Imagine taking all your relationship history with your bank and using it to compare and access offers from rival banks and fintechs. This scenario, which until recently was unlikely to happen, is beginning to take shape in Brazil thanks to two words: “Open Banking.” The initiative, led by the country’s Central Bank, promises to give Brazilians total control of their credit data and, with this, open a new era of innovation in the sector, with the promise of increasing competitiveness and, thus, making services cheaper and the access to the financial system, broader.
The Central Bank’s schedule for introducing Open Banking in Brazil has four phases. The first of them, initially scheduled to begin on November 30, 2020, ended up being postponed to the beginning of February this year. In addition to the COVID-19 pandemic, the postponement also happened due to “the need to adapt the systems of the institutions to other regulatory actions under the responsibility of the Central Bank of Brazil, following the example of PIX (the country’s instant payments system, launched last November),” justifies Mardilson Queiroz, a consultant with the Central Bank’s Financial System Regulation Department.
Carlos Augusto de Oliveira, technology director of the Brazilian Banking Association (ABBC), stresses that although simple to the end customer, Brazil’s Open Banking has a complex structure and, therefore, required a lot of work its initial stage. “The governance structure proved to be more time-consuming and complex than it seemed earlier. A lot of time was spent on structuring (this model’s management, including the formation of the board of directors, technical groups, and edition of standards), but it was necessary.”
All sources consulted by LABS say that delays in the schedule (another phase, the fourth and last one, also had its start postponed) are not a source for concern. Queiroz guarantees that it will not impact the initial forecast of completing the implementation of Open Banking in 2021. The four phases, with their respective start dates, are as follows:
- First phase, until February 1st: public access to data institutions participating in Open Banking on customer service channels and products and services related to deposit or savings accounts, payment accounts, or credit operations;
- Second phase, up to July 15th: sharing of customer registration information among participating institutions, as well as customer transaction data related to the products and services listed in the first phase;
- Third phase, until August 30th: sharing of the payment transaction initiation service between participating institutions, as well as the service of forwarding a credit operation proposal between financial institutions and correspondents in the country that may have been contracted for this purpose;
- Fourth phase, until December 15th: expansion of the scope of data to include, among other things, foreign exchange operations, investments, insurance, and open private pension, both concerning publicly accessible data and transaction data shared between institutions participants.
There is much expectation in the sector for the arrival of Open Banking. The promises are that the system will foster competitiveness in the sector by releasing customer data from banking institutions’ silos, that is, by allowing these data to be used to compare and access offers and products from across the ecosystem, with agility and low costs.
“Open Banking comes with the proposal that every financial market should have a standardized technology layer, which means a more simplified form of communication to facilitate data portability,” explains Jéssica Machado Bortolato, Head of Marketing and Sales at Juno, a fintech based in the Southern Brazilian city of Curitiba.
The enthusiasm around Open Banking’s promises can lead someone more skeptical to distrust the model. No wonder. The big banks, which concentrate a majority share of the national financial system, will have to open the sources of information they have about their customers, precisely what gives them the competitive advantage over all other players in the sector.
The participation of large banks is mandatory – segments S1 and S2; to other institutions authorized by the Central Bank, the participation is optional.
He recalls that Open Banking is a global trend and that, to a large extent, resisting or ignoring it is not an option and that, in addition to greater competitiveness, it should also bring indirect benefits, such as facilitating integrations: “As Open Banking develops integration standards, it is much cheaper, simple and quick [for financial institutions] to partner, attract products to their platforms, take their service to other environments. This generates an increase in efficiency in institutions’ capacity to implement new strategies in a more agile way, bringing benefits to society. ”
There is an apparent alignment between the Central Bank’s views and the banks. The authority wants Open Banking to be seen as a real opportunity, not “a mere rule of ‘compliance’” in the words of Queiroz, that is, a bureaucratic task without major practical consequences. Oliveira warns that the implementation will be a one-year journey. During this process, it will be essential that the end customer feels the benefits of the offers released at each new phase of the schedule. “The challenge is to transmit to society the concrete benefits [of Open Banking] and to provide security.”
