Valentina Meneses
Analyst
AMI
For several years the financial sector has seen the evolution and improvement of its services based on a customer-centric model and viewing customers as owners of their financial data. According to the Open Finance Market event held in Bogota, Colombia, on May 5, 2023, the market is broadly headed toward an open economy, starting with Open Banking, and continuing with Open Finance. Different key points are emerging at the heart of this process, among them the technological advances and the regulations that allow such an evolution. Below we summarize some of the lessons learned from the Colombian context.
Open Banking and Open Finance in Colombia
Open Banking refers to banks allowing other financial players access to information about their customers. It means recognizing users as the owners of their financial information. Consequently, only they can accept (or not accept) the democratization of their data, which represents a paradigm shift. In this respect, if users agree to share their data, various financial or non-financial institutions will be able to offer them personalized products and services. One example of open banking is the use of a single integrated application for managing several bank accounts, such as Bancolombia’s alliance with Finero (a Mexican startup), called Finero Connect Bancolombia. This Open Banking solution lets users share their data to obtain better products. In turn, it allows entities to get to know their customers better and offer them personalized services, tailored to their financial needs and situations.
In regulatory terms, open banking’s implementation in Latin America is a common objective whose advancement depends on each country’s capacity and willingness to achieve it. Countries such as Mexico, Brazil, Colombia, and Chile already have regulations in place. Other countries, like Argentina and Peru, are still conducting research and structuring their regulations. Colombia in particular has a hybrid model in which financial institutions are leading the implementation of open banking, in alliance with the regulator, developing regulations together that will allow for the most viable use cases.
Open banking as a concept, however, has evolved toward integrating the entire financial system. This is the context in which Open Finance has emerged, moving beyond the exchange of information between banks to offer far more integration and inclusion. Here is where other financial services, such as insurance, pensions, investments, etc., enter the frame.
API, tools that allow data integration in Open Banking
Application programming interfaces (APIs) are what enable the exchange of data among the different players.
But what are APIs?
They are defined as a “a set of tools, definitions, and protocols for integrating application software and services” aimed at “the connection of data, applications, and devices.”[1] APIs can be private, shared (developed with a provider), or public. They are also monetizable, meaning that, as a product, they can offer new revenue streams. The models considered by Colombian banks include:
- Charging third parties directly for each data request
- Giving third parties a balance to consume as they use the data
- Allowing free access to some data and charging for access to other data
- Exposing their data to third parties to make improvements to their existing products and gain new customers. For example, a bank may be allied with a fintech that does credit analysis, to improve the way this bank issues credit.
However, these models are still in the early stages in Colombia. Banks are currently experimenting with them, so APIs do not represent a significant share of their revenue. Nevertheless, we can list a few cases of institutions leading the way to the open economy:
- Banco Davivienda and its BaaS model to enable debit card and account issuance for Rappi
- Grupo Aval’s development of its own APIs to connect with the various banks of the group
- Coopcentral’s model, which offers Open Banking for deposits, allowing it to take up customers of entities like Tpaga, Efecty, Claro Pay, or Mono
- Finero Connect Bancolombia, as mentioned previously
In this context, the importance of BaaS platforms has begun to show. They allow companies from different sectors to connect to their API systems and offer financial products and services to their users without necessarily being financial institutions themselves. APIs have different use cases, from improving onboarding processes, to payment initiation and financing options such as instant loans or BNPL. APIs add value to the processes, as well as agility and innovation in a context where users want immediate solutions.
To summarize all of the above, the graph below shows the evolution of products and services toward a customer-centric model enabled by APIs. Open Banking can lead to the evolution of services such as account aggregation, personalized banking services, and in-purchase offers. It is followed by Open Finance, with the incorporation of products and services related to insurance, mortgages, pensions, consumer loans, and investments. Ultimately, it is possible to imagine an open data economy in which companies like airlines, energy utilities, transport services, etc., would be integrated.
Addressing security
Concerns about the use of personal data are among the pain points of the open economy. However, Open Finance companies agree it is precisely these software tools and APIs that improve security, while also ensuring that the products and services work properly.
Looking at these tools in more detail, we might mention certain standards, such as ISO 27001, which consists of an Information Management System based on an established risk assessment system. It uses a Zero Trust model, in which no device is trusted until considered explicitly necessary, as well as encryption for handling information, and other strategies.
Embedded finance
Another concept that the open economy puts into play is embedded finance, where companies that are not present in the financial system can use APIs to provide the services and products of a financial institution. This simplifies the user experience and avoids friction points such as redirecting the user to another page to complete the purchase process. In this way, embedded finance promotes customer retention and revenue growth. This type of practice will likely bring with it new actors that will make for a more competitive, yet customer-centric, financial system.
Challenges and opportunities of Open Finance in Colombia
Looking beyond the regulations for developing or implementing open finance in Colombia, it is important to talk about the regulatory framework for data protection, which is more than 20 years old and needs aligning to prevent legal gray areas.
At the same time, there are challenges like user training for the authorization process, and the terms and conditions for the use of their data. As mentioned previously, security is one of the pain points of Open Finance in Colombia because, aside from the potential for data leaks, fraud or scams that could be solved by using technology and investing in security and innovation, there are concerns over the ethical use of information. In other words, how do we ensure data is not used for purposes other than those authorized by the user?
Why should financial services evolve toward an open economy?
It is interesting to ask ourselves a few questions that may not perhaps be answered within the framework of this article:
- Is this model sustainable in the medium and long term for traditional players like banks?
- Have the system’s players system accepted this model out of regulatory pressure or as a strategy?
- What is the relationship between open banking and real-time payment systems, such as SPI, currently under development in Colombia?
- How can consumers be educated about open banking and the responsible and secure handling of their personal information?
These and other questions remain to be answered and deserve a special look as open banking evolves in Colombia and Latin America.
If you would like to learn about the opportunities Colombia offers for your company in the context of open finance and open banking, get in touch with PCMI.
PCMI, a subsidiary of Americas Market Intelligence, conducts personalized studies tailored to the investment needs and projects of its clients. Its areas of focus include open banking, payment initiation, e-commerce, alternative finance, crypto, and more. PCMI’s founders have more than four decades of experience in market intelligence for the payment sector and have produced more than 300 studies for the industry.
Sources
[1] RedHat, 2018. “Understanding APIs“
Zambrano, R., 2023. “Open Finance“. La República
Filippis, M., s.f. “Retos y oportunidades del Open Finance en Colombia“. Universidad Externado de Colombia
iPro Up. “Qué son las Finanzas Embebidas y cómo te transforman la vida sin que te des cuenta“
