The US Prepares for the Open Banking Revolution: A Game-Changer for Wealth Managers

The Consumer Financial Protection Bureau (CFPB) has proposed significant changes to personal financial data rights in the United States, paving the way for the potential introduction of open banking practices, according to Fintech Global. As enthusiasm grows within the country’s financial sector for this development, the question arises: why should wealth managers take a keen interest in open banking?

Open banking is a concept that facilitates third-party financial services’ access to consumer-permissioned financial data from both banks and non-bank financial institutions through Application Programming Interfaces (APIs). Its primary objective is to empower consumers with greater control over their financial information and to offer them more personalized financial services. The European Union led the way in embracing open banking in 2015, with numerous countries, including the U.K., Hong Kong, Australia, Singapore, Brazil, Nigeria, and Turkey, following suit with their own regulations. The open banking market is poised for substantial growth in the coming decade, bolstered by the regulatory certainty offered by the CFPB’s rulemaking. In 2022, the global open banking market was valued at $20 billion, with projections indicating it could reach $122 billion by 2032.

While much attention has been focused on open banking’s potential to streamline payments, its impact on wealth management is equally significant. This is particularly pertinent as more retail investors seek personalized engagement to enhance their investment returns, a demand that has surged in the digital age, previously reserved for wealthier clients.

Brian Costello, Head of Data Strategy and Governance at ByAllAccounts, Morningstar Wealth, emphasized that financial advisors across various domains require comprehensive insights into a client’s financial history, current situation, and future projections to offer personalized, effective, and compliant advice. Traditionally, advisors had to sift through printed statements and gather information, but technological advancements have made data more accessible. Open banking further expedites this process, allowing advisors to allocate more time to portfolio curation.

Costello stated, «Open banking is essential for wealth management activities to empower these professionals to deliver personalized, timely, and scalable advice.»

The crucial question is why firms, especially wealth management firms, should care about open banking and its growing influence. Costello explained, «Wealth management firms should care about open banking because it is essential to their operations. Done right, it will greatly improve their business operations and advisory services. Financial data aggregators enable clients to safely provide their advisors with secure access to data about accounts that are not under the advisor’s management—giving advisors a complete view of the client’s financial situation.»

One of the driving forces behind open banking adoption is the need to meet consumer expectations. Consumers not only demand personalized services but are also willing to pay extra for them. A report from Refinitiv revealed that 64% of millennials and 51% of investors aged 35 to 54 are willing to pay more for personalized investing products and services.

Open banking plays a pivotal role in delivering personalized and timely advice. It allows for a deeper understanding of a client’s financial health and preferences, moving beyond traditional demographic-based financial profiles. Additionally, it provides advisors with insights into the impact of their recommendations on client portfolios and goals, enabling them to suggest necessary strategy adjustments.

However, gaining access to open banking data is just the beginning. The complexity of investment products and data flows necessitates in-depth expertise to normalize and enrich the data effectively. This process is crucial for providing personalized financial guidance and servicing complex back-office reporting systems.

Costello highlighted the varying degrees of adoption among wealth management firms and advisors when it comes to open banking. Many are still in the early stages of their open banking journey.

While the United States, with its substantial economy and leading FinTech sector, might be expected to have open banking standards in place, it has lagged behind. This is set to change with the anticipated launch of the Dodd-Frank Section 1033 Rule in 2024, granting consumers the right to share their financial data with third parties.

Despite welcoming the CFPB’s actions, Costello expressed caution about whether these guidelines would adequately support the investment data ecosystem. He noted that the initial rule does not encompass accounts designed for investment, education, and retirement, leaving a significant gap.

Costello also emphasized the need for the CFPB to explicitly define «consumer» to include legally appointed advisors and agents for relevant use cases. Existing data sharing consent mechanisms primarily cater to sole account owners, whereas the financial ecosystem is far more complex, with joint accounts, guardianship arrangements, and retirement planning. Regulations and standards must account for the rights and needs of all US consumers, not just individual account holders.

Looking globally, many countries are either developing or considering open banking frameworks. Given the opportunities it presents, the question arises whether a global standard should be established to facilitate widespread adoption.

Costello pointed out that global financial standards could be beneficial for cross-border payments, asset transfers, fraud detection, and enforcement. However, he expressed reservations about applying a global standard to open banking, which primarily serves consumers. Instead, he advocated for a global standard for open banking interoperability to ensure safeguards for all stakeholders.

The US is on the brink of embracing the open banking revolution, presenting wealth managers with a transformative opportunity to enhance their operations and advisory services. As the financial industry evolves to meet consumer demands for personalization, open banking is poised to play a central role in driving the sector forward. While challenges and complexities remain, the potential benefits for both consumers and financial institutions are substantial, making open banking a trend worth watching closely.