August 31, 2018

Open banking and advice - creating new realities

Simon is Business Development Director at Wealth Wizards, with 20 years' experience driving the development of automated financial advice.

Smart Platform blog
Since open banking came into effect in January there has been a flurry of activity from fintechs to develop new concepts and innovative solutions for consumers and businesses.

This has been spurred by the fact that the Competition and Markets Authority (CMA) has mandated that the nine largest current account providers must offer standardised application programme interfaces (APIs) for approved third parties to deliver account information services (AIS) and payment initiation services (PIS).

It would be a mistake for the financial advisory sector to think that open banking only impacts the banking and fintech sector.

Far from it. Open banking could provide wide-reaching opportunities for the advice sector supporting both clients and advisers alike.

This is especially relevant while the current question mark resides over the pensions dashboard's future. Could it be that open banking is the catalyst for an advisory sector working towards an age of digital transformation?

The following six key areas showcase where open banking could change how the sector operates:

1. The Brave New World Of Open Banking

The aggregation and integration of customer data from multiple banks will present information in a much easier and accessible way for customers.

Created by approved third party providers (TPPs), APIs will provide a single point of access to a range of relevant products and services, and expert advice, based on the analysis of their aggregated information.

For example, a dashboard for small businesses that incorporates intelligent cashflow management tools, or creative ways of saving for consumers such as rounding up purchases to the nearest pound and investing their spare change.

As well as convenience, customers will benefit from better product and service choices as well as pricing; previously traditional banks would only offer ‘captive' proprietary services. This will change.

TPPs will be able to offer a vast range of services such as lending platforms that use sophisticated technology to analyse customer data and make behaviour predictions that hold more competitive terms.

This is especially relevant when applied to investments and pensions; a customer could give permission to a TPP to access their data.

The TPP then makes investment suggestions based on the rich data and risk profile/retirement desires and ambitions indicated by the customer.

2. Changing Ecosystem

Open banking is triggering a change that is being felt throughout the financial ecosystem. Traditional service providers such as accountants, business consultants, pension advisers, and many others that obtain business through recommendation or tie-ups with banks, must find their place in the re-oriented value ‘ecosystem', alongside new service providers. Why?

The banks are moving to a place where they are no longer just focusing on selling everything to the customer themselves but instead looking to share with third parties.

As a result, an ecosystem of reliable strategic partners will evolve where banks will share revenues on the products and services that the third party partners can provide to the customer. This is a move from traditional vertically integrated banking to a far more modular and networked architecture.

3. Access To Information

Open banking proceeds from the principle that the individual customer should have power over and control of their personal data, including data currently held by the banks they deal with.

Customers can, therefore, provide or withdraw consent for access to personal data whenever they wish. This may appear a trivial detail but its impact is huge.

Data is the oil that lubricates the financial services market. Without customer data TPPs cannot provide competitive services.

Customer permission therefore becomes ‘currency' for the banks - and its associated ecosystem that also includes advisory firms.

It is therefore in the interest of everyone involved in the financial ecosystem to promote the advantages of data sharing including the advice sector who all stand to benefit from new data aggregation and analysis platforms.

For the individual financial adviser, customer data, aggregated and presented in a user-friendly format, will significantly improve the advice process.

Permission will be granted to advisers to find out relevant information about a client's financial situation, rather than having to dig out old statements from shoeboxes in the loft or try to work out for themselves where their money is and where it goes.

We could, therefore, see a seismic shift in the ability to better understand customers by having access to ‘real' and relevant data while reducing costs-to-serve through the introduction of technological efficiencies into the data gathering process.

As a result, the adviser is able to serve more and more clients helping them to gain control of their saving and retirement goals while contributing to increased margins for the firm.

4. The Tech-Savvy Adviser

Tech is driving the opportunity in financial advice to change the whole interaction from "across the desk" to "along the road". This "along the road" advice can help people see in real time how much they are spending or saving, and where opportunities exist to do better, like putting small amounts aside each month when they've paid the bills or reducing some discretionary spending.

Additionally the opening up of product comparison information will help people choose the accounts and other products that do most to make their money work for them.

This is where a trusted adviser, given permission to access and monitor what's happening via the TPP platform, can add significant value to the client's decision making process. The adviser can access situational advice about what the client can do ‘right now' to progress their client's goals. In this way, the adviser is not replaced but becomes the trusted aid and interpreter of aggregated data turning wishes and dreams into reality through a broader and more relevant range of products.

But it doesn't stop there. The adviser of the future will need to be increasingly tech and data savvy while advisory firms will need to engage and connect more deeply with customers. Consumers now expect tech-driven solutions across their lives via the brands they trust - the financial advice sector learn from this and embrace it.

For example, new non-traditional market entrants are taking advantage of brand loyalty and partnerships to create financial service offerings such as Facebook Messenger payments enabling the transfer of money by partnering with major players like Stripe, PayPal, Visa, MasterCard and American Express.

Just a few years ago, no-one could have imagined Google, Apple or Facebook's entrance into the financial sector causing further disruption and increased competition.

