The fundamental aspect of Brazilian open banking is the customer’s autonomy to choose banking and financial services and products. This autonomy is only possible when individuals have control over their information and financial history, easily migrating it from one institution to another, from one service to another, or even integrating services and products from several institutions at the same time.
In a concentrated financial system like the Brazilian, this is not as simple as it may seem. Hence the revolutionary character of open banking.
On the market side, open banking has the potential to bring traditional banks, fintechs and other financial institutions that operate under some license from the Brazilian Central Bank on equal terms thanks to the adoption of a standardized technology layer that will simplify communication and data portability between institutions.
Brazilian open banking is part of the “Agenda #BC”, a Central Bank agenda focused on tech evolution to modernize the financial system and the laws that govern it, and also to improve competitiveness and transparency. Brazilian open banking looks further ahead, aiming to open finance.
Although the regulatory agenda for open banking is a global trend, its design and implementation strategy change in each country. In Brazil, the Central Bank centralized management and the adoption of a communication standard via APIs (application programming interface) are great differentials in comparison with other countries.
The European Union‘s open banking had many problems, such as decentralized implementation and customized APIs, which resulted in a major communication problem between the interfaces of each institution. In the UK, 50% of the market had to adopt a standard API.
“It is as if communication between a group of people was possible, but each one speaks a different language”, illustrates João Bragança, senior director of the German consultancy Roland Berger.
The mandatory participation of big banks is also decisive for the success of the proposal. In a very concentrated market, if traditional banks did not participate, open banking would hardly be successful since these institutions have a gigantic volume of financial data and the largest share of users. Until now, 171 financial institutions have already joined the Brazilian open banking.
Thiago Alvarez, founder and CEO at Guiabolso, a platform for financial management and marketplace that also provides an open banking solution for financial institutions, says that the Central Bank was very skilled in the regulatory framework.
“In addition to the requirement for large institutions and the standardization of APIs, the scope of the Brazilian open banking model is broader, it includes other financial and banking services. It goes beyond banking; it is open finance,” says Alvarez, who is a model implementation advisor too.
Big banks, neobanks, fintechs: who take more advantage of it?
Open banking will challenge the Brazilian big banks’ monopoly: they will fight for 60 million customers with fintechs and other financial institutions and may have a loss of revenue of up to BRL 110 billion, according to an estimate by Roland Berger.
Despite the estimates, Leandro Vilain, director of innovation, products, and services of the Brazilian Federation of Banks (Febraban in the acronym in Portuguese), is optimistic.
“Competition is crucial for the banking sector, we encourage it at all levels. Open banking will be an important tool for this. However, we emphasize that it is important that the rules must be the same for everyone, whether they are already established banks or new competitors,” he says.
Competition becomes more complex as innovation and digitization increase. According to Bragança, traditional banks will struggle because they do not have a digital mindset to compete with players who were born digital.
Vilain says banks are prepared to adapt to technological and regulatory innovations. “Since 2018, Febraban has specialized teams dedicated exclusively to the project and qualified bank teams for technical support, in addition to an international consultancy that brings us all the necessary knowledge and support.”
For him, the big banks will gain the advantage of agility and flexibility with the launching of products and information management.
A report prepared by Roland Berger points out two strategies for big banks to remain competitive: to strengthen the relationship with the customer through a better user experience or to expand the availability and efficiency of the product and compete for the best price and the best balance between risk and return.
It is also necessary to look carefully at the target audience. While the high-income clientele is already targeted by investment players, middle and low-income customers are gaining the attention of digital wallets.
For Bragança, traditional banks have a greater advantage in the dispute for the middle class, for which there are fewer specific offers.
“The middle class is less disputed by emerging players. So, it is worth investing in good products for this class rather than competing for niche markets that are already well-served,” he analyzes.
In the dispute between traditional banks, neobanks, fintechs, there is a specific category of players with good chances of getting ahead in the fight for the high-income clientele: the brokerage firms.
