4 Ways Open Banking is Set to Democratize Retail Investing for Everyone

The world of finance is evolving at a rapid pace thanks to digital transformation, and advancements in its underlying technology are set to improve the accessibility of advanced investment tools to a broader market than ever before.

This democratization of retail investing can be a powerful tool for individuals who would otherwise never have the opportunity or resources to meaningfully begin their investment journey.

Open banking is supported by an expansive network of interconnected technologies and financial ecosystems, which help to provide more personalized solutions for users. For the millions of individuals who have insufficient knowledge or access to the tools needed to begin investing meaningfully, the arrival of this transformative technology could fundamentally change their ability to reach savings goals.

With an estimated 1.4 billion individuals without access to global banking services, open banking could be a vehicle for meaningful change worldwide.

Access to open banking is set to become more imperative than ever as younger generations come to terms with an unprecedented transfer of wealth, according to Maxim Manturov, head of investment research at Freedom24.

“Millennials, the largest generation, are reshaping the economy through financial technology and changing consumer preferences,” Manturov notes. “Moreover, the upcoming generational wealth transfer of up to $80 trillion will further drive economic activity.”

The widespread democratization of investment tools with open banking will fundamentally transform how the world saves its money. With this in mind, let’s look at four ways this new financial frontier will deliver a new era of inclusivity throughout the financial sector:

1. Data-Driven Insights

Open banking helps users gain unprecedented insights into their spending thanks to the categorization of raw data.

This can help individuals categorize their outgoings into utilities, rent, outdoor dining, and non-essential subscriptions to gain unprecedented control over their habits around expenses.

Data-driven insights mean open banking technology can help users understand and optimize their outgoings. For instance, if a user identifies a frequent outgoing for bus tickets, they can use the data to determine whether they could make a saving on a monthly or annual pass. This, in turn, can help to transform the volume of cash they set aside for investing.

Deeper insights also mean that investors can better align their strategies. If you’re adopting a 50/30/20 approach to saving, better access to your expenditure means that you can ditch a one-size-fits-all approach and allocate closer to 23% or 28% of your income towards building your savings account, for example.

2. Generative AI and Personalization

The age of generative AI will also significantly enhance open banking and the democratization of investing tools.

Utilizing the rich data captured through open banking, generative AI tools can create fully customized trading strategies that are based on an individual’s risk profiles and financial goals. This can help to leverage personalized recommendations for building investments while caring for perceived risk tolerance, time horizon, ESG considerations, and other investment preferences.

This level of personalization can also help to provide automated expense management suggestions based on spending habits, such as recommendations to consolidate expenses or reduce non-essential recurring costs.

Looking further ahead, generative AI can utilize machine learning (ML) algorithms alongside open banking services to create highly accurate financial forecasts to help illustrate the true impact of recommended investment strategies in real time. Crucially, this can help individuals with little saving experience to get an accurate taste of what their financial goals could look like.

3. Unprecedented Accuracy with IoT

Developments in the cloud will empower open banking users to integrate seamlessly with the Internet of Things (IoT) to gain unprecedented accuracy in monitoring outgoings and various spending commitments.

With automation technology helping to drive interconnectivity between banking tools and smart homes, users can actively analyze their spending commitments around the house, such as their energy consumption, with open banking tools offering recommendations for switching to cheaper providers. For car owners, open banking services can consider outgoings like insurance to suggest more cost-effective plans or even amendments when gaining quotes to access the best possible deals.

This union between open banking and IoT empowers more financial services to refine their marketing strategies to deliver a level of personalization that cuts out the sales talk and instead directly offers individuals the best deals based on their smart home data.

4. Next-Generation Security

Open banking can also enhance the payment processing security measures used to keep investors safe. With vast structured and unstructured financial data flowing through interconnected apps, Open Banking APIs will be hard at work in securing sensitive information on a scale that’s never been seen before.

While we can expect to see machine learning leverage an always-on strategy in compliance monitoring across financial institutions, we’ll also see open banking pave the way for the age of Strong Customer Authentication (SCA), which will deliver multifactor authentication such as one-time passwords, biometrics, or hardware tokens to investors worldwide.

With Nasdaq and Verafin data showing that criminals stole $3.1 trillion globally due to financial crimes and illegal activities in 2023, it’s imperative that digital transformation addresses growing security risks throughout the investment sector. The implementation of SCA represents a significant step in the right direction in paving the way for unprecedented safety, as well as widespread access when it comes to investment tools.

Finance’s New Frontier

Open banking will be one of the biggest success stories of digital transformation, and its implications will be felt strongly as the great wealth transfer begins to kick into gear.

For individuals who have lacked the resources or time to meaningfully build investment strategies and financial goals, the flow of big data can help unlock fresh insights to develop sustainable savings strategies focused on the bespoke ambitions of its users.

There are millions, perhaps billions, of people worldwide whose lives could immediately improve with the investment insights and security leveraged by open finance. In democratizing investing for all, this new frontier of finance will be a resounding success in leveling the playing field when it comes to wealth management.

In short, open banking is critical in enabling digital transformation in the banking sector since it’s open banking that provides the framework for sharing. This leads to new and innovative products and services, which drive competition, increase efficiency, and improve the overall customer experience. For any bank that wants to enter the future, reach a new customer base, and innovate the banking experience, a digital transformation involving extensive use of open banking is an absolute requisite for moving forward.