In 2020, Pix brought an important modernization to the financial system in Brazil. But nothing promises to be as transformative as the open banking: the concept establishes that citizens and organizations hold their bank details and, therefore, can share them with institutions of their choice.
What’s transformer about it? A lot of things. We can expect that, when fully implemented, open banking will generate more competition between banks, facilitate the acquisition of credit, make financial services less bureaucratic and favor the emergence of fintechs of the most diverse types.
But what is open banking? Most importantly, how can this concept bring about so many changes? This is what you will discover in the next few paragraphs.
Open banking: to untie the chains
Right at the beginning of a live broadcast on February 1, 2021, Roberto Campos Neto, president of the Central Bank, declared that the institution’s objective with open banking is “Make the national financial system more efficient, modern and promote the democratization of financial services through technology”.
Isolated, the sentence may sound like a purely formal speech, with no effectiveness in the “real world”. In fact, Neto’s speech fits precisely into the possible and expected effects of open banking.
In free translation, open banking means open bank. The English expression was adopted here because the concept was imported. In the United Kingdom, for example, open banking is already a reality (albeit in a somewhat timid way) and countries like Germany, Canada, the United States and Japan are already conducting projects on the subject.
Formally, Brazil started its implementation of open banking in four phases. The first started on February 1st and, with no complications, the last one will take effect on December 15th, 2021 (we will enter the schedule in this text).
Your suspicious meter should be beeping at this point, but believe me, this is a good thing. In general, Brazil’s financial system is very robust, but it is also in a cast, despite the advances provided by fintechs, digital banks and, more recently, Pix.
There is a great expectation that, with open banking, the remaining ties in the system will be undone, stimulating competition between banking institutions, opening space for the emergence of new services and, mainly, giving the customer more decision-making power.
To give you an idea, in conversation with the Tecnoblog, Bruno Diniz, Latin America leader of the Financial Data & Technology Association (FDATA) and author of the book The Fintech Phenomenon, explained that this change could be very impacting for traditional banks, as they were, for a long time, protected by barriers of entry of a regulatory and technological order. Only in recent years has there been a flexibilization that gave space to fintechs:
Banks will have to take a much more proactive stance. They will have to think of new tools and ways to keep the customer. (…) Today we already have a progression, but with open banking, we will have another leveling of competitive forces.
Bruno Diniz, leader of FDATA in Latin America
Why is open banking so promising?
Think of open banking as a set of rules, procedures and technologies that standardize the exchange of financial information, not as a single system. Standardization makes institutions speak in the same language, thus, the risk of problems decreases and the efficiency of the sector increases.
Let’s take an example. Suppose you have had an account with Bank X for ten years and want to switch to Bank Y. The problem is that, in the latter, you will have a lower credit limit, as your relationship with the institution has just started.
But, thanks to open banking, you can share your transaction history from bank X with bank Y quickly and easily, after all, both institutions follow the same set of rules and procedures to make this type of transaction possible. Bank Y will then be able to use your history at Bank X to offer you a higher credit limit.
“Ah, but I didn’t have a good relationship with Bank X, so I want to get out of there.” Okay, you are not required to provide your history to Bank Y. The decision is yours. The Central Bank itself says that open banking provides the customer with control over their bank details, whether an individual or a legal entity.
Suppose, now, that you want to have an account with both banks. Well, the sharing of data provided by open banking also facilitates the integration between different services.
In this sense, you will be able to access both accounts from the internet banking of any of them, in the same way that you can access another email service from an account in Gmail, for example.
But the greatest expectations revolve around the imminent emergence of new services.
Diniz emphasizes that the exchange or integration of data is already the basis of many businesses, citing as examples platforms such as Uber and Airbnb, which base part of their services on maps shared by Google.
For him, it was the turn of the financial market to follow the same path. Among the new possible services we can think of:
- platforms that compare insurance based on the consumer’s profile;
- tools that help a company find the cheapest financing;
- services that inform the user which credit card has the lowest dollar rate on a given date for international transactions;
- applications that analyze the consumption pattern of an indebted person to guide them on how to “clear their name”.
Note that these are just a few examples. The possibilities are numerous. Want another example? Perhaps you have already closed a purchase via WhatsApp. What if you could pay without leaving the platform?
WhatsApp tried to have a similar function last year, but was hampered by regulatory problems. With open banking, experts believe that integrating banking services with other platforms will only be a matter of time.
It is the position defended by Ricardo Taveira, founder of Quanto (fintech specialized in open finance), in Tecnocast 179:
The Central Bank is even building a new [modalidade de] institution regulated to be able to fulfill this role, which we are designating as Payment Transaction Initiator or ITP. This institution does not hold accounts. It simply has the right to access open banking or Pix’s APIs to play that application role.
