How open banking has become critical to everyday investors

Retail investment has changed the trading landscape in Europe. Investment platforms such as Freetrade, Trading212 and eToro are now household names, opening up the stock market and other asset classes to the masses. 

And those masses are becoming increasingly choosy about who they trust their money with. The online investing experience matters more than ever, namely how easy it is to open an account, deposit funds and withdraw returns, as our research shows.

The old ways of moving money — card payments, manual bank transfers, direct debit mandates — no longer meet retail investors’ expectations for an undemanding, fast and inexpensive journey. Investment platforms that continue to rely on these methods risk disappointing their customers and failing to convert prospects. 

“Wealthtechs have put incumbents under pressure by appealing to retail investors,” says Henry Lee, Wealth Growth Lead at TrueLayer. “Traditional investment platforms will have a hard time doing that if they still rely on debit cards and manual bank transfers.”

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Wealthtechs have put incumbents under pressure by appealing to retail investors. Traditional investment platforms will have a hard time doing that if they still rely on debit cards and manual bank transfers. The needs of the market are changing, and this demographic shift is compounded by a generational shift.

Henry Lee, Wealth Lead - Growth

Conversely, the speed, ease and security of using open banking offers an opportunity for retail investment platforms — and wealth management providers more generally — to differentiate and drive customer loyalty. By removing friction from the payments experience (both ‘pay-ins’ and ‘payouts’), a retail investor gets their money where they need it, when they need it, letting the investment platform focus on its core offering. 

“Open banking rebalances the digital playing field,” Lee notes. “It provides an opportunity to enhance client experiences for retail and mass affluent investors alike.”

An elegant, intuitive experience is even more important as a younger cohort of retail investors enters the market. For example, Hargreaves Lansdown, a large UK-based asset management firm, has seen the average age of its customers fall from 58 to 46 over the past 15 years. 

“The needs of the market are changing, and this demographic shift is compounded by a generational shift,” Lee adds. 

More tech savvy, digitally literate and device agnostic, this new breed of investor expects the same online convenience they get from everyday banking apps, ecommerce, and social media. Yet our research found that slow onboarding and deposits can frustrate investors. Open banking has the potential to turn the tides.

The trust factor

As open banking fixes the problems of cumbersome onboarding and slow moving money, it also inspires trust. Whereas identity checks and account verification bogged down traditional finance, open banking integrates those processes far more smoothly. The result: customers get a far better experience whilst remaining confident their personal information is securely handled.

The instantaneous nature of open banking ensures no frustrating or nervous wait for money leaving the banking system to appear on the investment platform (and vice-versa) to be put to work. Freed from fulfilling these tasks manually and reconciling payments, the provider can prioritise the customer experience. In other words, both parties can overcome faceless financial systems to build better relationships.

Open banking even makes the very nature of a payment more empathetic. As the process becomes more invisible, it begins to feel less like a payment and more like the simple process of transferring funds from one account to another. In turn, that changes the dynamics between investor and asset manager — from the transactionality of payer and payee to the partnership of depositor and custodian.

More flexible and personalised payments

These benefits become more pronounced when payments are made on a recurring basis. Variable Recurring Payments (VRP) is a new frontier for open banking, and allows wealth management platforms to take routine payments, even of variable amounts, without the customer having to authorise each one. 

Recurring payments provide their consent for an open banking processor, such as TrueLayer, to make payments on their behalf, according to a set of rules they have created. They push payments further into the background, and bring the investor experience to the fore.

Liberating and leveraging data

Data deepens the effectiveness of that relationship. In open banking, information is liberated and leveraged to guide investors to the most appropriate products for them. In traditional investing, such personalised advice comes at a premium; but with open banking, it’s more accessible to retail investors. 

As the worlds of open banking and open finance start to merge, that advice will be enriched with insights about customers’ insurance premiums and claims, mortgage and loan liabilities, pension policies and benefits, and other financial data points. In this hyper-personalised and holistic environment, investors will not have to worry that the unconscious biases of researchers, analysts and wealth managers creep into the advice they receive. 

Opening more opportunities 

Things don’t stop here, though. Open banking pioneers foresee a time when open banking moves not only money and data, but also assets. 

Today, transferring assets between brokerage platforms is a relatively difficult, lengthy and expensive exercise. Applying open banking protocols makes things easier. Investors will be able to select different wealth managers for different asset classes, injecting choice, control and competition into the market. 

A few steps beyond that and you arrive at the concept of ‘self-driving money’, where open banking is infused with AI. Funds automatically move from a bank account or through the sale of assets to higher performing or more appropriate investments.  

These predictions aren’t fanciful. Open banking technology is already ushering in a revolution in retail investing. Within the next five years, these advances will serve as the foundation for new financial instruments that will be integral to traders’ everyday lives.