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Transforming your financial future through micro-investments

Samantha Seaton, CEO Moneyhub Enterprise discusses how PSD2 legislation has opened banking and empowered businesses to take advantage of emerging technologies.

The UK financial landscape has been transformed over the last few years. Widespread adoption of digital technology has enabled banks and other financial services providers to integrate themselves into our daily routine, with access to our savings possible through our smartphones at the touch of a screen. But, despite the ease with which people are able to access their finances, there is little evidence to suggest that the UK is doing enough to close the savings gap. Open Banking could make this challenge significantly more achievable.

Those toward the start of their careers can no longer rely on the safety net of the State Pension, and yet the data shows that people are still saving significantly less than needed. In 2017, the Lifetime Savings Challenge Report 2017, compiled by Close Brothers and the Pension and Lifetime Savings Association (PLSA), revealed that a third (33%) of UK employees were saving less than £50 a month, with one in five (20%) not saving anything at all. The issue is one disproportionately faced by women, whose savings and pension pots are on average notably lower than their male counterparts. A recent report from the Pensions Policy Institute revealed that most damage to women’s pension wealth is done while in their thirties – the general age when women are taking time off work to care for their families. This is further highlighted by research from the Chartered Insurance Institute which showed that women have an average defined contribution pension pot of just one fifth the size of a 65-year-old man.

There’s no quick fix. But there are solutions. Saving ‘little and often’ is a mantra often repeated to those struggling to put something aside each month, but even this can seem like a bit of an up-hill task. That’s where money management platforms are able to play a key role.

Firstly, they help users get to grips with their finances. Powered by open banking, users are able to see a single picture of their financial world, rather than having to piece together fragments. Not only does this reduce needless and paperwork, but it also enables the effortless tracking of their expenditure. Having this level of oversight empowers them to make smarter money decisions, and clearly see how they can make their money work harder.

What can really make an extra difference is the incorporation of AI and smart nudges. These hyper-personalised nudges can be surfaced at key points of financial decision-making. For example, a user might use Loan to Value ratio nudge to alert when deals not previously available can be considered, or a Micro Saving nudge can be generated if utility bills are lower than normal or if the weekly shop costs less than normal. Such in-day savings prompts feel less of a wrench than finding money at the start or end of the month and over the course of time can start to build up a solid investment or savings pot.

The additional level of insight available through open banking also means that the money that users are able to put aside can be put to work in a more streamlined and targeted manners. Whether it be through a robo-adviser or a financial adviser, it’s now possible for them to be granted access to a much wider view of a customer’s finances.

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For those struggling to save, robo-advice is a more likely choice. But historically, these digital advice models are remarkably fallible to human error. The majority require a new user to fill in a questionnaire when they sign up, and the answers to the questions will inform what the algorithm recommends. However, if a user submits incorrect data, omits some details, or is simply not asked about a particular aspect of their finances, the algorithm could deliver a misdiagnosed recommendation.

Open banking can transform this process, using open banking APIs to legally aggregate a customer’s data. This means that the algorithms used to generate investment recommendation could access a much wider data set that includes credit cards and bank accounts, and generating far more accurate and effective personalised advice and recommendations, while saving customers from spending hours on fact finding.

If granted rolling or recurring access, the robo-advisers can then continue to offer guidance, support and nudges to help customers maximise their unique circumstances in relation to their investment returns and their money more generally.

Whether it’s through embracing online banking, being able to track our spending or investments through apps, or the increasing prevalence of contactless cards, technology is transforming the way we interact with our finances.  The true potential of Open Banking is still some distance away from its potential being fully realised, but it is already showing signs that it can play a pivotal role in closing the UK savings gap.

For more information on all topics for FinTech, please take a look at the latest edition of FinTech magazine.

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