Technological shifts have come to define modern banking. Between the invention of online banking in the 1990s and the complex relationship between regulation and technology that was born in the wake of the global financial crisis of 2008, changes are well under way to reshape banking and wealth management, from the traditional analogue to a digital-oriented industry.
Today, sophisticated software applications can harness the accelerated power of personal computers (mostly in our pockets) to derive information otherwise unforeseeable to human analysts. From the wealth management’s perspectives, the insights that cutting-edge information systems bring to light is powerful to provide real value to clients. From a regulatory perspective, however, the proliferation of personal data storage (big data) and monitoring technologies are at the same time paving the way towards more transparent/open banking, but also creating a tricky territory for people to protect their information.
Cloud networking, data analytics, blockchain, mobile banking, automation, artificial intelligence (AI), and machine learning (ML) are topics that have been covered by the media almost on a daily basis, but the question remain on how those will actually start to empower wealth managers and financial planners to offer a more informed, real-time, and bespoke experience for their clients. Regulators and policymakers are also wondering how these technologies might help mould financial markets into more fair and efficient mechanisms. The Competition and Markets Authority’s (CMA’s) open banking initiatives are a clear example of this trend, of how the UK envisioned to use these technologies to encourage fairer financial practices for all.
Fintechs and Regtechs, and their impact on the Open Banking
The global recession of 2008 taught the world a hard lesson regarding the importance of transparency and regulations in financial markets. During this time, the United Kingdom struggled through six consecutive quarters of negative economic growth before finally moving out of recession at the end of 2009. This recession period was longer than what the other G7 countries experienced, and millions of homes and businesses suffered as a result.
UK policymakers have taken several actions to reform domestic financial markets and help the economy get back on track. Many of these reforms fostered the origination of innovative businesses that aim to use financial technologies – or “Fintech” – and regulatory technologies – or “Regtech” – to support healthier market function through the more effective use of digital capabilities. Fintechs and Regtechs are, broadly speaking, harnessing digital solutions to carve new ways of addressing the market needs regarding their finances, at the same time increasing transparency in the system and removing intermediaries. More often than not, however, these solutions, shaped in the form of startups, rely on massive amounts of consumer banking and finance data to perform properly. To encourage all these innovations and attempts to make the financial system better, the UK regulators just passed a new direction opening up the banking system to the digital exchange of customer data: the Open Banking policies.
The UK's Open Banking Policy
The banking market is broadly known as a relatively closed-off industry. The nation’s five largest banks – Barclays, HSBC, Santander, Lloyds, and the Royal Bank of Scotland (RBS) – collectively control over 80 per cent of the market. After determining that this industry was not sufficiently competitive to ensure efficiency, the CMA ordered nine of the largest banks in the country to open their data to regulated third parties.
On the 13 January 2018, the Open Banking directive was initiated, which is designed to open up access and transparency in banking and financial services by forcing big banks to open up the possibility for clients to share their data with other business using automated Application Programming Interfaces (API). The CMA took on the massive task of building the technological infrastructure necessary to support the free and private exchange of customer data, which is currently managed by the non-profit Open Banking Implementation Entity (OBIE) with CMA oversight.
In the UK also, the Private Banking and Wealth Management firms are consolidated mainly into few large institutions, and hundreds of smaller boutiques. People quite seldom switch their wealth management providers, and as a result, many customers are paying way too much in trading and product fees while not earning justifiable rates of return on their portfolios. Soon, however, this situation might change significantly when clients will start to seek alternative ways to address their needs and new digital-players may be ready by then.
Capturing the Benefits of Open Banking
Open banking is a policy designed to improve transparency, competitiveness, and integrity in financial services. The regulated flow of information between companies will help improve the quality of the services as well as the breadth and variety of financial products. Those companies need to be regulated by the FCA, and the directives of the use of any data need to be manually managed by the clients. However, the impacts of open banking are not limited to customer experiences. By providing to modern innovative startups with the massive valuable data maintained on the servers of the largest banks, the Open Banking directive is blazing a new trail for innovation and endless opportunities will come soon.
Data transferred across the regulated platforms includes details about banking products and services of personal and business accounts. Because this information might be presented in a vendor-agnostic platform, customers seeking new current accounts, loans, investment services, or other products can easily find the best deal. With proper approval from the client, third parties can even use their personal information to develop completely new products that might never have existed before.
The potential benefits of open banking policies are vast. Beyond improving customer experience, the controlled and regulated access to big data encourages the development of non traditional and alternative banking and wealth management offerings. As an example, with access to the bank account information of one client, a new digital and automated financial planner could generate bespoke financial advice based on real-time data to best suit his or her needs.
The UK open banking policy even requires large banks to provide a means by which third-party service providers can initiate a payment from an account held by another bank, opening up a new channel for third-party payments outside of traditional credit or debit payments.
