, as many saw them on the losing side of this regulation. However, those myths were progressively debunked.

Open banking regulation not only would allow legacy financial institutions to keep up with the times, by presenting themselves as more appealing to a new demographic, but also brought to the mix a customer-first approach that aimed to improve convenience for all parties. 

But if traditional banks were living in financial darkness before open banking, the same can be said for wealth management platforms. Before this new approach to finance became unavoidable, customer experience, for example, was far from ideal.

Wealth management: what is it, and why does it need to change?

According to Investopedia, we can look at wealth management as an investment advisory service that, combined with other financial resources, can address the specific needs of their clients. This process requires a gathering of relevant information about the clients’ financial situation and objectives, in order to build a personalised strategy to grant positive return. 

However, this is a lot more than simple advice about what stock you should buy or what stock you should dump. It’s not just about managing what you have, it’s also about a coordinated strategy that takes into account not only your future needs, but also your current situation.

Innovation in this particular sector has set in motion an intense fight for customer loyalty. User experience has taken the centre stage of this type of operation, as more and more specialised offerings are on the table. 

The onboarding experience has become paramount in choosing whom to partner with, and open banking adoption is probably the most important aspect taken into consideration by those who wish to dip their feet into the game. After all, we are all playing it, might as well choose the right team.

Open banking and wealth management: the perfect marriage

By now, you are probably asking yourself, “so what? What’s so great about open banking that can guarantee me a more stable future?”

Well, glad you asked! Wealth management has gone digital in recent years, following a trend that was set by businesses in other key areas. This market niche now offers top quality digital products and services, always with a “mobile-first” approach that makes investing accessible for everyone. 

Moreover, it’s now one of the most potent driving forces behind mainstream cryptocurrency adoption, as more and more exchanges are embracing this technology to make it easier and safer for anyone to buy, or sell digital assets. 

How can open banking improve wealth management?

Let’s take a look at the main advantages of using open banking in wealth management, in order to really understand how important it is to asset capitalisation:

  • Customer onboarding: open banking allows access to personal account information, which in turn allows wealth management services to streamline this process. These platforms can have instant access to requisite information (name, address, funds available, etc). Better yet, this is done via powerful APIs that remove the need for manual labour. 

  • Flexible payments: managing wealth implies moving money, and people want to be able to move their assets in different ways, and this is valid for deposits, as well as withdrawals. Open banking allows for the automation of recurring payments or authorising one-off payments directly from their bank accounts. Payments can be transferred directly between bank accounts, removing the need for intermediaries and thus reducing costs. 

  • Multiple account visibility: modern wealth management is a part of an integrated financial service. This proposition is the root of super financial apps that combine everything in one place. Open banking Account Information Services (AIS) enables the presentation of a client’s financial information in one place, with the added benefit of easy-to-use interfaces.

  • Better insights: open banking grants access to relevant data that can be analysed and enriched to offer a competitive advantage to those who seek to maximise their investment portfolios.

Conclusion

With all this in mind, open banking presents itself as the next logical step in this fascinating journey of wealth management. Customer onboarding gets revamped and offers a more streamlined approach. Costs are reduced, time is saved and transformed into money. Safety is treated with all the seriousness it deserves, and the UX makes it available to everyone.

Not only does open banking present itself as an inescapable technology to drive wealth management to new heights, but it also condemns those who ignore it to be left behind and fail to meet customer expectations. 

Open banking advancements in wealth management gave way to new concepts like Wealthtech, which has become increasingly more popular over the last few years, especially as blockchain technology became so embedded into everyone’s lives.

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