2024 Public Sector Perspectives

The key feature of open finance is the provision of third-party access to financial data and services in a secure and standardized manner and with consumer consent. Individuals and businesses can share their financial data, such as account information, transaction history, and financial records with authorized third-party providers, and enable them to initiate payments/transactions on their behalf. While the scope of open banking is limited to banks, open finance also includes non-bank financial institutions, such as insurance companies, pension funds and investment providers. Access to data and payment initiation is typically through application programming interfaces (APIs), which are used to establish a connection between third-party providers and user’s bank and/or non- bank financial institutions. This standardized connectivity facilitates quick and straightforward integration with enhanced security standards. Open finance fosters competition by enabling third-party providers, such as account information payments providers (AISPs) and payment initiator service providers (PISPs), to access customer financial data and gain the ability to initiate payments (with the explicit consent of the individual or business account owner). This can result in innovative and customized financial products and services, such as budgeting apps, investment platforms, ecommerce solutions, forecasting solutions or loan comparison tools. By facilitating ecosystem interoperability, open finance improves efficiency, potentially lowering costs for consumers and broadening the spectrum of financial services they can access. Open finance prioritizes safeguarding, privacy and control of consumer data, and ensures secure data sharing and ecosystem practices. The advance of open finance reflects the evolution of both consumer and corporate behavior, where there is a move towards added-value solutions, integrated experiences, real-time interactions and more cost-efficient payment/collection options, as well as consumer demands for greater transparency and lower costs. How is open finance being developed in Latin America? Open finance is at a relatively early stage in Latin America. However, momentum is building across the region: Brazil and Mexico are currently live with open finance models. Colombia and Chile have issued primary regulation and are now developing secondary definitions and implementation plans (which are based on a collaborative public and private approach); five other countries are at a regulatory research or proof of concept stage. Mexico was the first Latin American country to issue primary regulation in 2018. Implementation of open finance was divided into the following phases: 1. Open/public financial data (location of ATMs, branches, financial products, and services offered); 2. Aggregated data (statistical information held by supervised entities that, due to its nature and processing cannot be disaggregated); 3. Transactional data (related to the use of financial services by consumers). The benefits of open finance • Financial services integration and interoperability. • Increased efficiency that benefits people, merchants, banks, fintechs and government institutions. • Enhanced security. • Innovation and the creation of new solutions with a value proposition for the digital economy, fueled by data, integrated experiences and a robust fintech ecosystem. • Financial inclusion, by supporting specific business cases and delivering cost-efficient solutions for final users. • Decreased cash use: Payment initiation features provide a convenient, frictionless user experience at a low cost, boosting the digital formal economy While Mexico has completed its first phase, other phases have been put on hold; industry dialogue regarding payment initiation and definitions is expected in due course. Brazil was the second country in Latin America to issue open finance regulations in 2021 and has advanced at a quick pace. It is one of the world’s greatest open finance success stories with more than 38 million open finance consents (as of August 2023). Its deployment has four phases: 1. Financial institutions public data (product, services and channels): live. 2. Private data (allowing consumers, with prior consent, to share their data such as records, account transactions, card information and credit operations with institutions of their choice): live. 3. Payment initiation (Pix as a payment method on open finance rails): live. 4. Inclusion of new data that can be shared, as well as new products and services, such as the contracting of foreign exchange operations, investments, insurance, and private pensions: ongoing. Open finance in Brazil was led by Banco Central do Brasil (BCB), which defined a clear strategy and regulatory roadmap, and adapted the concept to the needs of the country. The BCB also harmonized its strategy with other financial services modernization initiatives as Pix, the successful instant payments scheme. Having implemented several of its defined phases, it is working to stabilize open finance while seeking new opportunities and use cases, such as recurrent variable payments. Colombia and Chile issued open finance primary regulation during 2022 and have a roadmap in place. There are also public and private collaborative spaces in place to determine the final governance model, as well as operative and technological definitions. Both countries are aiming to leverage the existing characteristics of the financial infrastructure in order tomaximize the impact of open finance. Colombia has adopted a hybrid approach, with both regulatory and market-driven elements. The regulator has prioritized payment initiation in its first stage and targeted 2024 for launch. Payment and bank data sharing will occur in a second phase, which is timetabled for 2024-2025. The third stage will cover data sharing relating to transactional financial investments, pensions and insurance. Colombia seeks to extend the concept of open finance beyond financial institutions’ data. As part of its National Development Plan, the Open Data initiative targets data from telcos, public services, public sector entities and others, with a focus on facilitating financial inclusion. Boosting financial inclusion and economic growth Open finance could play a potentially significant role in improving financial inclusion, which is a key issue across the region. According to the World Bank’s Global Findex 2021 Database, 27% of adults in Latin America and the Caribbean do not have access to financial services, and the share of adults borrowing from a financial institution is 30%, below the average for OECD member countries. Open finance also creates opportunities for Latin America’s financial ecosystem and payments infrastructure to leapfrog multiple stages of market development. To this end, Latin America is focused on open finance rather than open banking, with a view to broadening access to finance products rather than simply bank accounts. Ultimately, by boosting competition and innovation, open finance should accelerate economic growth. McKinsey estimates that the adoption of open-data ecosystems could increase GDP by 1% to 5%. Although McKinsey did not specifically look at Latin America, it noted that the greatest benefits are likely to accrue to emerging market countries. Citi Perspectives for the Public Sector 21 20 Open Finance in Latin America: The Key to Unlocking Opportunity