How impactful has open banking been to WealthTech?

It has nearly been a decade since the EU launched its open banking rules, but has open banking lived up to the hype?

The European Union pioneered open banking in 2015 through the Payment Services Directive (PSD2). The aim was to create greater competition in the market and help new payment services enter the market. As part of the regulation customers were empowered to share their banking data with third-party providers (TTPs).

Around the same time, the UK enacted the Payment Services Regulations, which mandated the nine biggest banks to adopt APIs and give TPPs access to customer data. This was then followed by the creation of the Open Banking Implementation Entity (OBIE) to support the growth of open banking with standardised frameworks.

Open banking has since been adopted by countries around the world. Australia, Nigeria, Brazil, Bahrain, Singapore and Japan, are just some of the countries to have open banking. The US and Canada are set to soon join the ranks, with both countries in the final stages of their frameworks.

Despite open banking having opportunities across the whole consumer financial ecosystem, a lot of attention has been focused on its benefits to streamlining payments. However, wealth management can drastically improve in scale and quality through open banking, particularly as more retail investors seek better engagement from providers to drive returns via personalized investing.

It is no secret the digital world has increased the demand for personalisation and consumers now expect a tailored experience, something that was reserved for wealthier clients. Open banking allows financial advisors to streamline the collection of a client’s financial data, giving them a clearer picture and saving time so they can focus on portfolio curation.

When open banking was first gaining steam, it generated a lot of hype. It was expected to be a revolutionary standard that would help to increase competition and provide customers with better financial services. However, now that nearly a decade has passed since it was first created, has open banking been impactful to the WealthTech sector?

Brian Costello, Head of ByAllAccounts Data Aggregation Strategy and Governance, Morningstar Wealth believes that the open banking concept has made positive contributions to the sector. “It has made positive contributions to WealthTech firms by providing the means for investors to share their account and transaction data with the platform or advisor they select as best suited to help them achieve positive financial outcomes. These investor-linked connections enable new WealthTech firms to develop, test and launch before establishing formal data connections with asset custodians.”

Sharing a similar positive opinion of open banking was Alex Skolar, CPO of Velexa. Skolar explained that open banking has allowed WealthTech companies to tap into customer data to provide personalized services, such as portfolio optimisation, robo-advisory, and financial planning.

He added, “Additionally, open banking enables WealthTech companies to seamlessly integrate with banks and other financial institutions, improving collaboration across the financial ecosystem. What is more, the broad spread of open banking has helped to significantly optimise the time to market in building new services in the wealth management industry.”

Another benefit open banking has brought to the sector is the ability for industry technology vendors to explore additional opportunities for innovation. “By establishing secure API frameworks, providers can now deliver the infrastructure that WealthTech companies rely on to integrate real-time, cross-bank data into their platforms, putting them in a position to serve as strategic facilitators of more connected, data-rich financial services.”

Statistics around the use of open banking suggest it is becoming a major part of the financial services market. Statista estimates that open banking transactions reached $57bn, globally, in 2023 and is expected to continue to rise. Similarly, it alleges the number of signals sent through APIs for the purpose of open banking will reach 580 billion by 2027. Looking at the UK specifically, a recent report claims 11% of Brits are regular users of open banking services.

However, not everyone is as positive about the impact of open banking. PYMNTS recently surveyed 200 financial institutions in the US, of which, nearly half believe open banking might not be a valuable proposition. The cause of this sentiment is a fear it will increase fraudulent incidents. Only 35% of the surveyed FIs felt the benefits outweigh the risks for open banking. However, the report notes that most of the smaller FIs were enthusiastic about open banking.

Fredrik Davéus, the CEO and co-founder of Kidbrooke, believes that open banking has failed to live up to the hype. “Not nearly as much as it has been hyped up to be. Serious use cases still require several aggregation providers to have a good geographical and institutional type of coverage. Open banking alone still typically supports transaction accounts although there are a few providers that offer investment and pension accounts as well.”

Hurdles for open banking

There can be a number of challenges when FIs try to implement open banking. These can include security concerns, technical challenges when integrating various data sources, and balancing various regulatory requirements that differ in each region.

Skolar added, “In the UK for example, where open banking adoption is among the highest in Europe, 72% of banks say they faced integration problems due to complex compliance requirements. On a global scale, those issues are further deepened by consumer scepticism and reluctance to share banking data. “

Davéus believes one of the biggest hurdles is the focus placed on payments. “The limitation to transaction accounts was not a good decision. It has limited the value to wealth management. Typical use cases include credit and not wealth.”

