Opportunities of Open Banking in LATAM
In Latin America the opportunities for fintech innovations are massive. From a shift of payment habits towards new and digital forms of payment to an entirely new structure of payment settling in the background. PayRetailers is part of all these transformations and keeps working together with many partners in Latin America, to make sure the right technologies are implemented at the right time.
In this article we take a look at a part of the hot fintech innovations that promise a major shift in the industry: Open Banking.
What is Open Banking
Open Banking or API Banking describes the process of opening up the bank sector and the banks’ data for third parties. With APIs (Application Programming Interfaces) data aggregation and usage becomes possible, as well as account transactions and operations facilitated by third parties. This new trend will add to the variety of products and services and lead to more possibilities and comfort for the end user. The ultimate achievement for an Open Banking service provider would be to offer a dashboard that shows all finance related activities in one place in real time.
It all started in 2018 with the Payments Service Directive 2 (PSD2) in Europe that soon after has been implemented by the UK. The directive supports users of financial services that want to receive more control over their data. The banks must offer discrimination free API-access for third parties for account and data fetching. This means that third parties may use parts of the e-banking-systems of different banks for their own platforms within products. On the other hand, the possibilities for banks grow as well. They can include data of other banks in their own products to offer a more complete product for the bank customer. The banks will be able to monetize data with the API access and partner with fintechs. Furthermore, the value chain can be optimized for separation of production and delivery of financial services. Lastly, the newly created sector of Baas (Banking as a Service) will help challenger and neo banks develop products.
The PSD-framework has reached Latin America but each country in the region interprets it differently. Mexico and Brazil play a leading role for shaping the future of banking. The regulators have a strong vision and are not shy to implement regulations. These two countries already have introduced regulations for parts of the sector like crowdfunding and P2P-lending.
Opportunities in Mexico
Mexico started in 2018 with the Fintech Law that provides a general framework. The Central Bank of Mexico and the National Banking and Securities Commission compiled the Open Banking Law in May 2020 as a result of two years listening to the stakeholders of the industry.
The first iteration of the law is about collecting Open Data. The next step of the law is to include regulation of aggregated data and data processing based on Open Data.
Opportunities in Brazil
Brazil followed soon after Mexico in 2019 when the Central Bank of Brazil started to acquire information from the industry. The bank together with the National Monetary Council released their Open Banking Law for the country in May 2020 as well.
The first iteration of this law already includes more aspects than the Mexican one. The objectives, principles and data scope have been defined. Moreover, a four-step implementation process is included, that comprises the regulator, representative trade associations and an independent advisor.
The first step is about gathering data from institutions about the usage of their products. This leads to data that helps create comparison tools.
The second step opens the sector up to be able to use basic end user data for new or enhanced products and services.
Step three is about the implementation of PISPs (Payment Initiation Service Providers) – companies that make use of the Open Banking infrastructure to facilitate payment transactions.
Step four will regulate the broad market and all other areas of banking related activities, such as pensions, FX, insurance and investments. Due to the wide-reaching scope, this can be considered the Open Finance stage.
What about the region as a whole and the outlook?
Besides Mexico and Brazil, other countries in the region are slower with establishing a legal framework. But it can be expected that Peru, Argentina and Chile will soon follow because of their big markets.
Overall, with the growing market penetration of smartphones (from 60% in 2018 to 80% in 2025) and digital services, especially when it comes to fintech innovations, we can expect a steadily growing interest of LATAM countries to develop the Open Banking or Open Finance sectors.
Two important aspects of Open Banking are driving the change – payment system modernization and financial inclusion. Open Banking will be a strong supporter of this change, foster competition and make use of the growing smartphone penetration. Challenger banks are able to offer strongly personalized services that traditional banks are lagging behind with. In turn this leads to an upwards-spiral of a blooming utility for the end consumer.
We at PayRetailers are providing payment service solutions in 12 countries in LATAM and counting. If your company wants to harvest the opportunities in that region, you should talk to us.