The rise in Open Banking around the world is putting the spotlight on the United Kingdom, a country which is ranked number one for this new banking approach and which showed distinctive and early development of Open Banking regulations and standards. But, while the UK is shining in the limelight, Latin America is where you should really focus in regards to Open Banking, especially Mexico and Brazil. Advancements there are happening at another level.
In order to understand the importance of Latin America in Open Banking, we have spoken with one of CFTE Senior Lecturers, Carlos Figueredo, Founder and CEO of Open Vector, an Open Banking advisory firm, and former UK Head of Data Standards for the Open Banking Implementation Entity (OBIE). Here are the main takeaways from our conversation with him.
What countries are leading in Open Banking in Latin America?
Currently, Mexico and Brazil are the leading countries in Open Banking in Latin America. Mexico’s “Fintech Law”, which passed in 2018, is the first of its kind in the world (Carlos Figueredo was invited to work on it by the Mexican regulator). The Central American country was quick to grasp the opportunity of Open Banking by implementing the first Open Finance initiative globally with Brazil following through shortly after. In Carlos’s words, it is a matter of time until the rest of Latin American countries catch up. Colombia is already following Mexico’s and Brazil’s example.
What is the main difference between Latin America and Europe in Open Banking?
The biggest difference between Latin America and Europe in Open Banking is that Europe was obliged by the European Commission to establish Open Banking practices. As they were the first to establish such rules, they had to invest millions into it, for there was no precedence for them to base themselves off. Banks regarded these regulations, such as the PSD2, as a compliance issue, and the speed at which this was implemented meant they had no time to assimilate what Open Banking truly was and the opportunities it could bring. Proof of this speed, as Carlos told us, is that he joined in November 2016 to head Data Standards and by March 2017 they released the first set of these standards. In terms of speed to implement data standards, this is unheard of.
In Latin America, however, the reality is different. Open Banking was, for the most part, regarded as an opportunity, not as a regulatory issue, thus Open Banking in this region was born out of a market effort combined with the direction of the regulator. They saw what was happening in the UK and banks, as well as regulators, had enough time to educate themselves on the Open Banking & Open Finance practise before they were rushed into complying with standards – allowing them to view, assess and long for the opportunity that “Open” could bring to Latin American countries. Their disposition to adopt Open Banking & Open Finance was much greater than in Europe.
Why are Latin American countries more ready to adopt Open Banking?
Latin America’s predisposition for Open Banking is based on a higher awareness from financial institutions about the threat of new banks as well as fintechs entering the market. Latin America has seen the rise of new challenger banks, like Brazilian NuBank, that are threatening to enter the market and consolidate their positions. LATAM Banks, who traditionally have not integrated technology maybe to the extent to which European banks have, are concerned about their ability to compete in a market where challenger banks leverage technology to access the underbanked and unbanked and are starting to gain market share.
In the UK, meanwhile, this competition has not been as aggressive. The UK has seen the rise of challenger banks like Revolut or Starling Bank, but they have grown quickly and then plateaued – signalling little substantial threat to traditional banking institutions. Nevertheless, the reality of competition brought on by Open Banking, whether that be through a challenger bank, other reading banks, or the bigger fintechs still poses a realistic threat.
Is Open Banking in Latin America comparable to the UK level?
For our expert Carlos the answer is very clear: the Open Banking level of Latin America is absolutely superior to that of the UK. He argues this because Mexico, for instance, has gone beyond Open Banking to Open Finance. Its Fintech Law applies to 20 subsectors in finance, not solely banks, but associations, cooperatives, stock exchanges, currency exchange houses… Mexico viewed the opportunity of Open Finance beyond banking to produce products and services that benefited customers by realising the opportunity of cross sectors. The Mexican fintech law will encompass over 2665 entities as part of this Open Finance initiative.
In Brazil, Open Banking is partially market-driven, meaning the market has a say on how Open Banking works in the country – instead of only letting legislation rule that.
Why does the UK receive so much attention on Open Banking as compared to Latin America, then?
Simple: because the UK is the Fintech centre of the world – it has more fintechs per square miles than anywhere else – and so more is expected from it. But Carlos argues that if you look into it, they have only truly launched 2 or 3 open banking products.
When Mexico and Brasil launched their Open Banking initiatives, Carlos mentions, a lot of media attention was drawn there. However, it later becomes mostly broadcasted nationally, keeping us from receiving more news in Europe. At the same time, Carlos suspects there is certain reluctance to announce where Open Banking is taking place because when that’s happened, companies and organisations alike have rushed to the new focal point to try and shape the Open Banking environment there.
In Mexico, for example, tons of companies moved their headquarters, opened offices or sent representatives over when Open Banking was launched in order to immediately try to offer products and services. Brasil is still working on the development of their Open Banking strategy which they are doing under an in-country strategy. Similar to Mexico, we are also seeing firms from various countries trying to enter the market.
The global pandemic is also accelerating the adoption of Open Banking in LATAM
Another reason for LATAM’s adoption of Open Banking lies in its socioeconomic situation. Both Mexico and Brazil have large shares of unbanked consumers, “and the pandemic is highlighting that many are choosing to interact with FIs and businesses through mobile phones rather than traditional channels” the Merchants Guide To Navigating Global Payments Regulations states.
The LATAM region’s interest in online services is spiking as digital tools and solutions are made available in the region. Of course, the main enabler here is the smartphone, whose numbers in Latin America are counted by the hundreds of millions. The preference for online services is palpable. In Brazil, for instance, 73 percent of Brazilian consumers report that they would be open to banking with online-only banks, according to the Merchants Guide.
The pandemic is also putting pressure on banks. With the current COVID-19 pandemic, Carlos highlights that banks are realising that while their margins and profits have been decreasing through time, the threat of a greater need by consumers for digitisation resulting in the need for further online services requires them to realise the importance of investing in Open Banking more than ever.
About Carlos Figueredo
Carlos Figueredo is the Founder and CEO of Open Vector, an Open Banking advisory firm that helps governments navigate the Open Banking realm with their extensive expertise in order to design its Open Banking strategies. Previously, Carlos was the UK Head of Data Standards for the Open Banking Implementation Entity (OBIE) in 2016 where he oversaw the ISO 20022 based standards.
He is also the senior lecturer of CFTE’s Open Banking course on Regulations, Standards and Operational Risks. This course is the fourth of a five-course specialization on Open Banking and Platforms in Finance.
If you’d like to learn more about Open Banking, check out our Open Banking and Platforms in Finance Specialisation. CFTE has designed this programme, the world’s first of its type, with top industry leaders in the field so you can accelerate the transition to digital and be prepared for a future of finance that is now immediate.