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November 9, 2021

Open banking is a new financial services model wherein banks and other financial institutions share customers’ consented financial data with third parties through open APIs to provide innovative financial products and experiences. There are three types of approaches for open banking implementation worldwide – prescriptive, market-driven, and facilitative. When it comes to Latin America, most countries in this region follow a prescriptive or regulatory-driven approach, with Brazil and Mexico becoming the pioneers in Latin America’s open banking adoption.

Open banking in Latin America

The Central Bank of Brazil published the open banking regulations in April 2019 to reduce ‘information asymmetry’ and increase efficiency in the credit and payments market by promoting more competitive environments. Although influenced by the Australian Consumer Data Rights, Brazil’s open banking specifications offer additional scope in payments, investments, insurance, corporate banking, and more.

As per Mexico’s Fintech law, all financial institutions must enable APIs to aggregate and share product or service data and customer transactional data with each other. In continuation, Mexico’s National Banking and Securities Commission (CNBV) rolled out the initial open banking regulations in June 2020. Countries like Chile, Colombia, and Peru are also exploring different options for designing their open banking regulations and subsequent implementation.

Key driving factors

Many socioeconomic factors, along with rapid technological advancement, are driving the adoption of open banking in Latin America, and this includes:  

Financial inclusion: Financial awareness and government encouragement push a large section of the population towards financial accounts and digital wallets. This new userbase creates a unique opportunity for financial institutions to expand their reach and explore new revenue streams.

Adoption of technology: About 64% of Latin America’s population is expected to have mobile internet access by 2025. Broader usage of smartphones with easily accessible internet drives open banking adoption as financial institutions can now connect with larger sections of the population through their digital offerings. Further, financial institutions are investing in digital technologies like cloud, artificial intelligence (AI), and machine learning (ML) heavily, which propels the rapid development of customer-centric products and services.

Rise of the middle-class population: Economic expansion and job creation are contributing to an increase in the middle-class population in Latin America. This prosperous and growing middle-class population is always looking for products and options for financial security and freedom, which creates a growth opportunity for financial institutions.

Innovative ecosystem: The Latin American fintech landscape is growing rapidly, with Brazil alone expanding at approximately 300% (2017-2020). In Brazil, the number of fintech institutions increased from 244 in 2017 to 771 in 2020. This healthy, startup-friendly environment provides a perfect launchpad for innovative financial products and solutions in the region.

Benefits

Open banking empowers consumers to make the most out of the data managed within a financial institution’s repository. The benefits of open banking can be measured in different dimensions. Based on early trends, the following are some of the benefits that are observed:

Supreme digital payment experience: Digital and contactless payments are gaining momentum in Latin America, especially due to the COVID-19 pandemic. As per open banking regulation, payment initiation service providers (PISP) are helping consumers to initiate payments without directly managing funds or transaction accounts. PISPs like UnDosTres and Cuenca are providing frictionless customer experiences and reducing payment transaction costs.

Digital economy: Open banking promotes financial inclusion and can be used as an opportunity to spread financial services to larger sections of the population. Financial inclusion will be a key factor in the economic response to the COVID-19 pandemic. Digitalization of the financial infrastructure will help governments in Latin American countries identify, plan, and distribute financial aid in a more organized manner.  

Innovative financial products and services: Open banking promotes competitiveness and innovation. This creative ecosystem not only leads to new products and supreme customer experience but also generates new employment opportunities, with more choices and convenience for the end customer.

Efficient data sharing: Regulatory-driven open banking implementation ensures efficiency in data and information sharing, as all participants can follow the same standards and guidelines.

Way forward

Open banking principles can be extended to an industry-agnostic data-sharing framework and can be used as a building block for an ecosystem-based business model. This trend of blurring industry boundaries will create opportunities for innovative solutions and propositions like the ‘SuperApp’ where a single platform can be used for multiple services, thereby providing a frictionless user experience.  

However, the success of open banking in any geography depends on its adoption, where customer awareness is a key driver. Government authorities and financial institutions should dedicate resources to educating customers and increasing awareness. The pandemic has pushed consumers to embrace digital channels more than traditional cash-based channels. This change in consumer behavior will accelerate open banking adoption, making it one of the cornerstones of the digital economy.

Sayantan Santra is a Solution Architect in the Open Banking Strategic Initiative group of the Banking, Financial Services, and Insurance business unit at TCS. He has over 13 years of IT experience predominately in retail banking and insurance with expertise in open banking, API banking, API security, and next-gen digital banking implementation. Sayantan is an alumnus of Jadavpur University, Kolkata, India.

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