Brazil and Mexico are leading Latin America’s move to open banking and instant payments, driven by the need to increase financial inclusion and formalise cash-based economies. Both countries’ central banks are introducing open banking in order to increase competition by allowing fintechs to offer lower-cost services challenging the top banks’ dominance, Robin Arnfield writes
Latin America is characterised by low bancarisation and high smartphone penetration. According to the GSMA (https://www.gsma.com/r/mobileeconomy/latam-es/), 64% of Latin Americans used smartphones in 2018, expected to reach 78% by 2025. Since unbanked and underbanked consumers aren’t well served by traditional banks, fintechs and digital-only neobanks such as Brazil’s Nubank, which has 8.5m customers, are catering for their financial needs.
Around 55 million Brazilian adults are unbanked, and 71% of Brazilians have smartphones. Over 52% of Mexicans don’t have access to bank accounts and over 10% don’t have access to formal saving mechanisms, according to Claudia Del Pozo of Latin America-focused consultancy C Mind (https://www.openbankingexpo.com/insights/the-global-revolution-of-open-banking-a-look-at-mexico/).
Brazil and Mexico set for Open Banking roll out
Open banking rules are expected to come into force in Brazil and Mexico during 2020, requiring banks to share customer data and transaction history with other companies and providing an opportunity for fintechs to compete more effectively with traditional banks. Concurrently with open banking, both countries are introducing instant payment systems: CoDi (Cobro Digital/digital purchase) in Mexico and PIX in Brazil.
According to Latin American banking publication Iupana (https://iupana.com/2020/01/06/ai-cultural-change-and-open-banking-latam-bank-tech-priorities-in-2020/?lang=en#widget/?lang=en), Chile and Peru are also advancing with open banking. The advent of open banking in Latin America is attracting foreign fintechs such as Rapyd, which in March 2020 partnered with Brazil’s Dock and Banco Rendimento to offer its international customers local payments solutions in Brazil (https://www.electronicpaymentsinternational.com/news/rapyd-joins-dock-banco-rendimento-to-launch-all-in-one-solution-in-brazil/).
Swedish open banking API vendor Tink has acquired Madrid-based Eurobits (https://www.verdict.co.uk//retail-banker-international/news/tink-acquires-eurobits-technologies/) to expand into Latin America, where Eurobits provides account aggregation services in Mexico, Chile, Colombia, Argentina and Peru, and Southern Europe.
“Open banking should generate great benefits for Brazilian consumers by encouraging financial sector competition and reducing prices for end users,” Gilberto Martins, Global Regulatory and Legal Director at Latin American cross-border processor EBANX, says. “We hope BCB will extend the opportunity to participate in open banking to other entities in addition to the banks and fintech lenders, which currently fall within the BCB’s open banking guidelines.
The launch of PIX will further stimulate financial sector competition and bring Brazil closer to a cashless scenario. Also, PIX will allow payment companies, retailers, small businesses, and microentrepreneurs to reach a new demographic of customers, expanding their total addressable market with a new payment option.”
“In Brazil and Mexico, there’s an expectation that real-time payments will lower merchants’ payments costs by providing a cheaper alternative to payment card acceptance,” says Arkwright Consulting partner Francesco Burelli.
Both countries are pursuing similar objectives comprising a mix of financial inclusion, increased competition to financial services incumbents, replacement of cash payments, and the reduction of the shadow economy in their respective markets.”
Burelli says that Brazil and Mexico’s adoption of real-time payments solutions will face potential transaction latency in rural areas where data connectivity may not be as far-reaching as in urban areas. “A further challenge will be the affordability of smartphones, which, despite on-going price reductions, aren’t universal throughout the underserved demographic segments in both countries,” he says. “Brazil and Mexico’s central banks will likely face challenges similar to those seen in other countries where mobile-based, real-time payments have been introduced, including fraud, money-laundering, and consumer data protection issues.”
Visa is positive about the advent of open banking in Latin America. “We believe our network is well-positioned for open banking, and, working with partners, we can bring open banking capabilities to life with our Latin America and the Caribbean clients in markets like Mexico and Brazil,” says Ruben Salazar, SVP of Products and Innovation for Visa LAC. “We have a positive view of the implementation of real-time digital payments systems in Mexico and Brazil. This paves the way for more options in the ecosystem that ultimately improve the payment experience for consumers and enable us to continue competing against cash.”