Open Banking and “open banking”, the difference between the practice and Central Bank’s project in Brazil
There is an important distinction to be made. The Brazilian Central Bank’s initiative called “Open Banking” is part of the strategic agenda BC+, the authority’s series of plans to redesign the financial system for the future, but it also repeats the name of the practice “open banking”, which is the common term to refer to any movement towards releasing customer data within the financial system. There are open banking initiatives in countries all over the world and, even in Brazil, regulations that guarantee customer registration rights since at least 2006.
“The main merit of Open Banking,” says Queiroz, “is to standardize the sharing process, reduce deadlines for its effectiveness and improve the customer experience in the process, preserving confidentiality.” If, until now, the open banking initiatives in Brazil were specific, carried on by the institutions themselves, now with the Central Bank’s program, there will be a general standardization.
Esallabs and Juno cases show how open banking calls for adaptations
The state-owned bank Banco do Brasil is one of those that already offer open banking solutions to its corporate customers. Esallabs, the innovation arm of the retail group Esal, is one of the companies that use the bank’s solutions. At the end of 2020, using an API from Banco do Brasil, Esallabs integrated to its ERP system the possibility of receiving payments through PIX – even before this functionality, included in PIX’s official schedule, is available.
Since it created its own ERP four years ago, the Esal Group has aimed to integrate as many financial solutions as possible. “We looked for a series of solutions on the market and found that today there is no API, even in digital banks,” says Bruno José Esperança, CEO of Grupo Esal. “For everything, there is already integration, as in transactional emails and even WhatsApp, but in the financial sector, it does not exist.”
An API stands for “Application Programming Interface,” it is a piece of code that a company makes available to others so that they can integrate safe, standardized, and automated solutions to its platform. “Today, our customer can pay with PIX in the same way that he pays with [credit or debit card],” explains Bruno. “We have a solution that generates a dynamic QR code, that is, one for each transaction. With that, the customer scans [in his or her mobile app] the QR Code with their banking app and processes the transaction. In two seconds, this data goes back and forth from the bank to us, informing us that the transaction took place, we release the sale, and the customer receives the sales confirmation.”
For now, ERP and other software created at Esal are used only internally. The company also has its own vending machine solutions, point of sale (cash and mobile), payment link, and e-commerce. In 2021, the company will begin to license its systems with a focus on small and medium-sized companies.
Open Banking is expected to have a major impact on Juno’s API. “With our integration, it is possible to offer a complete financial solution for customers, with notifications via webhooks, the highest security standards, tokenization, mobile solutions, and more,” says Bortolato. These resources also apply to white-label solutions – used by companies that offer financial services to their customers using Juno products without showing the fintech’s brand.
In the highly competitive Brazilian financial sector, innovation has ceased to be an asset to become a basic requirement. For Bruno, from Esal Group, “the great advantage of open banking is that you no longer depend on a bank. You are free; you are with whomever you want to be.” This is true for companies, but mainly for individuals.
Power to the people
The Central Bank’s Open Banking initiative has been in operation for years and is in line with modern legislation on personal data, such as Brazil’s General Data Protection Law (LGPD) in force since September 2020. “Open Banking is based on the enshrined principle in this legislation,” which says that the consumer is the holder of his personal data, and has the right to share with whoever he wants, recalls Queiroz, from the Central Bank.
At businesses, such as Esal Group stores, the consumer will have access to convenience. But the biggest impact of the initiative will happen in the relationship between people and financial institutions.
Today, many account holders are in banks for any other reason than their own will. “It is usually because he or she receives a salary there, did some credit operation and had to open an account and ended up staying there,” exemplifies Oliveira. With this, the bank is learning all about the financial and credit behavior of this customer, making offers based on this profile built over years os relationship. “The big problem is that this information stays in that bank,” says the expert, and when an interesting offer comes from a rival bank or a fintech, all that history that could be used to increase the customer’s chances of making a good deal cannot be used. “We have an asymmetry of information in Brazilian the market,” he summarizes.
It is this asymmetry that Open Banking seeks to correct.
All this flexibility has a robust layer of security built into it, which is required by the Central Bank, as well as well-defined security policies and accountability rules in case something gets out of the script. It is important to note, reminds Queiroz, that “sharing personal data or service depends on the customer’s prior consent for specific purposes and term.”
In the end, Open Banking is also a crucial tool to financial inclusion, to allow companies and institutions to reach those that are currently neglected by traditional financial institutions, providing this customers with products and services that are more suited to their needs.