In an earlier AMI Payment Coffee Chat — held on March 28 — AMI’s team discussed the “Payment initiation” in Brazil. This new approach to open banking is licensed by the Central Bank of Brazil (BCB) and allows players to run Pix transactions directly on the app, which will have a huge impact on e-commerce. We touched on this earlier in our article on 6 payments megatrends in Latin America in 2022, but this Chat and this piece delve into it in greater detail. Before we begin with that, however, the graphic below will take you to our Coffee Chats page so you can find out more about that and register to attend.
AMI Payments Coffee Chats for Latin America
This biweekly discussion brings together top payments professionals with AMI’s team to discuss the crucial issues affecting the industry, providing fresh data and strategic analysis to provide clarity
Phases of Open Banking and the Payment Initiator
Brazil is becoming a pioneer to open banking initiative, led by the Central Bank of Brazil (BCB). According to AMI Payments Practice Leader Lindsay Lehr, “There is a clear path of open banking in Brazil, with established dates and phases, and is well ahead of other countries in the region.” Mexico seems to be following a regulator-driven open banking process, although it is falling behind its own target dates, while other LatAm markets are following a market-driven open banking approach.
As laid out by the Brazilian Central Bank, the four phases of open banking are as follows:
1. Product and service information
2. Customer information, which went live Aug 2021
3. Transactional information, which began October 2021, and includes:
- Fund transfers between accounts
- Bank slip payments
- Debit payments
- Payment initiation
4. Open Finance, which involves exchanges, investments, pension plans and insurance
Payment Initiation, the New Launch by Brazil’s Central Bank
Phase 3 of the open banking regulation includes what is called “payment initiation,” a function that enables non-banks to initiate payments on behalf of another entity. This is most relevant for payments via Pix. The Central Bank’s payment initiator function enables e-commerce merchants and digital wallets to execute a Pix transaction without requiring a redirect to the user’s banking app to authorize the transaction. Prior to payment initiation, Pix transactions required the user to switch between apps — they needed to obtain a Pix code from the e-commerce merchant where they want to make the payment, then go to their bank app to paste in the code in order to complete the transaction process. But in the case of payment initiation, any financial solution fintech or merchant can receive a special license to initiate a Pix transaction within their own app. In words of Lehr, this approach to open banking in Brazil is “quite disruptive,” with multiple benefits that include:
- Merchants becoming the “payment initiators,” making payments more accessible and attractive
- Empowering non-banks to provide payment services like P2P
- Making Pix transfers even easier and faster, cutting down the online purchase process to 3 steps (from 7)
- Reducing friction from digital payments
- Migrating spend from physical to digital
Mercado Pago, the First Payment Initiator under Open Banking
It was recently announced that Mercado Pago had become the first payment initiator under open banking in Brazil. “Mercado Pago brings the money from user’s bank account to their Mercado Pago wallet,” explained Lehr, “by allowing users to initiate a Pix transaction directly in the Mercado Pago app.” However, she clarified that Facebook Pay (WhatsApp payments) was actually the first payment initiator in Brazil, although it did not operate under the same exact open banking regimen as Mercado Pago. Indeed, Facebook did receive a special license from the Central Bank in March 2021 to enable WhatsApp to enable money transfers via Visa and Mastercard card rails. According to Brazil’s Central Bank, “the licenses granted may bring new possibilities of cost reduction for users of payment services.”
Regardless, the next step for Mercado Pago and other payment initiators will be to let consumers pay for e-commerce purchases by using Pix directly on their platforms. This capability greatly improves the e-commerce experience for consumers, creating a more seamless and faster checkout experience. The fear of large banks and card networks is that payment initiation makes it even easier for consumers to funnel funds out of traditional bank accounts and into digital banks and wallets, and for consumers to choose Pix instead of a credit or debit card when checking out online. Since most banks and merchants have not enabled debit card usage for online purchases in Brazil, this has created a vacuum which Pix is quickly filling and will continue to do so.
