2024 Public Sector Perspectives

Meanwhile, Argentina, the Dominican Republic, Ecuador, Panama and Peru have announced plans to adopt open finance; some of these countries have already begun a dialogue on market or public/private issues. Lessons learned When consideringwhat to do – andwhat not to do – in order tomaximize the impact of open finance, it is important to recognize that every country has different circumstances, needs and levels of financial servicesmaturity. There is no one-size-fits-all model. Nevertheless, there are some broad aspects of successful open finance implementations that should be prioritized by countries: 1. Strong governance: If an open finance initiative is to gain traction, promote a reliable ecosystem, ensure sustainability and achieve open finance’s goals, structure and practices relating to definitions, implementation, deployment, operation and performance are important, as are measures to foster accountability, responsiveness and inclusiveness. Having a single and specific entity that has responsibility for governance brings orchestration, efficiencies, trust, a faster time tomarket, and a focus onmeeting defined goals. 2. Public-private collaboration: Equitable representation of ecosystem actors (government entities, banks, payment schemes, fintechs and organizations representing individuals and enterprises) is valuable in determining definitions to ensure the planned initiatives will deliver benefits for all stakeholders. Benefits may vary. For example, consumers could gain a fluid, accessible andmore secure customer experience; merchants may benefit from a more efficient collectionmethod; and government can boost digital financial inclusion and accelerate the switch from cash into the digital formal economy. Public-private collaboration can also be enhanced by a flexible regulatory environment and a financial regulatory sandbox (which has helped to drive the success of Brazil’s financial services modernization, for example). 3. Strengthen security: Safeguarding, enhancing, and monitoring technical standards, the operative model, fraud management and cybersecurity are critical. It is also essential to establish a secure participant model to ensure minimum requirements are met. A centralized registry and monitoring of AISPs and PISPs has also been shown to be useful. A regulatory, market-driven or hybrid approach? One key distinction when introducing open finance frameworks is between a regulatory and mandatory- driven approach (as adopted by the UK and Brazil) and a market-driven approach (as in Singapore). In Latin America, the example of Brazil shows that there are significant benefits from a regulatory- driven model with an active role for government institutions. Crucially, Brazil required banks to develop use cases for open finance, which helped to focus minds and ensured the initiative quickly gained momentum. In contrast, the experience in Latin America shows that purely market-driven approaches run the risk of incumbents failing to embrace open finance with enthusiasm. This is not necessarily the case in other parts of the world: mature and developed economies, with more modern financial services infrastructures, can progress well using a market-driven approach. A regulatory driven approach should include ‘smart deployment’, where particular types of institutions, use cases and phases are specified as mandatory, rather than adopting a blanket approach. A one-size- fits-all mandatory model can be counterproductive in terms of efficiency, time to market and adoption. Given the significant investment required of private sector financial institutions, it is important that they retain the freedom to focus on where value can best be created and delivered. A hybrid model where participation and use cases are mandatory only where applicable to institutions is therefore likely to have the greatest potential for success in most countries. 4. Maximize efficiencies: Isolated implementations are extremely costly so technical integration must be efficient. A single integration through a centralized entity brings economic efficiencies and speeds time to market compared to multiple implementations. Ultimately, lower integration costs can be passed on to final users to drive adoption. 5. Focus on use cases rather than functionality: It is advantageous to focus on use cases at the same time as setting out clear phases that will define open finance implementation. Use cases that generate the greatest impact in line with established open finance objectives should be prioritized. 6. Reinforce efforts to promote adoption: A variety of different approaches should be used to maximize adoption. Some aspects to consider include: • User experience: Having a single and streamlined user experience design for each use case brings benefits in terms of clarity, a frictionless experience and adoption. • Trust: Trust can be facilitated in a number of ways. A trust mark can be used covering aspects such as user control to provide and revoke consents to third parties, data privacy and protection, fraud prevention, disputes, costs, and performance. • Customized communication strategy for individuals and businesses: This can accelerate awareness of open finance benefits and dynamics. • Incentives: Establish the proper incentives for individuals, business, banks and third parties. These incentives need to be clearly articulated via a public-private dialogue. A perspective on the evolution of open finance If momentum towards open finance continues to build across Latin America, it will have transformative impacts on the region’s economies and financial services modernization. The example of Brazil shows what can be achieved in a relatively short period of time in the region and serves as an inspiration to other countries. Open finance is at an early stage and is a long-term project. As it evolves, a number of additional characteristics could take on greater importance: 1. Digital identity could be valuable in accelerating adoption, trust and furthering financial inclusion. 2. Open data society: Governments can encourage the opening up of additional sources of data fromother stakeholders, such as telecom, utility companies, healthcare and government entities that can be used to substantiate and verify consumers’ needs and behaviors, as well as drive solutions that utilize users’ data. By doing this, countries will begin to move beyond open finance towards an open society based on open data. 3. Cross border open finance: While open finance initiatives in Latin America currently focus on national projects, embracing common standards across Latin American countries could unlock substantial benefits, paving the way for wider regional harmonization in the future. Regional harmonization Open finance efforts to date have focused on national projects. However, there could be significant benefits for Latin America if there are commonalities between country standards in order to facilitate future regional harmonization. As well as making implementationmore straightforward for regional banks, greater standardizationwould lay the foundations for more efficient and lower cost cross-border payment mechanisms, which are a key goal for many governments in the region. Promisingly, a recent report by the Inter-American Development Bank indicates that three of the five regulators and supervisors currently working on open finance across the region are interested in technical standardization for third-party providers and APIs, among other technologies for implementing open finance. Brazil is at the forefront of efforts to create common standards by opening its standards to other Latin American central banks (or equivalent government entities leading open finance initiatives), enabling them to replicate itsmodel. Colombia’s open finance plans, for instance, have adopted some features of the Brazilian system. In addition, the fintech associations of Colombia, Peru, Mexico, and Chile have partnered to propose joint standards for open finance in Latin America. Citi Perspectives for the Public Sector 23 22 Open Finance in Latin America: The Key to Unlocking Opportunity