By Daniel Trias, DT Consultores
Latin America and The Caribbean - Where we are today and how to move forward
Open banking is a new concept which proposes a synergy between financial institutions and fintech.
In Latin America and the Caribbean (LAC), the introduction of open banking is still slow. In most LAC countries, banks still have exclusive relationships with their customers, whose data is kept strictly within those institutions. Open banking creates the possibility for clients to let financial institutions share their data, generating enormous opportunities and true cultural challenges. Different countries progress at different rates regarding open banking, with the main differences concerning regulation and financial education.
Informality vs. access to banking services
The COVID-19 pandemic has left LAC with 158 million people within the informal economy (source: International Labour Organization (ILO)), which has increased the need to address accessibility to banking services. The informal labour market in LAC has expanded, according to data from the ILO and World Bank, analysed by country. Some examples of this include: Bolivia 84.9%, Paraguay 68.9%, Peru 68.4%, Argentina 49.4%, Ecuador 63.5%, Colombia 62.1% Brazil 47.1%. In Central America, the average is 70.5%. These numbers reflect an extremely low degree of access to banking services in LAC countries.
The regulator's role
LAC regulators, pressured by mandates on access to banking services within the region, promote open ecosystems similar to PSD2 in Europe and the Open Banking Standard in the UK. Transporting such open ecosystems to the Latin-American environment is complicated since the regulatory framework in the region is more inconsistent, complex, and slower to act. Fortunately, some countries have taken the lead in this respect.
In LAC, countries are moving at different speeds in their progress to open banking. Whilst Argentina and Peru are still in the preliminary stages, Chile, Colombia and Mexico are more advanced. Brazil is currently the driving force in LAC’s transition to open banking, thanks to its experience in the diversification of businesses, and because it is the fifth-largest in terms of the world population. Brazil’s leading position is supported by a strong regulatory framework and the existence of products that benefit consumers. Users have a key role since they are the ones responsible for transforming the consumption habits of society. Without users, there would be no successful and sustainable project.
Brazil created an open banking model in four stages, the first of which was launched on 1st February 2021 and the fourth in December 2021, with the concept of sharing non-banking services such as investments, insurance and foreign exchange. The Brazilian model was inspired by the UK model, and has managed to avoid some issues already experienced by the UK, such as low demand from customers and a lack of creative business models (Anne Boden, CEO of the UK’s digital Starling Bank). By January 2022, Brazil had recorded 3.3 million authorisations of clients to share data.
PIX is another product likely to disrupt the Brazilian financial landscape, as it has received great popular acceptance. An instant payment platform created by Brazil’s Central Bank, PIX was established in November 2020. It has even been said that Brazil adopted PIX as its strategic entrance to the open banking system. Initially, it benefits users with financial education, allowing them to access the ecosystem, and later will incorporate that access to the banking system in order to integrate it.
Brazil’s success is based on others’ trials and errors
In Brazil, many financial institutions, eager to take advantage of the benefits of open banking, are moving ahead of the regulator's requirements. The launching of PIX by the Central Bank of Brazil (BACEN) demonstrates the efforts made by Brazil to foster innovation.
PIX, a system of instant payments which allows transfers and electronic payments, today represents more than half of the banking transactions made in the country, and has gathered over 100 million users (out of Brazil's 213 million population). It is without doubt a disruptive product, being free, with 24/7 instant payments and a blockchain-based anti-fraud security system. PIX can be used in p2p, b2b, c2c transactions, to pay government accounts, and even to pay for ice cream on a beach using the mobile version of PIX - wallet to wallet. Certainly, it is inclusive and accessible for lower-income individuals who do not have the option of opening an account in traditional banks. PIX has also assured its success thanks to the ability it provides to make transactions instantly, which was not possible before. These types of products are the means of bringing people closer to the financial system.
PIX has been described as a satellite module (aiming for the future) of open banking because it is at the heart of access to financial services and financial inclusion. By arranging transfers to make payments, users learn how to manage expenses, balance their current accounts, and become familiar with financial products. Brazil today represents an example of what boosts the development of open banking, generating benefits for users so they are no longer afraid of banks, and giving them tools for financial education.
The key is to integrate the needs of excluded people, even informal workers, who are able to open accounts in digital banks with practical, accessible and economical products, without small print or big buildings. This strategy, which Brazil considers the best to achieve success in terms of financial inclusion, was developed after witnessing the trials and errors experienced by the UK. Brazil has taken it as an example to avoid failing, and Brazil is succeeding.
Another example of trial and error is Mexico, which was the first LAC country to introduce regulation for open banking. The Fintech Law of 2018, designed with the help of the Inter-American Development Bank, obliges more than 2,300 entities to share data. In 2019, Mexico launched a product called Co-Di, similar to Brazil’s PIX which was launched a few years later. However, Co-Di has not been as successful as PIX, which had, in less than a year, transaction amounts 4.000 times greater than the Mexican platform.
Undoubtedly, the COVID-19 pandemic accelerated the need for innovation in banking practices and has led to the questioning of the traditional branch banking model.
The growth of open banking has been exponential. But to enhance the impacts of the new ecosystem and to make correct projections, we cannot ignore the cultural, regulatory, social, political and market aspects that shape implementation and adoption in each country.
From Open Banking to Open Finance - Include to integrate
The potential impact of open banking is limited if it is not accompanied by a move towards open finance (which increases the possibility of data exchange with institutions other than the financial ones). This is especially important in regions where a large proportion of the population has no access to banking services or where financial services are inadequate, like LAC. Without access to banking services, cash will remain as a payment solution, even though it is slower and more expensive than current technologies allow.
As a society, we must enable people at the base of the pyramid to benefit from globalisation, in order to reduce existing gaps between those with financial education and those without it. If we do not do so, we may find ourselves discussing these topics in international forums without achieving any of our financial inclusion goals.