Open banking could drive advice forward faster than anything else, although it is not without its risks
You will have heard a few people talking about open banking lately, so what is it?
Its origins are in yet another piece of European regulation – the second Payment Services Directive – and it was pushed along heavily in the UK by the Competition and Markets Authority.
It brings in a set of rules that mean the nine biggest banks must open up account information to third parties. Others are now following suit.
While the individual controls who can use and manipulate this data, it does present a huge number of opportunities for advice.
Here are a few obvious ones that occurred to me:
1. Pre-filled cashflow models
Filling in an income and expenditure form for a cashflow model is a boring, time-consuming process, which results in a work of pure fiction. Assets and liabilities are far more exciting and precise.
When you gather data via open banking, as with the current, soon-to-be-defunct screenscraping solutions, you get 12 months of honest history straight away.
Using this to pre-populate a cashflow model makes the experience much more pleasant for adviser and client alike.
It could and should drive down the cost of obtaining a model for people with relatively few assets and one or two big fat liabilities, such as a mortgage or credit card debt, who are happy to fill in the details themselves.
Simple cashflow modelling of a sort could be brought to the masses. Basic, automated advice on budgeting and cash management will undoubtedly become more common.
2. Capacity for loss
This is still a problem for advisers. With reliable income and expenditure figures available, it should be possible to overlay the recommended portfolio on top of the client’s income requirement to establish what sort of market downturn would impact on their normal expenditure.
We do not know what is coming, but we can use history to make an informed judgement about how likely a 30 per cent downturn is, how long it might last and whether it would mean one less foreign holiday a year, or supermarket own-brand beans on toast for six months. I am aware of one tech provider currently working on a suitability tool that will combine all of this with more conventional attitude-to-risk questions.
If successful, it should solve a whole lot of problems, with a lot less work required by the adviser.
3. Income management
I like the idea of keeping two years’ worth of income in cash to draw down on when markets dip, and avoid reverse pound cost averaging.
It allows me to have a higher amount of equity exposure and avoid paying for expensive and often useless “guarantees” that are a drag on performance when they are not needed.
The problem is the amount of work required for an adviser to manage this type of solution, given the limited visibility they have over a client’s cash position.
Open banking would offer that visibility without having to invest in cash on a platform and face the punitive costs this incurs.
I suspect that, at some point, an algorithm could be written to switch the client from taking income from the portfolio to taking it from the cash account, which would then be slowly topped up again as markets recover.
This type of technology would also give platforms a new sense of purpose.
4. Personalised illustrations and information
Holding a lot of data about someone’s spending habits and the income they need is a risk, but it could make the information we send to them far more interesting. An automatically generated but highly personalised illustration, which told someone they needed to invest an additional £150 per month into their pension to have enough money to spend at the same rate they do now when they retire, would be far more meaningful than the useless information which plops on to doormats at the moment.
Personalised video has already been trialled with employees in workplace pension schemes and the results are very encouraging.
They are light years ahead of standard pension illustrations, and they drive action.
All of that said, there is a real danger that big data – of which open banking is now a significant part – will create greater financial exclusion.
Wearable apps already concern me, because the amount of data sent to medical and health insurers will not only reduce the availability of cover for those who need it most, but will probably invalidate much of the cover already in place in years to come.
Those who have never lied about how much exercise they do, or alcohol they consume, may argue otherwise, but these are issues the FCA and the government need to think carefully about.
In the meantime, the availability of data marches on. It is likely to spawn new products, services and technology, and will undoubtedly cut across advice at some point in time.
Phil Young is managing director of Zero Support