Writing for Payment Expert, Patricia Carolina Ramirez Arriaza, PhD student at University of Mariano Gálvez in Guatemala and Michel Reznik, Partner at Estudio Legal Bernal in Mexico take a look at the state of Open Banking in Latin America.
Latin America is a colossus of a market with a population of 660 million and a growing GDP of 5.6 trillion. It has a developed and established financial services system which combines local and international institutions that operate individually or through partnerships with local institutions.
The progress of Open Banking varies greatly between countries and even the most advanced countries like Colombia and Brazil are behind their European and UK counterparts which benefits the development and market entrants because they can use the European and UK experiences as blueprints.
The European and UK models are viewed very positively across the region and are often used as a source of inspiration and first steps.
Harmonisation of laws and regulations throughout the European Union and the UK has greatly contributed to the establishment and adoption of Open Banking. Payment Services Directive 2, which is the pinnacle of Open Banking, applies in broadly the same manner across the region.
By contrast there is not and will not be such level of harmonisation or uniformity across Latin America, which makes it essential to investigate each country in the region individually and the manner in which it adopts Open Banking and the laws and regulatory practices that apply and operate in each country in Latin America.
The Latin American legal systems are likely to be more rigid and less flexible than their counterparts in the UK which stems from historic nature of the systems and especially the legal and regulatory systems. The Anglo-Saxon legal systems are based on common law whereas the Latin American systems are inherently civil law systems with codifies systems of law in acts of parliament. This leands towards prescriptive laws and practices which by their nature are less flexible and adaptable than the common law counterparts.
It does not mean that one system is better than the other but that this difference needs to be accounted for and kept in consideration especially for market entrants coming in or out from one system into another.
Big v small fish
Robust legislation like Colombia and Brazil provides certainty and stability in the market and is reminiscent of the European and UK system. This stimulates the adoption and acceleration of Open Banking. Brazil, which has the most advanced system, is already attracting big international providers whereas in Mexico, where key elements are outstanding, the providers have adopted a ‘wait and see’ policy. It is only natural that big players are likely to move and follow the countries that have established and functioning environments, including regulatory, for Open Banking.
This is where the experience is likely to differ from the European and UK one. In the UK, the Open Banking initiative was driven by the Competition and Markets Authority (CMA) with an intention to foster competition in the banking sector and lower the barriers to entry for new entrants and it has reaped this very result.
However, in Latin America, once a system is established, it sees the entry of global powerhouses rather than challengers. As such it is important for those seeking to enter the market to monitor the progress and enter as early as possible before the market is crowded and saturated.
There will be notable differences in implementation across the Latin American region, between each of the countries within the region and between the manner in which it was implemented in Europe and the UK. For example, in the UK the requirements pertaining to Open Banking first applied to the nine biggest banks whereas the Fintech Law in Mexico has made it obligatory for the entire financial sector at the same time and in Brazil some requirements apply equally across the board whereas others only to the top tier institutions.
Further, the UK notably had a collaborative exercise that allowed for exchange of data through API with supermarket chains which has resulted in specialist and tailored offerings of credit to consumers. This has not yet emerged in Latin America and as such provides a huge opportunity for new entrants to explore and use the UK experience for their entry into the market.
When entering the market, a phased approach is advised of entering with one or two products and offerings rather than with all at the same time. This will allow for quicker entry and time to market and also to undertake necessary evaluations of the manner of entry and the market before expanding the product offering. The same would be true for both large, small and challenger institutions entering the market.
In the UK Open Banking was an initiative driven by CMA and implemented by the Open Banking Implementation Entity (OBIE), which addressed and mediated the interest of all the stakeholders in the market and that provided standards and model APIs. OBIE was established in 2016 and has ceased operations in 2022 and will make way for another institution, to be announced, which will uphold the standards of Open Banking and continue mediating the interests between the stakeholders.
OBIE is a commendable and recommended initiative, however, which hasn’t yet been replicated in Latin America and has left each of the stakeholders to protect their interests individually. The major stakeholders that normally includes: financial regulator, central banks, legislature, government (in particular Ministry of Finance and Treasury), institutions in charge of data protection and the largest market participants. The lack of an entity independent of all these may go some way to explain why implementation of Open Banking in Latin America has been slower than in the UK.
For those seeking to enter the market it is important to monitor the role and the voice of these stakeholders, which at times can overlap, and, to navigate through and adhere to their requirements and market guidance. Inevitably it becomes a balancing exercise which is essential to undertake at all times. Whilst doing so, the voice of the users is not to be forgotten, which is very easily done between the voices and interests of these prominent stakeholders.
The users have to at all times remain at the heart and they need to be informed and have the ability to make informed decisions in relation to their personal data. Overlooking this risks the ability to harness and maintain public trust and corollary mass-adoption of Open Banking. This overview follows on from Part One of our Open Banking deep dive, which saw a closer analysis of Colombia and Brazil and Part Two, which examined Open Banking in Mexico and Guatemala.