In the evolving landscape of the financial sector, the emergence of open banking practices has become a game-changer. Financial advisers, in particular, find themselves at the forefront of a revolutionary shift that brings both challenges and unprecedented opportunities.
Let’s explore the vast opportunities that open banking presents for financial advice firms and how embracing this trend can elevate their practice.
A boundless financial world
What is open banking?
Open banking refers to the financial services practice of allowing third parties to get access to consumer banking, transactions, and other financial data through the use of application programming interfaces (APIs).
This collaborative model is the first sector of the Consumer Data Right (CDR), which is designed to be economy-wide, promoting enhanced financial transparency, third-party provider innovation, and improved customer experience.
The Consumer Data Right was introduced in the banking sector first – hence the name “Open Banking” and any individual or business whose specified data is held by a Data Holder is an “eligible consumer”.
Rise of open banking in the financial industry
The financial industry has witnessed a significant rise in open banking initiatives globally, driven by changing consumer expectations, and technological advancements, particularly in Artificial Intelligence (AI) and Machine Learning (ML).
As these cutting-edge technologies continue to mature, financial institutions worldwide are accelerating their adoption to revolutionise the way they operate, giving way to a more interconnected and value-driven approach.
Understanding Open Banking
Core Concepts and Principles
To fully grasp the opportunities presented by open banking, it’s essential to understand the core concepts and principles that underpin this model.
At its core, open banking is a shift toward a more competitive banking model, emphasizing flexibility and collaboration as a catalyst for customer-centric innovation.
The bedrock concept lies in dismantling the barriers that have historically segregated financial institutions, through the adoption of standardised APIs, enabling secure and efficient data exchange among a diverse set of players.
The ethos of open banking revolves around transparency, encouraging financial institutions to share information while adhering to rigorous security standards. Interconnectedness becomes the linchpin, allowing for a more fluid movement of financial data, and fostering an environment where banks, fintech innovators, and third-party providers can collectively shape the future of consumer finance.
Practically, this transparency empowers consumer choice. With access to their data to compare offerings across various financial products, Open Banking strives to remove the barriers that have historically left consumers in a dissatisfied relationship with financial institutions, fearful of the cumbersome process of change.
How open banking works
Open banking is a carefully orchestrated process that reshapes the relationship between financial institutions, consumers, and third parties. Here are the mechanics behind these practices:
1. Consumer consent:
The cornerstone of open banking lies in getting explicit consent from consumers for data access through third-party applications. What sets it apart is the emphasis on ” consent,” granting consumers the flexibility to revoke access based on changing attitudes or external events.
2.Identity Verification:
Consumers play an active role in ensuring the security of sensitive information by verifying their identity on the web before sharing data with chosen third parties, creating a robust layer of protection.
3.Data Sharing Confirmation:
Before any information is shared, the bank confirms details directly with the consumer, covering aspects such as what data will be shared, the purpose, and the duration of access.
4.Data Transfer and Usage:
Utilising APIs, consumer’s data is securely transferred to third parties for processing.
Challenges Addressed by Open Banking
Security
One of the primary consumer concerns with data sharing is security. As financial institutions embrace the interconnected landscape, the responsibility to safeguard sensitive information becomes even more critical.
As an adviser, you are entrusted with the protection of your client’s financial data, making it imperative to address these security concerns diligently. Robust security measures, including advanced encryption protocols, must be seamlessly integrated into the operating framework. These security measures should be naturally integrated into most open-banking financial management tools, again, like Moneysoft.
By using open-banking tools and ensuring strict compliance with data protection regulations, you can create a secure environment where clients can confidently engage with your services.
Regulatory framework for data sharing
The Australian Government has established the Consumer Data Standard (CDS guidelines) to empower Australians with greater control over their data as part of the Consumer Data Right legislation.
These guidelines encompass various aspects, including general standards, security profiles, consumer experience, banking, administration, common APIs, schemas, known issues, and non-functional requirements.
Some standards are legally binding under the Competition and Consumer Data Standards, while others serve as guidance without mandatory obligations. Furthermore, technology providers and financial third parties must adhere to prescribed security guidelines, giving consumers confidence that any participants in the data-sharing economy are governed by a robust regulatory framework.
Opportunities for Financial Advisers
Streamlined Financial Planning
Real-time access to financial data is a game-changer for financial advisers seeking to streamline the financial planning process. Open banking acts as a catalyst, facilitating the seamless integration of various financial elements—accounts, investments, and other instruments. This integration not only expedites the data-gathering process but also enables advisors to provide comprehensive and up-to-date advice.
The result is a financial planning experience marked by precision, agility, and a forward-looking approach, offering a growing competitive advantage for the company.
Enhanced Customer Insights
Open banking is about putting consumers at the centre, and its practice unfolds a treasure trove of customer financial data for financial advisors.
This unprecedented access transcends traditional boundaries, granting advisers deep insights into the intricacies of their client’s financial lives. With a holistic understanding of spending patterns, investment behaviours, and overarching financial goals, advisors can now curate more personalised and impactful advice.
Growing your client base
Embracing open banking presents a golden opportunity for financial advisers to expand their client base strategically. The enriched customer insights derived from open banking tools provide a solid foundation for targeted outreach and client acquisition strategies. Armed with a deeper understanding of client needs and behaviours, you can tailor your services to appeal to a broader audience.
As open banking fosters a more connected and engaged client-adviser relationship, satisfied clients become ambassadors for the advisory practice, further contributing to organic growth. This not only attracts new clients but also helps you stand apart with distinctive services and an outcome focus.
Scaled operations
Gathering and analysing data takes time and energy. The scalability afforded by open banking is a transformative aspect for advisers seeking to expand their operations. Because streamlined processes and efficient data integration are inherent in open banking, it enables advisers to handle a larger volume of clients and transactions without a proportional increase in operational complexity.
Whether it’s managing diverse investment portfolios or providing personalised financial planning, automation plays also a pivotal role, allowing advisors to save time on their services without compromising on quality.
How Can Financial Advisers Implement Open Banking Today?
Best Practices in Adopting Open Banking Strategies
As the financial services landscape undergoes a seismic shift towards open banking, the imperative for financial advisors to embrace this evolution has never been more urgent.
Adopting open banking services demands a meticulous approach. We described this process in our previous article; Navigating a sea of tools to find effective solutions. Although defining the expected business and client outcome is pivotal, staying abreast of the ever-changing regulatory landscape is equally crucial to ensure your strategies aligns with evolving standards.
In a realm defined by dynamism, continuous monitoring and adaptation are key, demanding a culture of perpetual vigilance to stay ahead of industry changes. Transparent communication with clients, along with comprehensive employee training, are integral elements of this strategic shift.
As the heartbeat of the financial industry accelerates, financial advisors must embrace change in the adoption of open banking strategies.
This isn’t merely a choice; it’s an imperative to secure their position at the vanguard of innovation, delivering clients cutting-edge, secure, and compliant financial services.
Moneysoft has long been at the forefront of Open Banking championing transparency, consumer choice and a more outcome focused adviser-client relationship. Moneysoft is a Representative of Envestnet Yodlee, the Accredited Data Recipient, meaning it is perfectly placed to act as your immediate solution to leveraging the Open Banking revolution. To start a free trial, and your journey with Open Banking click here.