“Mastercard sees PIX as a big evolution of Brazil’s electronic payments industry,” says Walter Pimenta, SVP, Products and Innovation at Mastercard LAC. “It’s important to highlight that PIX is interoperable and uses the EMV QR standard, which makes it compatible with the cards ecosystem. Brazil is the most advanced electronic payments market in LAC and has been advancing rapidly in implementing open banking. Mastercard sees open banking as an important global trend and a significant opportunity for Mastercard. Our approach is to offer open banking solutions for connectivity, dispute resolution and fraud prevention meeting the needs of all parties – consumers, fintechs and banks – and to participate in the creation of the open banking ecosystem, not only in Brazil and Mexico but globally.”
Banco Central do Brasil (BCB) says that its PIX 24/7/365 instant payment scheme (https://www.bcb.gov.br/en/financialstability/instantpayments) will be operational by November 2020. All Brazilian banks and payments companies with over 500,000 customers (including chequeing and savings accounts, plus prepaid payment accounts) will be required to participate in PIX by then. PIX, which is based on ISO 20022, is currently in soft launch with FIs and PSPs testing their systems to check interoperability and risk issues.
PIX is designed to provide lower-cost payments and transfers for payors and payees than Brazil’s current near-real-time interbank payment systems.
It will offer P2P transfers, payroll, bill payments, and boleto bancário (banking ticket) payments as well as payment of taxes and government service fees. Intended for unbanked consumers, boleto bancário (https://www.pagbrasil.com/payment-methods/boleto-bancario/) is a barcoded payment slip which can be settled at convenience stores, supermarkets, or bank branches.
“BCB’s main objective with PIX is to increase the efficiency and competitiveness of Brazil’s retail payments market through a new payment scheme that will enable the digitalization of the Brazilian market,” says Carlos Ogata, Executive Managing Director of Brazil’s OGA Consulting and a Director of PAGOS (Association of Electronic Payment Management Companies).
PIX payments will take place by scanning QR codes, via NFC, or by entering payees’ email addresses, taxpayer ID numbers, or cellphone numbers, which will serve as proxies for their bank accounts. Transactions will clear and settle via BCB’s underlying centralised settlement infrastructure, the Instant Payments System (SPI), which will have two participant categories;
- Direct participants such as banks and clearinghouses which have accounts with BCB and will settle transactions directly on the SPI platform;
- Indirect participants, whose transactions will be settled through a direct participant. Payment institutions and fintechs that aren’t licensed by BCB can only participate as indirect participants.
BCB will operate a Proxy Identifier Database (DICT), which will be the repository of payees’ proxy identifiers. SPI direct participants will access DICT directly, and indirect participants may either access DICT directly or indirectly.
“PIX represents for us and our international merchants an opportunity to boost local reach in Brazil,” says Rodrigo Sánchez Prandi, VP of Product at cross-border payments platform dLocal. “Due to PIX’s reliability and instant nature, it is expected to become Brazil’s preferred scheme for peer-to-peer transfers. Also, there is a huge opportunity for online payments in Brazil as its digital payment adoption still lags India, Europe, and the US. With BCB’s standardized real-time scheme, we expect a huge surge in digital payments.”
Sánchez Prandi says PIX’s main advantage over digital wallets which already offer real-time transactions in Brazil, will be its reach. “All larger market players have to fulfill the BCB’s requirements to participate in PIX,” he says.
“We expect to be able to reach potentially over 45m new users with a better way to pay for their online shopping via PIX. For e-commerce, PIX will allow us to execute payments through an alternative payments method (AMP) at the same speed as card-based transactions.
Considering that confirmation for boleto bancário, Brazil’s leading APM, can take from 20 minutes to two days, PIX stands to gain significant adoption in the market.”
