Some might assume open banking will not affect anyone providing life insurance advice. F&TRC's Ian Mckenna believes this could not be further from the truth
Open banking is the process through which banks are being forced, by the European Union Payment Services Directive, to provide a level of information to parties that their customers have chosen to trust.
Banks have fought to retain this privilege within their own exclusive domain for years.
They have also long had the ability to provide customers with a far better insight into their day-to-day spending, but have chosen not to because it suits their commercial objectives.
Ideally banks want the customers to run out of money just before the end of the month, so they buy their expensive credit products.
Conversely financial advisers and insurance companies need to make sure clients have a surplus of monthly income over expenditure otherwise they will not be able to afford their regular insurance premiums and savings contributions.
Personal financial management
All banks must have the APIs, the technical mechanism through which the data will be shared, available by September 2019, although the nine largest banks, who are required by the Competition and Markets Authority must make theirs available by April 2018.
In the months ahead, open banking services will replace what previously were known as ‘personal financial management' tools.
These take the customer's banking and credit card transactions and provide them with a far more comprehensive view of how they are spending their money.
Many more sophisticated PFM services can monitor consumers' regular and one-off expenditure and give advanced warning if a customer might run out of money in their current account, so incur overdraft and other fees.
It has been possible for banks to provide information to customers in this format for well over a decade, yet almost without exception they have chosen not to. Why? Banks make a lot of money from these excessive fees.
In our recent study, Making Savings Affordable, F&TRC has explored techniques already being used around the world to help consumers budget better, reduce their banking costs and be able to make life insurance and savings more affordable.
Open banking presents an enormous opportunity for advisers to help clients manage their day-to-day finances so they can budget far more effectively.
An increasing number of PFM apps use machine learning and artificial intelligence to identify every few days the capacity that a customer might have to save a few extra pounds.
The service will typically notify the user that they will be moving an amount in a few days' time from the client's current account to a segregated savings account.
At this point the user has the option to stop the payment or do nothing in which case the money will be transferred.
In one recent example in Canada, users on average reduced their expenditure by between 4% and 8% per month simply because they were being given more accurate information on their spending patterns.
So far, most of the services have moved the savings amounts into separate deposit accounts although some are now moving the money into investment.
We see a significant opportunity to help customers budget for protection products in similar ways.
For mortgage advisers the increased accessibility to banking data should substantially reduce the time taken by affordability checks by using far more comprehensive data from not only consumers' bank statements but also their credit card and other credit providers.
This will allow mortgage applicants to grant permission to a new range of far more sophisticated mortgage sourcing tools to access their open banking data, in advance of meeting with their advisers.
Far more accurate affordability checks can then be carried out before the client meets with the adviser.
This can reclaim much of the time to explore other options, such as protection, which was when mortgage interviews became dramatically extended post-MMR.
Open banking services can also help obtain and maintain the consents necessary under GDPR to contact clients.
Providing insight on their day-to-day financial lives is something they are far more likely to grant consent for than traditional marketing e-mails.
I believe advisers can demonstrate to clients that they are far better people to trust with providing objective insights into their budgets than their banks.
A number of adviser software suppliers already offer personal financial management tools which will evolve into open banking services as the additional data becomes available.
Intelliflo and True Potential already have these built in to the client portal elements of their practice management systems.
Where an adviser's main software supplier does not include these options firms like Money Hub Enterprise and Moneyinfo are making standalone solutions available.
Moneyhub have been actively involved in the Open Banking Steering Group so have some particularly useful insights on this subject.
Threat to advisers
Banks are working to include details of a customer's life insurance, pensions and other savings products within their open banking services.
In doing so they will exercise letters of authority to obtain servicing rights, potentially taking the adviser's client away.
Personal financial management tools are very successful at achieving regular customer engagement.
Barclays told me some years ago that when they first rolled out their PFM service to their ‘premier' customers they found that customers who had previously only used online banking twice a month, where accessing the PFM service every other day.
As banks prepare to use open banking as the platform on which to build their next attempts to dominate the financial advice market, I believe it is important for all advice firms to be putting in place their own services for clients to ensure the relationship building opportunity remains with the adviser.
Ian McKenna is director of Finance & Technology Research Centre
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