How Open Banking is Transforming WealthTech: Insights, Challenges, and Future Directions
Open banking has been a buzzword in the financial ecosystem for nearly a decade. Introduced in the EU through the Revised Payment Services Directive (PSD2) in 2015, its goal was to foster competition, enable new payment services, and empower consumers to share their banking data with third-party providers (TPPs), as outlined in Fintech Global News. But has it lived up to its potential, particularly in WealthTech?
Open banking started as an EU initiative but quickly gained global traction. Countries like Australia, Nigeria, Brazil, Bahrain, Singapore, and Japan adopted similar frameworks. Even the US and Canada are on the brink of implementation, poised to join the ranks with regulatory frameworks under development. Despite its widespread adoption, the focus often remains on payment solutions, overlooking significant opportunities in wealth management.
In WealthTech, open banking promises to revolutionize personalized investing, enabling financial advisors to streamline data collection, provide clearer financial insights, and expand access to high-quality advisory services to a broader clientele.
Brian Costello, Head of ByAllAccounts Data Aggregation Strategy and Governance at Morningstar Wealth, acknowledges open banking’s contributions. “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.”
Alex Skolar, CPO of Velexa, also highlights open banking’s role in fostering personalized services like portfolio optimization, robo-advisory, and financial planning. “Open banking enables WealthTech companies to seamlessly integrate with banks and other financial institutions, improving collaboration across the financial ecosystem,” he said.
The global financial services market reflects open banking’s growth. According to Statista, open banking transactions reached $57 billion in 2023 and are projected to climb further, with 580 billion API signals anticipated by 2027.
However, the journey hasn’t been without hurdles. Security concerns, technical integration issues, and region-specific regulatory complexities often stall progress. A survey by PYMNTS found that nearly half of 200 US financial institutions viewed open banking with skepticism, fearing increased fraud risks.
Fredrik Davéus, CEO of Kidbrooke, critiques the limited focus on transaction accounts, saying, “Serious use cases still require several aggregation providers for good geographical and institutional coverage. The limitation to transaction accounts has stifled its value to wealth management.”
In the US, the lack of a comprehensive regulatory mandate further complicates open banking adoption. Costello explained, “Until investment institutions and accounts are fully incorporated, WealthTech must find other ways to complement open banking, essentially filling the gaps to provide consumers and their advisors with necessary data.”
As North America prepares to adopt open banking, it can draw lessons from Europe’s PSD2, the UK’s Open Banking regime, and Australia’s Consumer Data Right (CDR).
Costello underscores the value of the UK model: “Key lessons learned from the UK are that a single mandated standard for data access and availability provides clarity but must be inclusive of all use cases.”
Davéus recommends accelerating regulations to include all account types and creating robust data standards for seamless interpretation. Similarly, Skolar emphasizes prioritizing security requirements and consumer education to build trust and accelerate adoption.
For open banking to reach its full potential in WealthTech, experts agree on key improvements:
- Broader Scope: Regulators should include investment and pension accounts to maximize wealth management benefits.
- Standardized Protocols: Simplifying API frameworks and establishing global data-sharing standards will reduce integration hurdles.
- Enhanced Consumer Rights: Strong authentication and consumer data rights are critical to building trust.
As Skolar aptly put it, “Incentives for institutions to implement these frameworks would also promote consumer engagement and trust.”
Open banking has undoubtedly reshaped the financial ecosystem, and WealthTech stands to benefit even more with targeted improvements. By learning from global pioneers and addressing current limitations, it can drive innovation, personalization, and accessibility in wealth management.