In May 2019, BCB announced its regulations for open banking in Brazil (https://www.bcb.gov.br/en/pressdetail/2330/nota), having published guidelines for implementing the technology in April (https://www.bcb.gov.br/content/config/Documents/BCB_Open_Banking_Communique-April-2019.pdf). BCB said that the aim of open banking is to increase efficiency in Brazil’s credit and payments markets by promoting a more inclusive and competitive business environment, while preserving the security of Brazil’s financial system and ensuring consumer protection. The regulations will allow authorized payments initiators to provide transaction initiation services, at the customer’s request, from bank accounts or payment accounts.
“BCB defines open banking as the sharing of data, products and services by FIs and other licensed entities through an integrated IT infrastructure ensuring security and convenience,” Isabel Carvalho and Ana Laura Pongeluppi, respectively a partner and an associate at law firm Hogan Lovells, tell EPI. “Individuals must consent to their data being shared.”
“Brazil is at an early stage of open banking,” says Ogata. “In early December 2019, BCB launched a public consultation with stakeholders to discuss fintechs’ participation in initiating consent-based transactions from customers’ bank and payments accounts in accordance with Brazil’s General Data Protection Act (LGPD). In March 2020, BCB announced the formation of a working group to discuss the model of open banking for Brazil, with a deadline of 30 April 2020.”
Open banking will be implemented gradually in Brazil, between November 2020 and October 2021, BCB said.
“Open banking will be implemented in four phases in Brazil, and each phase is planned to be implemented in six-month periods starting in the second half of 2020,” says Ogata. “The first phase (to be implemented by November 2020) involves sharing data on products and services offered by FIs.
In the second phase (May 2021), FIs’ customers will be able to give their consent for their financial transaction data to be opened up to third parties. The third phase (August 2021) includes fund transfers and payment initiation, which will allow payments to be initiated outside the banking environment, through a messaging application, for example. The fourth phase (October 2021) will allow other data such as investments, insurance to be standardized and shared between financial institutions.”
“As open banking is closely related to PIX, we expect to see open banking become a reality close to PIX’s launch,” says José de Carvalho, CIO of Brazilian prepaid card issuer BPP (previously called Brasil Pré-Pagos). “We believe that the benefits of open banking include enabling companies to build new services connecting easily with banks without creating new systems.”
“Open banking will provide a larger range of financial services in Brazil, as customers will be able to integrate their banking information into multiple platforms,” says Ralf Germer, CEO of Brazilian processor PagBrasil (https://www.electronicpaymentsinternational.com/special-reports/brazilian-fintechs-facilitate-global-cross-border-e-commerce/). “We strongly believe open banking will also provide convenience and financial inclusion, as customers will be able to carry out financial operations from any app.”
In advance of formal open banking infrastructure, Brazilian banks are sharing their open APIs with fintechs in order to benefit from services developed by these companies. Fintech partnerships enable banks to offer new services such as loans and personal financial management (PFM) quickly and efficiently to a larger market.
“The first API integration between Brazilian banks and fintechs occurred in August 2019 between digital-only Banco Original and PFM provider Guiabolso,” Carvalho and Pongeluppi tell EPI. ‘The partnership allows Banco Original’s customers to view their spending and income data in Guiabolso’s app. Banco do Brasil, the largest FI in Latin America, has been developing partnerships with fintechs as well as with other players.”
“Banco do Brasil (BB) has integrated via API with several fintechs to share services such as personal loans and viewing account statements,” says Paula Sayão, BB’s Director of Digital Business. “Our first partnership took place with Conta Azul, a cloud financial management platform for small businesses. This partnership is interesting, as some BB customers had expressed the need for a more robust PFM product. So BB looked at whether it was worthwhile developing the product internally or through a partnership. We decided on the partnership option and began the integration process. Shortly after we announced our partnership, over 1,000 companies joined the Conta Azul platform to integrate their data with it.”
BB has integrated with the Bxblue loan marketplace. “BB account-holders can use Bxblue’s platform to take out a loan from BB,” says Sayão. “We also share one of our APIs with a digital bank called Agibank which enables customers to add debit authorisations to their account without having to visit a BB branch.”
“We see many possibilities with open banking such as the expansion of products and services that can be offered on BB’s platforms as well as on third-party platforms,” says Sayão. “These new functions and services will add value on a broader scale by improving the consumer experience and making our relationship with customers more relevant and engaging. We see open banking as an important stimulus for innovation and competitiveness.”