According to Bragança, they will have no difficulty in obtaining authorization from customers to access financial history due to the consolidated relationship of trust. “It will be disruptive. And it is a characteristic of the Brazilian market; there is no other country with a market player with the same power that brokers have in Brazil,” he says.
However, in Roland Berger’s analysis, the biggest positive impact of open banking will be on legal entities.
“The onboarding process of Legal Entities in a bank is bad, requiring extensive documentation and a lot of bureaucracy. With open banking, Legal Entities simply authorize the sharing of their information. With this, the financial institution will have access to that company’s banking history, will know if the receipt flow is up to date and if the cash is well managed. Then, the bank will be able to offer a more efficient credit and financing portfolio,” explains Bragança.
This whole process does not involve innovation at the product level. It’s more about access to information and customer experience.
User experience versus portfolio innovation
The future of open banking reserves a list of new products and services that are more diverse and sophisticated as the implementation phases advance and the level of access and integration increases.
The offer can come as a better interface or as new products. Possibly, it will come from the combination of the two fronts. “Experience impacts the product, the product impacts the experience,” says Thiago Alvarez, from Guiabolso.
An example is the applications focused on financial management, which help the customer to take care of his financial life. “A bank will be able to offer financial management. This is the customer experience. Now, based on the data generated by this application, the bank will be able to reduce defaults by 17% and thereby improve the supply of credit and loans. This is the product. Open banking encompasses the entire customer journey.”
In the first phase of open banking, among the solutions that may arise are the comparators of bank fees, accounts, and credit cards. These products have the potential to change the way banking services are consumed since users will have easier access to the options available on the market.
“Applications for credit and investment simulation may emerge, all based on the client’s financial history and data that can be aggregated after consumer consent”, says Leandro Vilain, Febraban’s innovation director.
João Bragança‘s big bet is on the account aggregator. “This is the first run, by the account aggregator. Challengers will offer this product on day one. The success of open banking depends on the client understanding that the offers are compatible and cross-cutting, that he can operate his bank account on the interface of his broker, for example,” he explains.
E-commerce will also be a breeding ground for open banking, especially from phase three onwards, with the possibility of initiating a payment outside the banking environment. Vilain is betting on the emergence of models that allow the customer to make the payment or transfer on the e-commerce platform itself.
Open banking will bring competitive advantages not only for banks, neobanks and fintechs, it also has space for retail giants, whose penetration in a country of continental proportions such as Brazil is a valuable capital.
With open banking, retailers will be able to get to know their customers in the financial environment as well and use this data to create new products for their ecosystems. Major Latin American retailers, such as Magazine Luiza and Mercado Libre, already offer some financial products on their platforms, such as digital wallets or branded cards.
“Today, retailers know customers in the retail environment, but they know nothing about their financial and banking history. Retail has a restriction on the ability to offer credit, for example, because it is difficult to get to know the customer. Open banking changes that,” says Alvarez.
Brazil’s open banking phases
- February, 2021 – Phase 1
The financial institutions whose adherence is compulsory and those that opted to participate share standard information on banking products and services. At this point no customer data is shared.
- August, 2021 – Phase 2
From now on, the client will have more active participation and will be able to request the sharing of their data and financial information between institutions. The biggest benefit for the consumer will be the customization of offers and products. The financial ecosystem will be shaken by innovation and competitiveness.
The second phase was scheduled to start on July 15, but was postponed to August 13 and staggered in stages ending in October.
- August, 2021 – Phase 3
Consumers will have access to services such as payments and credit proposals beyond the financial institutions’ channels. The consumer will gain more autonomy to access financial services through other channels. But not all services will be available, the offer will be staggered due to a resolution by the Central Bank that has changed phases 3 and 4.
This year only transfers via PIX (the Brazilian instant payment system) will be available. Payments via other methods ( slips, debits, for example) will only be available from 2022 onwards.
- December, 2021 – Phase 4
The scope of open banking is widened: information from foreign exchange, investments, insurance, pension, and salary accounts will be shared, if authorized. The last phase of open banking begins on December 15 and ends on May 31, 2022.
(Updated according to changes announced by the Central Bank)