Daniel Castillo November 3, 2023 LATAM 9 Open Finance Challenges for LATAM Context 1. Business value perception 2. Building trust 3. Security at the forefront 4. Getting ahead of regulation 5. Building a common standard 6. Transparency is the way forward 7. Test, test, and test 8. Designing for diversity 9. Security and data privacy at the forefront Conclusion According to an Inter-American Development Bank report, the financial sector in LAC is in a phase of disruption and change due to low confidence in the use of financial services, a perception of high associated costs, relatively low financial inclusion and a lack of regulation that contrasts with more developed economies such as the UK, the EU, China and the US. Context The World Bank identified that the post-Covid economic rebound has led to significant changes in inflation. According to Trading Economics, interest rates have also undergone similar changes, not only in LAC countries but also in more developed economies, which has a direct impact on the cost of financial services. Brazil’s inflation jumped significantly from 4% in 2019 to 11% in 2023, while Mexico and Chile also experienced increases from 4% to 6% and 2% to 8%, respectively. As for interest rates, Brazil’s rose from 6% to 14%, Colombia’s from 4% to 13% and Mexico’s from 5% to 11%. In contrast, India maintained stability in both metrics at 5%, while China managed to reduce its inflation from 3% to 2%, keeping its interest rate constant at 4%. The US inflation rose from 2% to 5% and a similar rise in interest rates. The impact on consumers is that 60% of unbanked adults in the region consider financial services too expensive. This proportion is highest in Brazil, Colombia, Honduras, Nicaragua, Panama, Paraguay and Peru. Nonetheless, the Global Findex Database 2021 highlights that over the past decade, access to banking in LAC has seen remarkable growth, with a notable push from digital channels. From 2011 to 2021, bank account penetration in LAC rose from 39% to 74%. By contrast, the USA steadily increased its penetration, reaching 95% in 2021. Among the five largest Latin American economies in 2021, Chile and Brazil lead with 87% and 84% penetration, respectively, followed by Argentina at 72%. Colombia and Mexico lag behind at 60% and 49%. In Brazil, digital channels dominate the means of accessing financial services. Regarding FinTech innovation, Mexico and Brazil lead the way with more than 1,283 FinTech startups in the region. As part of this evolving landscape, a clear preference of FinTech companies for the “Payments and Remittances” vertical is evident, making up 25% of FinTech companies in the region. This is closely followed by the rise of alternative “Lending” platforms, with 19% and companies focused on “Business Technology Solutions for Financial Institutions” with 15%. This is closely followed by the “Enterprise Financial Management” and “Insurance” verticals. The data shows a great challenge ahead for traditional financial institutions and FinTechs. But it is not all about uncertainty, there are important technological advances that introduce innovations that can transform these challenges into opportunities for all players in the ecosystem, one of them being Open Finance. This challenging path requires a balanced approach. Regulators, Banks, traditional FIs and FinTechs must not only navigate the region’s unique socio-economic terrain but also learn from and adapt global best practices. The following post dives into some of these complexities, highlighting the key challenges for Open Finance adoption in Latin America and the Caribbean. 1. Business value perception For many banks and smaller FIs in LAC, the immediate value of transitioning to Open Banking can be unclear, especially in countries where there is a lack of appropriate regulation or uncertainty about the regulator’s vision. The associated costs like infrastructure, compliance, and staff training can overshadow perceived future benefits, in particular for smaller FIs with limited resources. This barrier can be overcome by clearly demonstrating the benefits of Open Finance through designing use cases that address specific needs, are customer-centric and have a clear return on investment. According to Business Insider, most FIs in the UK are now more enticed by the potential of Open Banking, likely because they are overcoming obligations and now have a better view of the opportunities. It is clear that banks and FIs in LAC need to align Open Banking initiatives with their long-term business strategy, considering future market trends and customer preferences. It is also necessary to conduct thorough cost-benefit analyses, using pilot projects or phased approaches to test the waters and quantify benefits. 2. Building trust According to the Global Findex Database 2021, in Latin America and the Caribbean, about a third of unbanked adults do not have an account because they distrust the financial system. More than one in three unbanked adults cited the same barrier in Argentina, Bolivia, Bulgaria, Colombia, Jamaica, among others. Data sharing through open banking can generate more personalised and accessible services for users, but it has a direct impact on data privacy and control over how that data is used and with whom it is shared. This can lead to a perception of little control over data, as the number of third parties with whom data is shared is uncertain, reducing transparency and clarity about accountability and custody of data. It is important to note that open consumer financial data can be protected in different ways. One country may have a data protection regulation that covers all sectors of the economy, such as the European Union’s General Data Protection Regulation (GDPR). A second possibility is that data protection regulation applies only to the financial sector, as in the case of the US Financial Privacy Act. A third alternative is that there is a personal data protection law and an Open Banking regulation with specific privacy requirements for the financial sector, as mentioned by CGAP in its report. With this context, it is recommended for regulators to benchmark against global best practices, engage in multi-stakeholder consultations, and evolve regulations that balance innovation with user protection. 3. Security at the forefront With a growing FinTech ecosystem and the rapid digitisation of financial services, LAC faces a challenge in instilling robust security measures across varying institutions, some of which may lack the infrastructure expertise and in some cases regulation. Kaspersky’s recent Latin America Threat Landscape shows that malware attacks against computers and mobile devices have seen a 617% and 50% increase in attempted phishing attacks and banking Trojans respectively, with financial services being the main target of attack. The return of economic activities after the pandemic is the main cause of the explosion of fraudulent messages in the region. This is compounded by the emergence of tools that use Artificial Intelligence and other technologies that enable the automated creation of scam content and execution of malware such as Spyloan. Among the countries experiencing the highest number of cyberattacks, Brazil stands out with 134 million attempts, followed by Mexico (43 million), Peru (31.5 million), Colombia (30.9 million), Ecuador (12.2 million), Chile (10.5 million), and Argentina (9.4 million). When examining the subject matter of these messages, it’s noteworthy that 42.8% of phishing attacks specifically target financial information. This breakdown includes 28.40% centered on banking topics, 9.40% on payment methods, 2.70% on other financial services, and 2.30% focusing on cryptocurrencies. Therefore, the financial ecosystem in LAC not only faces the challenge of dealing with the risks arising from vulnerabilities in its systems and cyberattacks but also the daunting task of generating trust among users so that they adopt with confidence. This challenge is even more significant for FinTech segments such as digital banks but undoubtedly affects the entire FinTech sector. 