“Itaú Unibanco already works with some open APIs,” an Itaú Unibanco spokesperson tells EPI. “However, the requirements and standards for Brazil’s open banking ecosystem haven’t yet been defined. We believe that open banking will be a natural technological evolution in Brazil, following a global trend of focusing on client-centred experiences.”
In October 2010, Banco de México (Banxico) launched the CoDi 24/7 digital payments service. Based on QR codes and NFC technology, CoDi enables people to buy and sell goods and services at the point of sale or online. Anyone with accounts at regulated Mexican financial institutions such as banks, Sofipos (Sociedades Financieras Populares/community financial institutions), or Socaps (Sociedades Cooperativas de Ahorro y Préstamo/cooperative savings and loan institutions) can use CoDi to pay for purchases up to MXN 8,000. However, users must download their FI’s mobile banking app to access CoDi.
Payments are cleared instantly through Mexico’s real-time interbank payment network Sistema de Pagos Electrónicos Interbancarios (SPEI), and transactions don’t incur any fees for users or participating banks. As of October 2019, 33 financial institutions were participating in CoDi.
CoDi aims to encourage competition amongst payment service providers and to attract financially-excluded consumers who lack access to traditional banking and payment services, but own smartphones. This will help achieve financial inclusion, with the goal of bringing people currently doing business in Mexico’s large informal economy into the financial system. Banxico also hopes to reduce the amount of cash used in everyday transactions.
“Since 1 October 2019, 2.4m CoDi user accounts have been opened and, as of 3rd April 2020, transactions totalled MXN 230m,” Rene Arce, Luis Davalos, and Dinorah Pensado, respectively partner, senior associate, and associate at Hogan Lovells, tell EPI. “The three main banks participating in CoDi are BBVA, Banamex, and Bancoppel, accounting for 74%, 8% and 6% of user accounts opened to date, respectively.
All participants in SPEI can have direct access to CoDi, including banks, Sofipos, Socaps, fintechs, and other payment institutions. Also, Web developers and e-commerce companies that don’t have access to SPEI, can participate directly in CoDi by developing mobile applications for collecting payments, once they have Banxico certification to access CoDi.”
In 2019, Mexico became one of the first countries to regulate its fintech sector with the publication of its Law to Regulate Financial Technology Institutions. This so-called Fintech Law regulates virtual assets, electronic payments, and crowdfunding, introduces a Regulatory Sandbox, and requires the publication of regulations for Open APIs within two years. It aims to encourage the rapid growth of Mexico’s fintech industry, one of the largest in Latin America.
Arce, Davalos, and Pensado note that, according to the Fintech Law, all financial institutions including banks, fintechs, credit institutions, and money transmitters are required to share through APIs the following data:
Information about financial products and services offered to the public, plus location of offices and branches, ATMs, and other access points;
Aggregated data: statistical information about operations carried out by or through financial institutions;
Transactional data: information about the use of a product or service, including deposit accounts, loans, and other financial services. This information can only be shared with customers’ consent.
According to C Mind’s Del Pozo (https://www.openbankingexpo.com/insights/the-global-revolution-of-open-banking-a-look-at-mexico/), Mexican regulators differed from the scope of the UK open banking standard by requiring that Mexico’s open banking regulations apply to all products and services and be adopted by all financial service providers, not just banks.
The Fintech Law specifies that the National Banking and Securities Commission (CNBV) and Banxico are required to issue the secondary provisions for Open Banking by March 2020. However, publication of these secondary rules has been delayed.
“Since the operational rules for open banking haven’t been published yet, banks aren’t required to share their open APIs with fintechs,” Arce, Davalos, and Pensado say. “However, in 2018, prior to the Fintech Law’s enactment, Mexican banks had already begun to share data through public APIs. For instance, Citibanamex has an international developer hub with 16 public APIs available specifically for Mexico. Likewise, Banregio and BBVA have begun to share data through APIs.”
“We think that in Mexico open banking will include open payments, where fintechs can initiate payments from customers’ bank accounts with their consent, and this will be done through an API,” says dLocal’s Sánchez Prandi. “Open payments will be the main reason for consumers to adopt open banking.