Open Banking in LATAM – Revolution or Evolution?

Temenos – Company

Banking is opening up across Latin America. Fintechs are surging in number and impact. And increasingly, these new players are partnering – rather than simply competing – with incumbent banks.  

A smiley face on the pavement.

This creates big opportunities to make banking better. Like tailored, personalized solutions for every area of money management. Everything from savings and borrowing to budgeting, credit-score building, borrowing, and investment. And as society continues to fight the coronavirus pandemic, fraud prevention for the vulnerable, as well as help for those with an unpredictable income in managing their finances and getting a mortgage.

Open Banking is a key driver of this collaborative and open approach. This is where consumers allow third-party providers to use their financial information held by their bank to inform new products and services. It’s done with technology known as Application Programming Interfaces (APIs).

Open Banking can benefit both banking players and customers alike, through innovative and differentiated products, services and experiences. To gain greater insights on its progress, Temenos partnered with the Economist Intelligence Unit (EIU) on a new report. This combines expert analysis with the findings of a 2020 global study of 300 banking executives from retail, commercial and private banks. Over half of those surveyed are at C-suite level.

The findings suggest clear indications for the next steps in Latin America’s Open Banking journey.

Latin America will use regulation to drive Open Banking Forward

As of 2019, there were 1,166 fintechs in Latin America across 18 countries. This represented an increase of 67% in just two years. The EIU report notes that this fintech boom was aided by regulation – such as Mexico’s Fintech law in 2018 and Brazil’s Circular 4,015. These reduced barriers to entry and attracted new capital. In fact, Latin American respondents to the EIU survey placed regulation on digital technology as having the biggest impact on banks in their region in 2025. This was second only to new digital technologies themselves.  

Latin American regulators are now focusing on driving forward Open Banking. Mexico launched the first stage of its regulations in June 2020, while Brazil has recently kicked off its Open Banking implementation initiative. Chile laid the groundwork for Open Banking in September 2020 with a Financial Portability law to help customers move more freely between providers. It aims to publish full Open Banking regulations within the next two years. Colombia has also announced an intent to develop an Open Banking standard. Unlike other countries, the Colombian standard is expected to be voluntary, with banks joining when they are ready.

Covid is accelerating Open Banking

Before coronavirus, banking in Latin America was already beginning to go digital. For example, mobile wallet usage was growing rapidly as mobile phone coverage surged. Around 86% of adults in the region are forecasted to have a smartphone by 2025.

One of two female customers is holding mobile phone over credit card reader for contactless payment transaction in the coffee shop. Coffee cups and glasses are on the table.

The pandemic has accelerated digital in banking by years. Consumers are now less likely to use branches or cash and more likely to embrace digital channels. 66% of Latin Americans now say they will use cash less often. [1]

This means BIG CHANGE, as previously around 80% of transactions in Latin America were still conducted using cash.

The EIU report suggests that the pandemic has proved a powerful booster for open banking and the fintech ecosystem. This will be timely for Latin America, as its banking industry seeks to find innovative and rapid responses to shifting consumer demands. 48.1% of Latin American respondents to the EIU’s survey see acting as a true digital ecosystem as the primary way in which their current digital business model will evolve. And Open Banking will be a driving force in achieving this.

Digital technology is key to the success of Open Banking

The EIU report found that 87% of all countries globally have some form of Open APIs in place. The building blocks are there. And as we have seen, regulators in Latin America are seeking to push things forward.

But Open Banking can only be successful and sustainable if it has consumer confidence.

Consumers must see a clear benefit from sharing their data. This means differentiated, tailored products. It also means stable, reliable systems that are capable of handling steep increases in demand and delivering rapid service as Open Banking takes off.

They must also trust that that their data will be protected. And 44% of Latin American respondents to the EIU survey said cyber security was a top focus for their technology investments. 

The complex, legacy IT systems that many banks are still using cannot deliver the confidence Open Banking requires. They have high operational risk, meaning new services cannot be delivered seamlessly. They don’t have the capabilities to create and launch products quickly.  And they can’t innovate and create tailored, hyper-personalized experiences.

For Open Banking to succeed, banks must embrace an end-to-end digital architecture.

This requires modern banking platforms that are:

  • Based on Open APIs. That’s the only way that banks can collaborate with third-party providers to create value.
  • Driven by AI analytics. This allows data to be easily processable by third-party providers. It also mean banks can leverage the data internally and gain high quality insights for better service personalization. This was a top priority for nearly a third (32%) of respondents in the EIU’s survey.  
  • Elastically scalable. Advanced technologies like Cloud are able to cope with rapidly rising and highly variable usage.
  • Highly secure. Banks’ platforms must have the highest standards of security. This includes areas like authentication, authorization and access control. 

Revolution or Evolution?

A few years into the Open Banking journey, both a revolution and an evolution is taking place in LATAM. Such fundamental change will take time to fully evolve. But there is no doubt the trend is accelerating – even more so because of the pandemic. And with advanced banking technology, Open Banking is on course to be truly revolutionary for banks, their fintech partners, and billions of banking customers.   

Happy man talking on a cellphone jumps in the air. There are mountains in the background.

Source: [1]

Temenos – Company