Where technology really starts to create a step-change for the advisory sector, and where advisers need to be on-the-ball is the advent of AI, machine learning and automation. Integral to products and services of today, they will only serve to enhance those APIs and platforms, developed as a result of open banking, and will create unrecognisable improvements that will significantly enhance the human-digital advice offering.

One such example is the introduction of chatbots, able to interact with customers using natural language processing and facial expression recognition, they are becoming more widespread and better developed.

Bank of America has recently launched Erica, a chatbot that can help users check balances, put in reminders for the bills and get answers to all bank-related queries. Mastercard has also launched an AI enabled bot, ‘Mastercard KAI' through which users can transact, manage finances and shop through messaging platforms.

These tech-driven features such as chat-bots or AI that learn about a consumer, a client or the house-style of an advice firm, are not a threat or a replacement to advisers; rather it's the opposite. These features can support the adviser speeding up data analysis allowing the adviser to deliver quality advice underpinned by sophisticated interpretation of the client's real needs. For example, a client in a high street bank is talking to an adviser who is being prompted with questions on screen. The AI listens to the client's answers and populates a ‘fact find', together with ‘sentiment analysis' to work out the client's attitude to risk and financial goals.

From a robo advice perspective, AI is already making its presence felt. For example, Wealth Wizards recently launched their ‘Turo' solution that incorporates intelligent automation and machine leaning capabilities with NLP (neuro linguistic programming) voice and emotion recognition potential, to help redefine and improve the client advice journey and experience. This is just the start as nimble groups such as Wealth Wizards continue to spend on R&D investing in emerging technologies and develop innovative solutions in response to industry developments such as open banking.

Through lean and agile methodologies, they are able to move very quickly from a promising idea in research to a ‘live' product capability. In the case of Wealth Wizards, this is evidenced by the AI techniques already used in their live defined benefit transfer algorithm and their microservices architecture that lends itself to integration with third party services where these offer further opportunities to accelerate innovation within a wider fintech eco-system.

5. Broader Range Of Products

It is hard to imagine the sheer scale and variety of innovative solutions that will be launched on the back of open banking and all designed to create additional value for customers.

If we look at how tech supports our every need in our ‘normal life', we take it for granted; for example a property search application seamlessly incorporating Google maps to enhance the app's utility without leaving that app. We can expect to see the same with the TPP platform design as they incorporate added value benefits such as spending pattern analysis, debt and debt control management, savings and retirement objectives. This will lead to a richer, more compelling service offering for customers with a more comprehensive assessment of needs.

The financial adviser of tomorrow will have the ability to recommend or interpret these additional and new services on behalf or alongside clients selecting those that are most useful and suited to their circumstances while advising on an investment strategy that can be easily accessed and managed with finesse and accuracy in real-time.

6. Consumer Demand

Consumers are used to having instant access to information to decide on purchase decisions in all aspects of their lives. They now expect the same from financial services and wealth providers who, until now, have been slow to the table.

The solutions of the future will need to be fast, highly competitive and able to provide advanced valuation of customers while anticipating their ongoing needs.

However, as APIs are rapidly being developed to solve a myriad of consumer and business problems, recent research shows that consumer awareness of open banking and its benefits is currently low. PWC and The Open Data Institute found that only 18% of consumers are currently aware of what open banking means for them. This is expected to increase significantly to 64% by 2022 driven by the development of innovative propositions, whose benefits will outweigh current concerns around sharing data.

The conclusion is that, while it won't be immediate, banks will face a rocky road ahead as consumers are predicted to select non-banking interfaces or products for their financial management. This is echoed in a study by Bain, Salesforce and MaritzCX who found that those aged 55 or younger are expected to embrace the advantages of open banking; 65% are open to sharing their personal data with other banks or nonbanks in order to get better products or services. This group, termed ‘high-risk' customers may only account for 15% to 20% of the total customer base of the banks, but Bain, Salesforce and MaritzCX estimate that they make up close to 45% of bank profits. And the majority of these consumers have already started to adopt at least one alternative fintech solution, such as Apple Pay - a shot across the bow to the traditional banking sector.

Open banking is one of the biggest changes in financial services in a generation. The changes enabled by open banking and comprehensive credit reporting will have a significant impact for customers, data privacy and financial crime, strategy and pricing, conduct and fairness, artificial intelligence, and API's.

The evolution from a ‘closed' model, where each financial institution retains and controls the information it collects about its customers, to an ‘open' model, where customer data is shared, has the potential to prompt a whole new ecosystem that shakes up the competitive landscape with the creation of new products and services based on data. This will have a knock-on effect to an advice sector that now needs to find and define its place.

The established banks are well positioned to keep their overall leadership of the market because they have been investing. They may be moving at a slower pace than the fintechs, but there is an inherent inertia in the market, which prevents sudden changes in market share.

The difference in the future won't be between big banks winning or fintechs winning, it will be which banks and fintechs invested successfully in becoming the most customer-centric and those that that didn't and therefore lost.

This article originally appeared in Professional Adviser.

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