So the idea that WhatsApp can enter your bank account, with your authorization, and command a payment or transfer without having to enter your bank’s application is not a hope, it is in fact what will happen.
Ricardo Taveira, founder of Quanto
This will not only apply to WhatsApp, but to several other platforms, of course.
Brazil as a reference
Although Brazil is not a pioneer in the matter, do not think that the country is lagging behind in the implementation of open banking. On the contrary. Brazil has everything to be a reference in the adoption of the concept.
As a sample of this, Bruno Diniz says that, as a representative of FDATA in South America (a global association that deals with financial data and has open banking among its agendas), he was recently invited to a lecture at a Canadian institute. The reason? The good impression that Brazil has for advancing with open banking even with the pandemic problem:
Canadians have had this discussion for a long time, but the scope there is a little broader because it involves not only bank details, but general consumer data. This depends on congressional votes, but there is not much political mobilization to make this happen.
They were amazed to see Brazil moving forward on this agenda. And this is because the country had already resolved the LGPD and the fact that Brazil’s open banking model starts with something that is totally within the control of the Central Bank, which operates over regulated financial institutions. (…) The Central Bank is able to autonomously deal with all aspects with its own regulations.
Bruno Diniz, leader of FDATA in Latin America
This does not mean that open banking will have a transformative effect in Brazil overnight. The changes will be progressive and could take months, perhaps years.
But they will come. This is what the Central Bank and the market bet, after all, with the user having more control over their data, banks and the like will have, more than ever, to dispute customers based on the quality and diversity of services.
It is obvious that there are technical and regulatory issues to be addressed. On this last point, Diniz explains that, when the implementation of open banking includes pension, insurance and foreign exchange services, for example, it will be necessary that, in addition to the Central Bank, regulatory bodies such as the Superintendence of Private Insurance (Susep) and the Securities and Exchange Commission (CVM) participate in the discussions.
This takes time. It is not by chance that open banking is being implemented in phases.
Open banking timeline
As you already know, the Central Bank has defined four phases for the implementation of open banking in Brazil. THE first phase, which started on February 1, allows financial institutions to exchange data about their products and services with each other.
Based on this, we can imagine, as an example, an application that accesses this information to compare the rates of banks’ service baskets.
But it’s from July 15th, when it starts to second level, that we will realize the practical effects of the concept. In it, the participating institutions will be able to share registration and financial data of customers, of course, with their authorization.
At third phase, scheduled to start on August 30, credit proposals and payment services may be offered outside the traditional banking environments, through applications or online platforms aimed at these modalities, for example.
Finally, the fourth stage, scheduled for December 15, 2021, will expand the reach of open banking by allowing customers to have control over a wider range of data. With that, the concept may cover services such as foreign exchange transactions, investments, insurance and private pension.
APIs come into play
In the examples from Airbnb and Uber above, what allows these services to communicate with Google maps are, basically, the APIs. This feature is widely used in intercommunication between systems and, in this sense, it also serves as a foundation for the exchange of data within open banking.
But, if you are not a developer or an IT professional, you may be asking yourself: what the hell is API? Well, the acronym stands for Application Programming Interface. It is, basically, a set of methods and standards that allows two or more systems to communicate so that each of them only shares or access what is necessary for the application.
This communication must follow well-defined parameters to ensure interoperability, efficiency and safety to the operationhence, once again, the importance of phased implementation: allowing the agents involved to identify requirements and define the technical aspects necessary for the functioning of open banking.
But is it safe?
“If it gets better for me, it gets better for the bad guy, right?” Many people may have this degree of distrust, but it is not so: open banking is not going to inadvertently make your data travel back and forth.
It is not that there will be no risks. In information technology, there is nothing 100% secure. However, open banking is being structured to ensure, as far as possible, data security and user privacy.
In relation to this aspect, Ricardo Taveira, of Quanto, points out that, in the digital universe, everything is much more traceable and it will not be different in open banking. He also recalls that the user can enter the institution’s system and revoke access to their data at any time.
Bruno Diniz has the same vision and reinforces that consent management, as the control of data by the customer is called, is part of the basic premises of open banking.
He also points out that the Central Bank and the institutions have been working so that any problem related to open banking can be reported in a timely manner.
No less important: the project has been developed based on determinations already provided for by the General Law for the Protection of Personal Data (LGPD).
Given these factors, no one can guarantee that open banking will be fail-proof in Brazil – it is nowhere in the world. On the other hand, there is nothing to indicate that the new phase of the Brazilian financial system will increase fraud or data breaches.
Tecnocast 179 – Open banking in Brazil
If you want to know more about the subject, be sure to check out the Tecnocast 179. With the participation of Ricardo Taveira, the program gives more explanations about what we can expect from open banking in Brazil: