Adapting to Open Finance: The new business models for banking

The wave of open finance is advancing in Latin America, challenging regulators, banks and fintechs to evolve their digital strategies, in a context where innovation and collaboration in new business models will be paramount not to be left behind.

The regional open finance network is expected to continue growing with momentum in the coming years, and although each country is handling its own infrastructure development and regulatory challenges, efforts are leaning towards partnerships, embedded finance and connection through the apification of the digital economy.

This promises to generate benefits for users in terms of power of choice, financial inclusion and modernization of the services and products they consume. For banks, revenue streams are also opening up by tackling new verticals, while making traditional products profitable and improving the overall user experience.

"Banks are not the end of an experience, they are the means; an enabler. Nobody wants to buy banking services, we need them.”

Claudio Rodrigues, lider de tecnología de Banco Ripley en Chile.

"That's why open banking is a way to be enabling more and more experiences, combining banking service with experiences that other companies can provide. It's like being an ally in the customer experience," he adds.

The specialist assures that the ways of operating of tech giants such as Spotify, Google and Waze have changed the way in which financial companies monetize their operations and relate to their audiences.

“It is mandatory to be creative and find ways to monetize services outside the traditional format, where the customer must have an account or a card to interact with a certain bank,” he adds.

Under the Open Banking scheme, and with the permission of each account holder, users of third-party platforms or applications connect directly to financial institutions, which access their authorized data of their personal information; such as their credit history or the registration of their payments.

In this sense, it is estimated that public and private APIs will continue growing from the current 200 million to about 1.7 billion in 2030, consolidating themselves as a global productive force and support for open finance models, according to a 2021 report from F5, a company that focuses on preventing vulnerabilities.

The horizon gives us a glimpse of a bank available at any time, and anywhere.

The Example of Brazil in Open Finance

The Brazilian market is the one with the most technological, regulatory and implementation advances in the region. The fourth phase of deployment has been in place since December and the Central Bank recently evolved the concept of open banking to open finance, to include other services such as insurance, investments or pensions.

In the first year of implementation there were just over 231 million interactions to share data (API calls), something that according to the Brazilian Federation of Banks (Febraban) shows a greater progress compared to other countries that have developed the standard. It also allows us to anticipate the reception that the system will have in that country and its potential in the rest of the region.

In that framework, BS2, a digital bank for companies, takes advantage of the capabilities of Open Banking in partnership with the Contabilizei digital accounting platform to automate the opening of digital accounts. The partnership is a sample of the essence of Open Banking and of its potential to create new business models.

PIX, the successful instant transfer system of the Central Bank, will also have a new momentum, with the prospect that it will have a positive influence on other means of electronic payment. This is already happening with the implementation of the Iniciador de Pagamentos (payment initiator) in the framework of open finance.

Previously, if a consumer used a food delivery app and used PIX to pay, they were provided with a link with a code that they had to copy and paste into their banking app, and then return to the delivery app. The regulation of open banking, through the “initiation of payments” allowed all non-banking platforms to offer payments with PIX directly.

Thus, a simpler and more agile payment flow is achieved, reducing the abandonment of purchases and increasing the conversion potential for companies.

Along these lines, Banking as a Service (BaaS) is another path that is yet to be explored in the region.

With this model, third parties can pay for banking services as they use them, shortening the investment of raising a financial institution and using the licenses of the banking provider.

Under this model, the Brazilian fintech Zoop, which belongs to Grupo movile, reached 250,000 active digital accounts on its banking platform in one year of operations. Zoop is a provider of BaaS and companies such as iFood, a food delivery application, takes advantage of the service to enable banking products to its restaurant network, like the iFood digital account.

El mercado de México

Another attractive market in Latin America is Mexico and its Open Banking regulation is also advancing, although more slowly. The Fintech Law of 2018 establishes a section where it is mandatory the development of APIs for data sharing, but secondary resolutions are still expected that will give the guidelines for the concrete deployment.

This has left some banks technologically prepared to tackle the scheme, but doubting whether enough interest of users to share their data will be generated.

However, few doubt the benefits of the scheme, once it has generated a critical mass of banks and users operating interconnected.

The proposals include applications where the accounts of different banks are displayed in a unified way, managed by the same user; as well as applications where insurance comparators or pension funds acquire more successful credits, achieved through the crossing and analysis of the buying and payment habits of users.

For example, BBVA bank in Mexico has integrated its savings products to the domestic employment platform Zolvers, warning that many workers did not have a bank account to facilitate the deposit of their fees. The bank is taking advantage of the trust and access that this sector has on the platform to open savings accounts.

Hypercustomization of products

Open finance is based on the paradigm that users are the owners of their data, and not the banks, and therefore they must consent before being shared with different institutions in order to customize and streamline the development of their products.

Banking has sensitive data about its customers and if they are shared in reliable systems regulated by the authorities, they allow adjusting the offer; and not only that, the door opens for other non-financial players to create relevant products or share useful information for the entire system.

Linking services on other platforms allows banks to become technology providers, while reducing operational costs through the use of hubs and APIs, which do not require developing their own software applications every time they want to launch a service to the market or enrich an experience.

This will allow the emergence of new business models and we will see companies positioning themselves as platforms when open banking facilitates the exchange of data and promotes the expansion of an ecosystem connected by APIs, Fernando Radunz, CIO of BS2 points out.

For example, crossing alternative data is something that Uber and Didi are doing, who are taking advantage of travel information, work schedules and earnings generated through the apps, to enable credits to drivers and users. Specifically, Uber through agreements with financial institutions and Didi by putting the capital directly, is how the credits are generated.

Obviously, all this requires streamlining banking architectures and migrating them to alternatives such as the cloud, which allows information to be organized and analyzed quickly, to draw patterns and thus customize solutions.

"Banks need to find ways to recover and institutionalize the spirit of startups. One way to do this is to drive the migration to the public cloud and create the kind of flexible and frequently updated platforms that are required to keep pace with their competitors,” recommends Nicolás Deino, Executive Director for the financial industry at Accenture Chile.

In fact, the Brazilian credit consultancy Serasa Score says that by combining the information obtained with open banking protocols and processing it with artificial intelligence, they achieved much more reliable credit scores, seeing a 49% increase in the expected repayment capacity of creditors.

“Open finance is going to increase greatly the number of companies of players, who are participating in the market and new business models that make the whole environment more competitive, more innovative,” says Daniel Pujazón, policy lead of PagoNxt, the fintech of the Santander group, commenting on the progress of open data in Latin america.

“However, in order for this to really turn into benefits for the customer, data sharing ecosystems should tend to an open data concept and be approached with a customer-centric vision and cross sector, so that customers can benefit from all the data they generate, regardless of whether these are produced from their relationship with a financial institution, a telco, a utility or a retailer”, he adds.

The trend allows us to foresee a future with open data, where companies will have to redouble efforts and technology to take advantage of them and translate them into benefits for the customer. This requires innovation and collaboration among various players that will generate new ways of doing finance; some that have not even been thought of yet.

Would you like to know the possibilities of Open Finance offered by Infocorp to grow your business? Contact us about IC Open Finance.