14 August 2021

The connection between Open Finance, Personal Financial Management and Investment


Open banking data promotes customer access to Personal Financial Management (PFM) and facilitates cooperation between banks and third-party service providers

I believe you must have heard these statements: "In the future, banks will resort to Open Banking", "Banks must open up customer information", "Banks must do Banking as a Service" and so on, but at this time, the question is, what is Open Banking and what are its benefits?

Open Banking is a protocol that fosters cooperation between banks and third-party service providers by opening access to consumer data through an application programming interface (API) after obtaining the consumer’s consent to provide more personalized and diversified financial services. 

There are numerous use-cases where open banking data can be used to help different stakeholders including individuals, financial institutions, and corporates. For instance, it can be used to reduce the cost of compliance and KYC for financial institutions and for corporates it can help in modelling consumer trends and getting expenditure analytics. In this chapter, however, we would focus on how it can enhance individuals’ Personal Financial Management (PFM) and help in constructing tailored investment portfolios. 


Open banking 2Source: Freepik


Obviously, PFM is one of the major uses of Open Finance. Users can consolidate all their bank accounts, insurance, pension funds, investments and cryptocurrency wallets and gain a more comprehensive understanding of their financial health and take better decisions based on the analysis. Within PFM, budgeting would be a significant component since it could assist users to build the financial plans to achieve their targets. There are different elements which are needed to be considered while doing personal financial budgeting, including age, income, assets, liabilities etc. It is essential to combine these quantifiable factors with a users’ financial goals and explore an AI-powered approach to managing finances better. Open Finance will be an essential part for understanding users’ financial status and estimating the most appropriate strategy for their personal finance

Another important application of open finance data is in evaluating a users’ risk profile for investment purposes. As you may know, risk-adjusted portfolios range from conservative to aggressive. Open Finance could quantify the users risk preference and let the asset manager understand their risk preference and the expected return. When an asset manager gets a better estimation of the users’ preference, the risk preference evaluation assessment could be minimized, and the portfolio could be re-balanced once there are any changes in the users financial circumstances that will provide the best fit investment strategy to the users. 

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