Adrian Boulding: The pensions digital future has started

'Open banking' could mark the start of a new era of digital financial transparency that will impact every corner of personal finances from retirement savings to life assurance and beyond, predicts Adrian Boulding

On 13 January 2018, ‘open banking’ went live in the UK, underpinned and indeed required by the EU’s second Payment Services Directive – or ‘PSD2′. So what, I hear you ask, is open banking and what should it mean to consumers and financial advisers?

Open banking is a framework of standards and protocols that has been thrashed out by the Open Data Institute on behalf of HM Treasury to enable specified data to be sent between banks and FCA-regulated third parties – and all authorised by customers themselves.

Right now, it is limited to demanding that our nine largest high street banks open up data connected to customer current accounts. That data is limited to simple banking records, including location of branches and exact details of current account banking products. Within the next two years, credit cards and other products will be added.

Granted, this may not sound very revolutionary from day one – and yet what open banking enables is more seismic when you take a longer view. Open banking is also a framework for enabling customers to share their personal transaction data safely with other banks and authorised third parties via open ‘application programming ‘nterfaces’ (APIs). The General Data Protection Regulation (GDPR), which takes effect on 25 May this year, adds the other key set of personal data safeguards.

Once banks have made available details of all their different personal and business current and savings accounts, it becomes easier for customers to shop around for the best deals – potentially using personally-authorised third-party firms to automatically switch accounts to optimise returns. Starting to feel like MoneySupermarket for all banking products? You are not far off – it certainly creates scope for a much more open marketplace in banking.

But open banking goes much further than its ‘shopping around’ benefits. It makes it possible for the vast and rich quantities of account transaction data to be shared, again once permissions are granted by the customer. This data will cover everything we spend, lend and borrow – from electricity bills to mortgage payments, to what I spend on coffee in my local Starbucks in an average month.

Open banking makes it possible to share that data with third parties with a view to them tailoring financial products to meet our specific needs. It could help solve the ‘thin file’ problem, whereby millions of people are unable to obtain a mortgage because they simply do not have enough credit history for current credit rating agencies to provide a good enough credit score to secure a mortgage.

It should also make it a good deal easier for the nearly seven million people who are either self-employed (five million) or gig economy workers – many of whom currently struggle to obtain mortgages without several years of solid management accounts now that ‘self-cert’ mortgages have disappeared.

The benefits do not stop there. Open banking also enables direct payments from bank accounts. So, if we are paying for goods online we will not need to be connected to our PayPal, linked to a VISA or other debit or credit card provider and keep all card details up-to-date and passwords to hand. We will be able to authenticate ourselves more easily and then buy goods and services direct using specified bank accounts.

In the future, it is entirely conceivable we will be able to do our banking with digital-only banks who will manage our money automatically via intelligent software. Excess funds sitting in low-interest current accounts will be automatically flipped to higher-interest savings accounts at our behest. Excess there might be judiciously moved over to your Stocks & Shares ISA and then dynamically invested in the best-performing funds in a pre-selected list that matches your risk profile.

I have already signed up for one of the new apps that is in trial form, available to just a limited number of early adopter customers, to investigate the potential of open banking. So far, I have managed to open a savings account with a new bank I have never dealt with before, without having to make any contact with that bank or provide it with any of that annoying evidence of identity. My open banking app did all that for me!

Translated to retirement

But how does this open banking vision translate into the retirement planning world?  Perhaps it starts with the centralised pensions dashboard. The latest soundings from Guy Opperman at the Department for Work & Pensions are that there will be one single, standards-driven platform that all providers will – eventually – be compelled to provide a feed into, so you can see your pot – whichever institution it is with – on the dashboard.

Once would-be and actual retirees and their chosen advisers’ can – hopefully – take a closer look at their array of retirement savings pots online, you pretty quickly build up a more holistic picture of the true retirement savings wealth position and likely income levels once fully-retired. Using this view, decisions can be made to work on a few more years, consolidate pots to reduce the effect of charges and/or select higher-performing investment funds to boost returns.

What if we could go one step further, however – perhaps using a new FCA-authorised fintech software player to automate retirement savings accumulation, using your risk profile and other pre-set parameters and preferences, with a view to optimising savings levels, while hedging against currency and other trading fluctuations?

And this digital pensions future does not necessarily spell bad news for advisers. They may well be involved in setting those retirement objectives upfront and defining parameters and risk profiles in discussion with their clients.

They could be authorised to override automated choices when they look to be straying from targets set. Alternatively, during low engagement phases up to five years before retirement, both parties might agree to run on ‘autopilot’, with the option to take back control of the tiller if either party spots an opportunity or a discrepancy.

Once in decumulation, optimised automation could again work well. We are already seeing a move towards phased annuity purchase, with customers securing slices of guaranteed income as they progress through the first decade of retirement.

In an open banking-type environment, an app could watch the annuity market daily and optimise the timing of each slice of annuity purchase to a point where drawdown funds have grown on rising markets and annuity rates have also improved. It would be rather like setting a limit order with a stockbroker today – except that it could be used to access all annuity offers easily and quickly for the ultimate ‘open market option’ experience online.

For those using income drawdown, meanwhile, automation could invert the way things currently run. Generally, income drawdown plans require the customer to specify the monthly withdrawal, and then offer annual reviews of the plan, which could come too late if markets have been dropping rapidly.

Instead, it would be possible to pre-set an acceptable probability of running out of funds, and then let the app adjust the income each month to fit with that probability. You can choose to run with that recommendation – via an alert to your mobile, of course – or override if you have already booked that round-the-world cruise or home improvement and now need to pay for it.

‘Automatic for the people’

So the vision is ‘Automatic for the people’ – but with the transparency needed and functionality at your fingertips to take back control should you want to. This would seem to be a promising digital pensions future and, thankfully, not one that demands disintermediation of all-too valuable financial advisers. After all, it is important to keep an expert eye on what the machines are producing.

Finally, we must expect the big banks, having been the first into open banking, will seek to branch out from simple interest-bearing accounts into other areas where the same open approach can deliver customer benefits. They will most likely offer simple mass-market or robo-advice offerings initially.

The key for those offering a genuine advice service to high net worth clients, however, will be to capture the advantages automation can bring their clients, while at the same time providing a personalised oversight of the whole process.

Adrian Boulding is director of retirement strategy at Dunstan Thomas