Within the LATAM region, Mexico and Brazil have rolled out open banking and API rules to increase competitiveness, efficiency and data transparency. Meanwhile, countries including Colombia, Argentina and Peru are currently working on regulatory frameworks and creating environments to build, test and review new products and services. Latin America’s fast-growing fintech market has helped to accelerate the adoption of open banking in the short term, while working with regulators to create country-specific open banking rules.
What is “open banking” exactly?
The Central Bank of Brazil defines open banking as “the sharing of data, products and services by financial institutions and other licensed institutions, at the customers’ discretion as far as their own data is concerned, through the opening and integration of platforms and infrastructures of information systems in a safe, agile and convenient manner.” For Brazil, this provides a great opportunity to bolster payments modernization and financial inclusion efforts.
From a more technical perspective, open banking uses APIs to enable third-party developers to develop new, more personalized applications and services. This can range from enabling alternative payment methods, to customized product offerings and the ability for the account holder to view their financial data in one place, such as a single smartphone app.
Why open banking for LATAM?
Given the twin directives of payments modernization and financial inclusion within the region, open banking is seen as a way to promote transformation, drive competition and capitalize on growing smartphone penetration; expected to grow from 66 percent in 2018 to 79 percent by 2025.
For the Latin American financial ecosystem, open banking will drive a new type of competition for consumer business. Now, challenger banks can offer personalized services and innovative offerings that could actually place them ahead of the larger banks. Naturally, this will drive healthy competition from more established banks, all to the benefit of the end consumer.
In terms of the revenue opportunities and modernization, open banking allows financial institutions to focus on:
- Data monetization through Open APIs and the ability to partner with fintechs to improve the customer experience
- Reconfiguring the value chain to separate the production and delivery of financial services
- Moving to an API-powered infrastructure to provide access to BaaS (Banking as a Service) to new entrants, including fintechs and neobanks
Fintech’s impact on regional growth
Latin America’s massive fintech growth will enable financial institutions throughout the region to fully leverage the benefits of open banking. Once thought to be a threat, fintechs have proven themselves to be invaluable partners within the payments ecosystem. Already we have seen the rise of fintechs in lending, and neobanks such as Nubank, Uala, Creditas – among many others – provide access to savings accounts, prepaid cards, insurance and lending.
The role of fintechs is especially crucial given that many financial institutions have extremely complex core banking systems and legacy infrastructure. Partnering with advanced fintechs can drive and accelerate innovation, while allowing financial institutions to focus on their day-to-day business.
Open banking regulations
In Latin America, open banking regulatory initiatives have been led by Mexico, with the Fintech Law published in 2018, and in Brazil with the introduction of a phased implementation, regulated by the Central Bank of Brazil and the National Monetary Council. At the same time, a growing number of countries within the region have created innovation hubs to encourage all parties – including regulators – to propose rules and scenarios to build a more collaborative financial ecosystem.
All regulatory frameworks will likely center around the adoption of digital financial services, helping to promote inclusion while reducing consumers’ reliance on cash.
Transforming Latin America’s financial markets for the future
By far the biggest challenge facing open banking adoption is in transforming the bank culture. New partners and new ways of creating and delivering products naturally disrupt old ways of doing business, which can cause unease within the industry.
Those with the ability to gear their culture towards one of openness and collaboration with fintechs and third-party vendors will be well positioned for success. Partners with extensive regional expertise – including ACI – and a vast API library can allow banks both large and small to experience the full benefits that open banking has to offer. At the same time, they can maintain compliance, even as regulations shift.
The COVID-19 pandemic has already accelerated digital adoption among Latin American consumers. Open banking offers everything financial institutions need to leverage this newfound consumer comfort with digitization and enjoy long-term success.
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