Open Banking In Brazil

Originally published on Fintech Today on May 4, 2021

Hey friends, Jenny here.

Google photos loves to remind me that this time last year I was deep in the banana bread making, sour-dough starter motherhood phase of blissful, insanity producing lockdown life. Google also reminded me that one year ago today, I screenshotted the announcement that the Brazilian Central Bank published regulations for the implementation of open banking in Brazil.

This brings up two ideas:

1. I really need to clean out my photo archives
2. We should do a deep dive into what has been going on with Open Banking in Brazil and what it could mean for fintech opportunities in the country

I sat down virtually with dear friend Thiago Alvarez, CEO and co-founder of GuiaBolso, to get the latest. GuiaBolso is a platform for financial management and a marketplace that also provides an open banking solution for financial institutions. It’s been a longtime leader in Open Banking, before open banking was cool or even a thing. Some might even call my friend one of the seven Board Members leading the creation and rollout of Open Banking in the country, representing the voice of fintech companies. Some might also call him a Jedi master, wielding the fintech force for good in Brazil.

Others might call me out on my Star Wars references. Buckle up because it is May 4th and we are taking it back to a long (not really) time ago in a galaxy country far (two flights), far (15hrs+) away (from SF)…

“Decide you must, how to serve them best.”

The Central Bank of Brazil (known at BACEN or BCB) has been discussing open banking since 2018. The initiative is part of a larger push by the central bank to promote digitization and transparency of financial services in Brazil, as well as increase competition by welcoming new market players and business models. Need I not remind you that the four largest banks control over 80% of deposits and charge some of the highest fees and interest rates in the world. Over the years, the Central Bank has pushed fintech-friendly regulations to stimulate competition like in 2018 when they allowed fintechs to directly extend credit and when they launched the instant payments system, PIX, in 2020. Open banking is the current focus.

The fundamental aspect of Brazilian open banking is the individuals’ autonomy to choose banking and financial services products. This means individuals need to have control over their information and financial history, easily migrating it from one institution to another, from one service to another, or even integrating services and products from several institutions at the same time.

The Open Banking regulation process was kicked off in the first half of 2019 by the Central Bank of Brazil in Announcement 33.445. On November 28, 2019, they published the draft regulation text for public consultation with the deadline for comments January 31, 2020. On May 4, 2020, the Central Bank of Brazil published official regulations for the implementation with the goal to have full implementation by the end of 2021. So where are we in the rollout?

“Do. Or do not. There is no try.”

There are four phases of the rollout and according to Thiago, they are all moving in parallel.

• Phase 1 — “Provision of access to institutional information about customer service channels, products and services.”In human speak, that means open, standardized data. Banks must provide a product catalog that shows all their products and prices. This in and of itself would be huge, as banks historically have not shown all their products or prices. Phase 1 was completed in February. However, the system is working through data quality issues. For example, some banks are sending annualized interest rates, not monthly, as aligned. Some are sending nominal interest rates vs. real. The banks are working on correcting the data quality issues and that the Central Bank is overseeing it.
• Phase 2 — “Provision of customer-consented access to transaction and registration information related to customer usage of the products and services covered in phase I.” Translation: with customers consent, banks can share registration and transactional data. This should be complete by July 15. Standards for consumer data include a 12 month history for: 1) KYC — personal info, address, CPF (Brazilian SSN); 2) checking acct info — balance, transactions; 3) credit card info; and 4) credit operations.
• Phase 3 — “Provision of customer-requested payment initiation services and forwarding of loan proposals.” Aka payment initiation and credit underwriting/offers. This is scheduled for August 30 but it is still in design mode.
• Phase 4 — “Expansion of scope of data to include areas like currency operations, investments and insurance.” Here we are talking about open everything. Wild. I asked Thiago where the Board is on phase four and he said “for now, we are not even touching.” This will require the participation of other regulators and is set to be completed by December 15. On April 22 SUSEP, the insurance regulator in Brazil, announced the public consultation for Open Insurance so there is at least some movement.

Thiago reiterated that this is all far broader than Open Banking and more like Open Finance.

“You will find only what you bring in.”

Who has to comply? Phases one,two, and four are currently mandatory for the largest banks and voluntary for other regulated financial institutions. Phase three is mandatory for all financial institutions with checking accounts (allowing a consumer to initiate payments from anywhere they have an account).. Overall, if you are not a regulated financial institution, you will not have access. And there is a cool reciprocity principle where if you are going to use data from the system you have to also share your data with the system.

“Your path you must decide.”

I asked Thiago how the banks are reacting. Febraban, the federation of the largest banks in Brazil, has historically been a fighter. One of the largest banks, Bradesco, even sued GuiaBolso back in 2018 in an attempt to shut the growing fintech down. He said “we are beyond the phase of banks trying to block.” While some institutions are still resistant, some are demonstrating progressiveness and looking at Open Banking as an opportunity for them, such as Itau.

“Patience you must have my young Padawan.”

There are a few unique aspects of Open Banking in Brazil worth highlighting. First, the Central Bank centralized management, as well as the adoption of a communication standard via APIs are great differentials in comparison with other countries. For example, the EU had decentralized implementation and customized APIs which resulted in a major communication problem between the interfaces of each institution. Second, Brazilian Open Banking is read and write. Not only will financial institutions be able to share and use data, they will be able to make transactions happen.Think for a second what this means for a lending business trying to automate collections or an investment platform trying to make a trade. Third, open banking is more than a capability, it’s an asset. Thiago feels that people are missing this part of the conversation completely. It is a real data asset. However, it will require time and expertise to unlock its true value.

“Difficult to see. Always in motion is the future.”

Who will be the winners of open banking in Brazil? In the first phase of open banking, among the solutions that may arise are the comparison platforms for bank fees, accounts, and credit cards. Likely also PFMs and marketplaces. These products have the potential to change the way banking services are consumed since users will have easier access to the options available on the market. Ideally this transparency will drive prices down. But this doesn’t necessarily mean banks will lose. As competition around prices and fees intensifies, large banks may have an edge over other players by having lower funding cost and a better structure to cushion pressure on margins.

The second phase will be all about customer experience and product customization. This phase can change the entire customer journey and the onboarding economics for a fintech. Customers can transport their KYC from their bank to a fintech, saving the fintech from having to build or source that capability themselves. Maybe they will pass these savings back to customers. With the data collected from KYC, fintechs can instantaneously customize the customer experience, product, and price. Fintechs can check for sufficient funds in accounts before initiating transactions. Could this eliminate the need for overdraft? *Dreams coming true*

Phase three and four could enable e-commerce or other platforms with the possibility of initiating a payment outside the banking environment. I can’t wait to see just how embedded fintech can get in Brazil.

Thiago reiterated that anyone can be a winner, from fintechs to the big banks. “[Read and write] data will be available to everyone. It will be about how fast and how well you go about understanding it. And to tailor it, you have to understand the customer journey.”

May the 4th be with you. See you in a few weeks!

And a huge thank you to Thiago Alvarez (CEO and co-founder of GuiaBolso) for the insights, all mistakes and opinions are my own.