4. Getting ahead of regulation At the moment the only country in the region that has a robust Open Banking regulation in place is Brazil, the rest of the countries such as Colombia and Chile are making important efforts through working groups where collaboration and transparency between FIs and financial regulators is key. Despite this uneven landscape, there are banks in the region that have already taken the initiative to navigate the Open Banking waters. This drive to be the leaders in innovation will pay dividends sooner or later. When Open Banking becomes a reality in the region, which is not a very distant future, these financial institutions will be able to take a better market share because of the experience they will have already gained, and the rest will be taken by those other big players who have been experimenting and perfecting their models worldwide. The rest of the players in the ecosystem will have a time disadvantage, which could result in the creation of products and services that are copied from the pioneers and do not necessarily fit their context. 5. Building a common standard In much of Europe, there is a general consensus among EU member countries, which may facilitate interoperability. Despite the lack of a mandated European standard, initiatives such as the Berlin Group have provided some level of interoperability. In contrast, in LAC, although efforts have been made towards a common standard, the reality is that it has not been considered at the working tables of the regulators who are developing their regulations. Once each country has its regulation in place, interoperability between countries will be a major challenge, especially for those participants who wish to take their services beyond their borders. Building true community and interoperability should be a key element for countries in the region. 6. Transparency is the way forward A clear implementation roadmap from regulators is essential for a successful Open Banking implementation, ensuring that all necessary steps are taken methodically and that stakeholders are well-informed. Given the diverse financial landscape, it’s challenging for regulators to establish standardised objectives that cater to both major banks, smaller FIs and FinTechs alike. 7. Test, test, and test Jumping directly into full-scale implementation can be risky. Banks and FIs in Latin America must test the waters through pilots, but many might skip this due to resource constraints or pressure to quickly go to market. Even with limited resources, institutions must prioritize pilot phases, gather feedback, and iteratively improve upon the implementation. To make this exploratory phase more tangible and secure, introducing a sandbox is key. Using a sandbox can help bring the technical standard to life and make it more concrete for a variety of participants. It provides data providers and requesters with a safe and controlled testing ground. A sandbox of APIs, data, consent and account access pages and advanced authentication flows is an invaluable resource when evaluating the standards and how apps will interact with them and provides participants with a shared understanding of the challenges and opportunities of Open Banking. 8. Designing for diversity Given the diverse demographic and socio-economic landscape, understanding and catering to the varied user needs can be challenging. Different levels of digital literacy and access in LAC is a crucial aspect to consider, so Open Banking platforms must be accessible and inclusive. Banks and FIs must also consider that as Open Banking is introduced, there will be a transition phase where users adapt from traditional banking methods to new digital platforms. These are not impossible challenges to achieve, it is recommended that banks and FIs conduct extensive regional user research and segment audiences to understand and cater to specific needs. It also becomes necessary to design transparent and intuitive user interfaces, provide clear information on data usage, and ensure robust security measures are visibly highlighted. User experience is not just about aesthetics or convenience; it’s a critical tool for fostering trust, ensuring accessibility, and driving user adoption. As LAC integrates Open Banking, creating a frictionless and inclusive user experience will be crucial to its success. 9. Security and data privacy at the forefront With a growing FinTech ecosystem and the rapid digitisation of financial services, LAC faces a challenge in instilling robust security measures across varying institutions, some of which may lack the infrastructure expertise and regulation. In addition, given the historical mistrust in the financial sector, combined with global concerns about data privacy, users in LAC may be particularly wary of how their financial data is shared and used. In contrast, the European Union’s General Data Protection Regulation (GDPR) provides a robust framework for data protection, setting clear boundaries on data usage and ensuring user rights. With this context, it is recommended for regulators to benchmark against global best practices, engage in multi-stakeholder consultations, and evolve regulations that balance innovation with user protection. For FinTechs that do not yet have a regulatory framework in this area, it is highly advisable to adhere to international standards and best practices or to consider the measures applicable to banks, which are quite robust, in order to provide confidence to their users. Conclusion Navigating Open Banking in LAC presents a multi-faceted set of challenges. From redefining the dynamics between competition and collaboration, ensuring business value perception, to crafting culturally resonant digital journeys and rigorously safeguarding user security and data privacy, the path ahead is intricate. However, it’s vital to remember that there isn’t a one-size-fits-all or magic recipe to address these challenges. The key to successful Open Banking adoption in the region lies not in simply transplanting models from advanced economies but in integrating those global insights with local expertise. It’s a journey of collaborative learning, where the lessons of the past and the challenges of the present shape a more inclusive, innovative, and secure financial future for all in LAC. TESOBE is a trusted expert for Banks and Financial Institutions around the world, having worked on Open Finance projects in Latin America, Europe, the Middle East and Asia. For more information, drop us a message at email@example.com or fill in the form.