In terms of the US, Costello believes the country’s biggest hurdle is its lack of support for the wealth management space. This means the wealth industry is unable to make full use of open banking and must find other ways to utilise it.

He said, “In the current US ecosystem, the lack of a comprehensive regulatory mandate has fostered inconsistency in data providers’ willingness to deploy open banking connections, as well as to accommodate screen-scraping or other data access methods. The recently enacted Personal Financial Data Rights Rule intends to provide that regulatory mandate as well as the framework for data, technical and governance standards for this connected ecosystem. However, this first Rule only covers certain bank and credit card accounts, and the phased rollout to other covered institutions and accounts, like brokerage and workplace savings, looks to be a long way off.

“So, until investment institutions and accounts are fully incorporated into the Rule, wealth management and advisory focused data aggregators like ByAllAccounts must make use of other means to complement Open Banking, essentially filling the gaps to provide consumers and their advisors with access to the data necessary to ensure personalised, reliable, and actionable investment insights. These gaps are particularly wide for access to retirement focused accounts such as 401ks and annuities where the respective providers have regulatory and commercial barriers to enacting the Personal Financial Data Rights Rule.”

How to improve open banking’s effectiveness

While open banking is still growing, Skolar believes there are a number of ways to improve its impact. At the top of this list is a push for greater standardized data-sharing protocols and more incentives for collaboration across financial institutions.

“Making API frameworks simpler and improving consumer data rights would help build trust and encourage more users to embrace open banking. In the EU establishing strong customer authentication procedures and opening up participation for third-party providers have been made possible by legislative frameworks such as the Second Payment Services Directive (PSD2), which is a great step. Incentives for institutions to implement these frameworks would also promote consumer engagement and trust.”

For Davéus, he believes regulators should expand the scope of their open banking regulations to include investment and pension accounts.

Costello shared a similar opinion. The wealth management sector could greatly benefit from open banking, but it is being held back by regulators.

He said, “Consumers don’t differentiate their financial accounts along regulatory definitions. Their financial behaviors are typically goal-based in service to major life events, both planned and disruptive, including a safe and dignified retirement. When using WealthTech tools directly or via their advisors, they expect equal access and utility across all their financial relationships. Without uniform access, they are at risk of making sub-optimal or incorrect decisions across their planning, saving, and investing behaviors which could have lasting consequences.

“For this reason, ByAllAccounts advocates for broader application of the Consumer Financial Protection Bureau’s (CFPB) Personal Financial Data Rights Rule to all financial institutions and account types as soon as reasonably possible given the amount of coordination necessary with other agencies like the Department of Labor and the SEC.”

What can the US learn from Europe for open banking

The CFPB recently outlined open banking rules for financial institutions in the US, with larger firms having an implementation date of 2026 and smaller firms having until 2030. The rules will mandate that FIs must give customers access to their data and allow it to be shared with third-parties.

This is the initial phase of the regulation, and it will eventually expand to include more institutions and account types. However, this initial rule does not include accounts designed for investment, education and retirement, leaving a sizable gap.

Canada is on a similar path as the US. Earlier this year, the country’s government introduced open banking rules which will allow consumers to share their financial data with third-parties.

With the US and Canada following in Europe’s open banking footsteps, there are a number of things it can leverage from this to improve their implementation. For instance, Davéus believes the US should accelerate the regulation’s expansion and include wealth accounts. “Make it mandatory to include all types of accounts and make sure to create a good data standard so that the information can be interpreted effectively.”

As for Skolar, he said, “The initial challenges Europe had in creating a cohesive, customer-focused framework can be great lessons for the US and Canada to prioritise security requirements and developing a transparent API governance mechanism early on to avoid fragmentation. The example of Europe also highlights how crucial it is to focus on consumer education in order to build trust and accelerate adoption for open banking.”

Finally, Costello believes that the US and Canada would do well to study Europe’s journey to open banking through PSD2, the UK’s Open Banking regime, and Australia’s Consumer Data Right. He said, “The UK ecosystem is more interesting as it aligns well with the regulatory intentions of increased competition via data portability with strong uniform consumer protections. Key lessons learned from the UK are that a single mandated standard for data access and availability provides clarity for all members of the ecosystem but must be inclusive of all use cases.

“An important feature of Australia’s CDR is the flexible authorizations available to data recipients, especially the Trusted Advisor which considers the pre-existing compliance posture of licensed data recipients like financial advisors. While there is no “one size fits all” standard, an amalgam of the best parts of the US and Canadian commercial ecosystems, UK Open Banking and Australia’s CDR can be a solid foundation for each regime.”