The global pandemic is accelerating digital transformation in the wealth management industry, according to new research from BlackRock, driven in part by high demand for online services.
US online trading platform Robinhood reported a 10-fold increase in net deposits in March for example, while online banks across Europe have reported a 4–5x increase in new accounts and daily trades for their digital brokerage.
Demand might be high, but research from Capgemini Financial Services suggests that wealth management firms are failing their customers when it comes to user experience – 65% of investors in Europe were dissatisfied with their online experience.
With the threat of BigTechs like Google and Amazon looming large, wealth management firms, “need to strengthen their digital capabilities and bridge CX gaps to better prepare themselves for potential competition,” says Capgemini.
So how can open banking help? Savvy online investment platforms like Nutmeg, Stake and Freetrade are applying open banking infrastructure across the customer lifecycle to root out friction and transform the user experience, while significantly reducing costs.
Why open banking?
As the first challenger banks entered the market in 2015, with the drive to solve real user problems, the European Parliament passed the second Payment Services Directive, PSD2, designed to increase innovation and competition in financial services by opening up access to financial data, previously only held by banks.
PSD2, and the open banking regulations that were enacted in every EU state in 2018, enabled European fintechs to reimagine the banking experience. Most, like Monzo and Starling Bank, focused on delivering a simpler, smoother experience around the current account, or, like Chip and Plum, supported automated savings by linking a bank account and allowing the user to set goals.
Perhaps unsurprisingly, their WealthTech cousins were not far behind. To see how the likes of Nutmeg, Freetrade and Stake are leveraging open banking, let’s take four key moments – and four common painpoints – in the wealth management customer journey.
Onboarding: the moment of truth
Onboarding is the first interaction most users will have with a product, so building trust upfront with a simple, secure experience is key.
For the wealth manager, it can also mean the difference between a lost prospect and an activated user. Studies show that in financial services, 40% of consumers abandon bank applications before they’re complete.
Open banking offers a new path: investors can onboard onto a new WealthTech platform instantly and securely, linking to their primary bank account, proving account ownership and meeting KYC and AML requirements, without having to manually upload documents, or leave the app.
For wealth managers, open banking removes inefficiency in onboarding and lessens the likelihood that a customer will give up and go elsewhere. For wealth managers offering credit for investments, it also enables instant credit checks, significantly reducing risk.
Account top up: Getting money to market
Open banking offers a highly secure way for customers to transfer funds from their bank account.
If it’s the first payment that a new customer is making, there’s no need to verify account ownership again (since that’s covered in onboarding). And since funds settle instantly (unlike card payments which can take 1–3 days), customers can make more timely investment decisions.
Stake is a global brokerage app that gives users from across the world direct access to trade US stock. It now offers open banking payments to customers. As COO and co-founder, Dan Silver, comments: “Slow processing times make it difficult for people to make nimble investments, so finding a partner that could enable instant settlement was extremely important for us.”
For wealth managers who see high volumes of Apple Pay or card payments, open banking presents an opportunity to make monthly savings of c.90% on transaction costs (based on switching 200 payments a month with an average transaction value of £280 from cards to open banking, via a third party provider like TrueLayer). Since open banking payments are irrevocable, there’s also no chargeback risk or associated costs.
Meanwhile, for wealth managers who see a high volume of payment by manual bank transfer, open banking removes the headache of reconciliation, since references for open banking payments are locked.
This year, Nutmeg became one of the first wealth managers to launch open banking payments, letting its users quickly initiate a bank transfer through its app.
As Nutmeg Product Manager Charlie Masters comments: “It reduces a lengthy user flow to just a couple of taps, and delivers a simpler user experience and a faster payment into Nutmeg.
“In a world where products and services need to be delivered more securely, more quickly, and at a lower cost, open banking will have a significant role.
Investment platform Freetrade, has also integrated open banking into its platform. Adam Dodds, CEO of Freetrade, commented: “Open banking integration is an essential step on our mission to get everyone investing, allowing customers to add funds seamlessly and with confidence.”
Funding accounts could be made simpler still in the future, as API providers build on top of core open banking infrastructure to offer wallet-as-a-service propositions. With their own in-app wallet, investors would have instant access to funds for an even easier investment experience.
Account aggregation: holistic investment advice
By giving wealth managers access to investors’ financial data (with their consent), open banking allows firms to deliver more personalised investment advice.
Rather than relying on investors reporting their own income during onboarding, or asking them to upload documents to prove it, wealth managers can use open banking to find out instantly what a customer makes and when, and what they spend and when, so they can better target investment advice.
As different types of financial data, including investments and pensions, are brought into the scope of open banking in the future, wealth managers will be able to build an even more complete view of investor behaviour and risk appetite, for example looking at where else they are investing.
As well as empowering advisors, open banking can empower investors: giving them a more consolidated view of their finances, for example showing current account and savings information, alongside their investments on that particular platform.
As Nutmeg’s Charlie Masters comments: “This is a great example of transparency in financial services leading to better user outcomes.”
Withdrawing funds: An opportunity to differentiate?
It might sound counterintuitive for a wealth manager to make it easy for customers to take money out of the platform, but in a competitive market, customer preference usually wins. It takes only one wealth manager to improve its payout experience in line with customer demands, to tip the market in its favour.
While open banking infrastructure itself doesn’t support payouts, providers like TrueLayer have built on top of open banking APIs to allow instant, secure, verified Payouts to any bank account, with a simple user experience (including payouts for amounts higher than the original investment).
The good news for those working in wealth management is that you haven’t missed the boat, yet. While open banking is just starting to take hold in this industry, now is the perfect time to start investigating how it could help you reshape user experience across the customer lifecycle — and manage your costs at the same time.
Connect with me on LinkedIn or email to speak more about your open banking project.