Potential functions for UK Account Holders
Currently, OBIE has whitelisted 151 regulated financial service providers with access to the APIs necessary to carry out open banking. Among these institutions, 38 had already gone live with their digital propositions at the end of 2019. Personal account holders at these institutions are already benefiting from innovative services and products.
Open banking policies reflect the digital transformation that is shifting every major industry worldwide. Modern banks rely on digital platforms to engage with consumers, and more and more regulated financial activities will be carried out via personal computers (your smartphone is included). However, beyond adapting to the technological disruption that is occurring in wealth management and financial services, this directive is designed to support the healthy functioning of domestic financial markets.
Smaller financial firms and fintechs can harness the power of this new regulation to find original ways to improve banking and investment services. However, there are inherent privacy risks to sharing data - particularly personal financial information. To ensure the appropriate protections for consumer privacy are maintained, one of the notable focus of CMA is on the integrity of the technologies supporting this exchange of data.
Protecting the Participants in Open Banking
The global financial crisis undermined public trust in financial institutions, and restoring confidence in banking requires meaningful assurances that the information exchanged on open banking platforms will not be misused. To ensure that it is appropriately protected, the data shared under the UK’s open banking policy is transferred via secure application programming interfaces (API). The nine banks directly affected by the policy are required to develop standard APIs for both account information and payment initiation services, although five of these financial institutions were given more time to achieve compliance.
OBIE completed a managed rollout of the APIs supporting the open banking policy in mid-2018, and on 17 April account data access functionality was released for public use. At this time, customers at fully authorised companies were able to safely and securely link their bank accounts to third party providers. It remains to be seen how financial institutions will adapt to their evolving roles with respect to the stewardship of customer data. Those banks are adopting higher-level security best practices like know-your-customer (KYC) capabilities, identity validation, and advanced fraud detection measures.
Even when privacy protections and security measures like these are in place and sufficiently robust to protect consumers, open banking requires financial institutions to educate and empower their customers to make the best possible use of the new opportunities this policy creates. Just as banks are facing a new reality defined by these novel applications, their clients will need to adapt to a tech-driven financial reality.
Wealth Management might face a new reality
Digital technologies are opening up unparalleled opportunities for greater clarity and more precise insights into financial markets. Even beyond open banking policies, the landscape of UK financial markets is shifting with the emergence of new technologies. Now, wealth management companies have to align their IT priorities with their operational priorities just to keep up with regulatory requirements and consumer demand. Digital services that were once effectively outsourced or generalised into “one-size-fits-all” solutions no longer function in a market defined by increasing personalisation.
Wealth managers and financial planners in the digital era must be prepared to develop their own right-sized digital operating model to support evolving digital capabilities and technological demands. For example, by combining video conferencing technologies with secure digital signatures and identity verification that can authenticate users via biometric data, forward-thinking wealth managers are streamlining client onboarding. Some companies are even developing their own suite of applications that utilise personalised content, real-time trading data, multichannel collaboration tools, and other functionalities to improve the quality and efficiency of their activities.
While modernising their technological infrastructures has seldom been a top priority for wealth management firms, the digital revolution has already started, and the transformation of the financial services is unstoppable. As the pace of this change continues to accelerate, the institutions who are reticent to adapt will fall by the wayside. In their places, however, forward-thinking and agile enterprises will arise.
What comes next?
Even beyond the potential benefits of information-sharing and collaboration policies like open banking, digitisation is mostly shifting paradigms. Digital technologies have created opportunities in every facet of the world, from shortening people's distance from their favourite food, to easing the burdens of their onboarding with financial enterprises. Most startups have innovation as their core business from the very beginning, but some of the most established corporations may struggle to achieve the level of agility necessary to adapt.
Digital transformation has already reached the UK’s financial markets, and it shows no signs of abatement. The Open Banking directive has forced some of the nation’s largest and most traditional financial institutions into the digital era, and it remains to be seen how effectively they will adapt. While some experts see this development as foreshadowing the demise of the UK’s classical financial institutions, others embrace the technological advances.
Technology is improving quality and access in retail banking, wealth management, and across all the other financial services. Regulators are also harnessing the power of digital technologies to free up the financial market for some much-needed competition. As Fintechs and Regtechs continue to evolve, top-notch wealth managers and financial service providers will start building more and more digital capabilities into their products and services.
Leveraging the combined powers of financial insight and advanced technologies are the best way to keep up with the dynamic nature of modern banking and financial practices. By combining the power of cutting-edge technology with industry-leading experience and keen human insight, Rosecut is breaking new ground in private wealth management. With an innovation driven culture and a passion for embracing the challenges and opportunities created by digital transformation, Rosecut is in the best possible position to thrive.
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