The Difference between Open Banking and the Current Pix Landscape in Brazil
The payment initiator function is one tangible impact of open banking that has a clear impact on consumers. However, beyond this, consumers have largely not yet felt the impact of open banking, even though we are already in Phase 3. In theory, due to data sharing across financial institutions, the benefits of open banking to consumers include getting a better credit score, getting better and more tailored offers on credit cards and loans, and accessing aggregated platforms like personal finance managers. However, most consumers are not yet experiencing these benefits, even after agreeing to share their data across various banks. As explained by Ricardo Marson, Product Superintendent at Getnet, explains, “At the end of the day, it’s expected that the more data you share, the broader commercial conditions you might have; the better fees, and so on, but that’s something we are not seeing yet,” he said.
From our conversation during the Coffee Chat, we learned that there are two major reasons for this:
#1 Not all banks are sharing data
#2 The banks that are sharing data don’t know what to do with the data—yet
During this March 28 Chat, Rafael Teruszkin from PagoNxt indicated that only tier 1 and tier 2 banks are enforced in the open banking regulation in Brazil. This means that large banks, like Santander, Bradesco and Itaú, had to implement all open banking infrastructure and therefore are able to ask their customers if they would accept to share their data, from which institutions, which accounts or products, and for how long, on a very secure consent process. Neobanks and fintechs are not enforced by regulation (although they could chose to participate, in the reciprocity model defined), which currently leaves most of them out of the equation. Teruszkin mentioned that currently there are roughly 40 active institutions on the Brazilian Open Banking ecosystem, opposed to around 800 connected to PIX and cited the example of Nubank: although it’s one of the biggest neobanks in LatAm, it is not yet part of the open banking participants list. By not having the country’s largest digital player and many relevant others, this ends up limiting the effectiveness of new product based on open banking data sharing and consequently, its attractiveness to consumers.
In addition, banks have been bogged down with several mandated projects, including complying with open banking and enabling Pix. This has left little time for investment in data analysis, big data, machine learning and other technologies that help banks understand the data they are collecting and turn it into insights. As per our invited experts, a may be a couple of more years before consumers actually experience the benefits of open banking. And until this occurs — until consumers get something in return — it’s unlikely that consumers will begin sharing their data on a large scale.
The graphic below shows part of the process that any user from Banco Santander should follow if they want to share their payment activity on other banks (such as Caixa) with Banco Santander.
Pix: A Brand-Focused Platform with A Defined UX
With open banking, this is not the case. BCB did not regulate the open banking user experience, meaning banks have had to develop the consumer journey for consumers to share their data on their own. This has created an inconsistent UX across banks and a process that is difficult, takes many steps and can be confusing. So that data sharing can really scale, “we should wait until the BCB defines a more specific journey as it did for Pix,” said Marson.
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Brazil: Pioneer in Open Banking Regulation and Usage
While some believe that the Brazilian Central Bank made the mistake of not branding or regulating the UX for open banking, which has caused it to stall, others congratulate the Central Bank for taking steps to put consumers data, and the consent to Access and use it, in the hands of the consumer. Other platforms around the world that aggregate banking data across multiple platforms use screen scraping, a practice that involves consumers sharing their banking password with a third party, who then logs in on behalf of the user and “scrapes” the data together. In contrast, this model puts the consumer in the driver’s seat; they get to decide who accesses their data, what kind of data, and for how long, without having to share their password or compromise security. Of course, this route requires cooperation across the ecosystem and takes time to build, but some argue, will build a more sustainable and more secure platform for data sharing and cross-sector data analysis in the long run.
The main lesson we learned in this Coffee Chat was that successful implementation of open banking takes patience, as even the world’s largest financial institutions are still in the process of dealing with massive amounts of consumer data and turning into tangible benefits for customers. In the meantime, innovations like payment initiation can make open banking feel more real for all those involved.
We invite you to download our Payments Coffee Chat deck about payment initiation. To access the presentation, please click the image below.
We also invite you to register for our AMI Payments Coffee Chats so you can join us for our bimonthly deep dives into LatAm’s payments sector.
Contact us if you need detailed research about the payments landscape in Brazil, including Pix, open banking, regulation and other key topics. We can also provide detailed research studies on user benefits and needs, as well as opportunities for merchants, acquirers, issuers and other players.
You can also contact us if you want deep research on any other market in LatAm — or for the whole region. Our broad payments research experience includes mobile wallets, e-commerce, ACH, cryptocurrencies, and much more.