Bank Regulation

Deep Dive: How The COVID-19 Pandemic Is Shifting Latin America's Open Banking Plans

Open banking has been picking up steam in Latin America for more than two years. Regulators in Mexico passed a law governing FinTechs in March 2018, just two months after PSD2 went into effect in the European Union, and others in the region have since followed suit. Brazilian lawmakers have been developing open banking plans since 2019, for example, outlining rough guidelines to be enacted late this year.

Many of these initiatives are moving forward during the COVID-19 pandemic, with Banco Central do Brasil — the nation’s central bank — announcing a four-stage rollout of open banking standards set to take place in 2020 and 2021. Mexico’s financial authorities have also updated their country’s 2018 law, making shifts that allow financial companies to more easily connect with larger financial institutions (FIs) and other business partners via application programming interfaces (APIs).

It may not seem like the pandemic is significantly affecting open banking in Latin America, but further research reveals that it is. The current health crisis continues to keep bank branches and other brick-and-mortar businesses closed, pushing customers to seek digital alternatives to fulfill their daily needs. This month’s Deep Dive explores open banking’s rise in Latin America as well as how growing smartphone penetration and internet access are fueling its adoption there. It also analyzes how the pandemic is affecting the future of open banking in
the region.

Open Banking And Digital Readiness

Growing interest in open banking typically coincides with the expanding use of online financial platforms and tools. The creation of open banking initiatives in the E.U. followed a steady increase in the usage of digital banking products both inside and outside Europe. A similar pattern is unfolding in Latin America, with interest in online services spiking as digital tools and solutions steadily filter into the region.

Internet connectivity within Latin American countries is spreading slowly, however. Just 13 percent of Brazil’s population subscribes to broadband internet services, for example, and more than 45 million of the nation’s adults remain unbanked. A 2019 survey showed that 73 percent of Brazil’s consumers would be comfortable banking with online-only banks, though, and the use of mobile and nontraditional financial tools is also expanding. More than 120 million consumers in the country use WhatsApp, for example, which allows them to interact with businesses and make purchases through the app’s mobile wallet without requiring bank accounts.

This steady march toward online banking tools has played a key role in how Brazil’s regulators are structuring its open banking rules. The first stage of its central bank’s four-step plan details how FIs, payment institutions, FinTechs and others can collect or share consumers’ transactional data, setting the stage for the next three phases, covering other aspects such as foreign exchange information and loan data. Mexico has crafted its upcoming rules with similar developments in mind, especially as its 2018 law makes the market more attractive to FinTechs. There were 441 FinTechs operating in Mexico in 2019, a 14 percent increase from 2018.

Both countries’ regulators have aimed to create rules that simultaneously satisfy and safeguard consumers who are growing more enthusiastic about online banking tools, but their initiatives were largely developed before the COVID-19 pandemic took shape. The region’s financial authorities have announced open banking regulatory changes in response to the health crisis, and the event therefore appears to have had little effect on the space’s current rise. The potential impact of the crisis on open banking’s future in the region is a different story, however.

The Pandemic's Delayed Effects On Latin America

The COVID-19 pandemic is likely to have large-scale, long-term impacts on open banking laws in both Brazil and Mexico, partly because it has significantly and immediately affected both countries’ economies and overall consumer behaviors. Understanding the virus’s impacts on both nations’ financial industries is thus key to understanding how it could change their open banking strategies and regulations.

Both countries have been among those hit hardest by the pandemic, leading many consumers to avoid leaving their homes even as retail businesses reopen in some markets. Months long social distancing and stay-at-home orders have left their marks, too, with recent data showing that the adoption of digital and online tools has been less robust in Mexico than in other Latin American countries. Both Mexico and Brazil also have large shares of unbanked consumers, and the pandemic is highlighting that many are choosing to interact with FIs and businesses through mobile phones rather than traditional channels.

Mobile wallets supported by card network Visa, such as PLIN and Yape, have gained more than a million users since December 2019, and the pandemic is accelerating this trend. One recent study predicted that 86 percent of adults in Latin America will have smartphones by 2025, while two-thirds of the region’s consumers said in another survey that the pandemic will push them to reduce their cash use in the future. This would represent a massive change for regulators, as 80 percent of transactions within Latin America are still conducted via cash payments.

FIs and regulators in Latin America therefore must closely monitor these shifts toward mobile payments, especially those enabled by third-party or FinTech platforms. The COVID-19 pandemic is set to dramatically affect the region’s approaches to and regulations regarding digital finance and payments within the next few years, and future open banking regulations must take these developments into consideration so that such transactions can be made securely and seamlessly.



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