Open Banking in Brazil: all questions answered by the Central Bank Brazil (Part 1)

Monday 20 September 2021 08:43 CET | Editor: Alin Popa | Interview

The Paypers has interviewed Otávio Damaso, the Central Bank Brazil’s Regulation Director, to get his latest thinking on what’s driving the evolution of Open Banking in Brazil, the progress made so far, and what more should customers, banks, and fintechs expect

What are the regulatory developments and recent trends in bank regulation in Brazil? 

Apart from trends in prudential, foreign exchange, and sustainability regulations, over the last years the Central Bank of Brazil (BCB) has enacted several important rules regarding fintech, in the payment and credit sectors and digitalisation of trade receivables, that aim at modernising the financial system and encouraging innovation and new business models. Aligned with other regulatory bodies and with the governmental agenda, BCB monitors technological innovations and assesses their potential impacts on operations conducted within the National Financial System (SFN) and the Brazilian Payment System (SPB). 

This approach has resulted in a successful agenda that fosters innovation in the country. Corroborating this statement, a study by the IMF concluded that Brazil is Latin America’s largest and fastest growing fintech hub, with more than 750 fintech companies operating in the country at end-2020

Some of our most relevant initiatives are: 

a) Credit Fintechs - CMN Resolution 4,656, of 2018, created two new types of financial institutions: the direct credit company, which may only use its own funds to extend loans (balance sheet lending); and the peer-to-peer loan company, which connects lenders and borrowers (peer-to-peer lending). Previously, companies providing financial services to micro, small and medium enterprises (MSMEs) were operating as correspondents of financial institutions. According to studies, 72% of these companies’ credit portfolio is composed of micro and small companies, a segment that usually has difficult access to traditional financial institutions. 

b) Open Banking - The sharing of registration and transactional data by customers has already begun, and payment initiation services are close to their launch. In addition, by the end of this year, the Brazilian Open Banking system should become an open finance initiative, as the expansion of scope in covered data includes foreign exchange operations, investments, insurance, and open pension funds, among other financial products. 

c) Trading receivables (duplicata escritural) - BCB has improved regulations on the issuance of electronic negotiable invoice in book-entry form. This ensures legal clarity for loans guaranteed by duplicates - known as invoice discounting. 

d) Regulatory sandbox - Introduces the 'controlled testing environment for financial and payment innovations' (BCB sandbox), aiming at establishing a proper framework for assessing financial innovations. For a certain period, entities will test innovative projects, while observing a specific set of regulatory provisions that support the controlled and delimited execution of their activities. The core purposes of the initiative are to meet the heterogeneous needs of financial users, to promote financial inclusion, and to balance the benefits of financial competition and the safety and soundness of the systems involved. 

e) Pix: Within the Brazilian instant payment (IP) ecosystem, BCB created Pix, the Brazilian IP scheme that enables its users — people, companies, and governmental entities — to send or receive payment transfers in a few seconds and at any time, including non-business days. By transferring funds between transactional accounts — demand, savings, and prepaid payment accounts — Pix is a payment method that tends to have a lower acceptance cost because its framework works with few intermediaries. It will also be the first payment scheme to be part of the Open Banking ecosystem. These initiatives are important steps in the process of digitising the financial system, creating an environment conducive to the emergence of new solutions for inclusive, competitive, safe, and suitable provision of financial services. 

What is the state of affairs of Open Banking in Brazil? What are the key initiatives running? 

Open Banking’s phase 1 is already in effect in Brazil since February 2021. Aimed at improving comparability of financial products, participating institutions were required to disclose public and aggregate information on service channels, products and services available, in an open data format. In the first three months the system was in place, 71 million successful API calls were registered, a powerful indicative of the project’s potential gains. Analysis has shown that further efforts on standardisation of information reported is required, understandably so, given the complexity and size of the Brazilian financial system. 

Phase 2 had its official launch in August 2021, and entails sharing customer’s or legal entities’ identification and transactional data, subject to prior consent and for determined purposes only. The sensitivity of the data being shared demanded a more cautious approach: APIs were divided in groups and will be published in rounds of 2-week intervals until October, to ensure adequate time for improvements, if necessary. 

It is expected that 2021 will also mark the launch of phases 3 (payment initiation and other services) and 4 (Open Finance), allowing for the sharing of data pertaining other financial products such as investment, foreign exchange, and insurance. 

Open Banking in Brazil has only begun, and therefore the impacts on customers and the emergence of new business models are still to come. In fact, we believe Open Banking should be perceived as a medium to long-term project, not simply a regulatory and technological framework, but rather a shift towards a consumer-centric financial system. 

What is the scope of the Brazilian Open Banking model? The main goal? What are its benefits and for whom? 

The purpose of Open Banking in Brazil is fostering competition in the financial sector by leveraging the sharing of data among financial entities. Open Banking is a priority in the competitiveness dimension of the Central Bank's agenda (the BC# Agenda). Reciprocity is at the heart of the regime in terms of ensuring a level-playing field in the data sharing between companies. 

Similar to what happens in other jurisdictions, the main objectives of Open Banking in Brazil are to increase competitiveness in financial markets, encourage innovation, and empower consumers with the promotion of their financial citizenship. Credit information about market niches will allow the emergence of new products and even new business models, for the benefit of consumers. Consumer empowerment, coupled with easier access to information, leads to better suitability of financial products, benefitting underserved population, which translates into a more inclusive financial environment. 

The Central Bank of Brazil has established an ambitious schedule with multiple stages of implementation: 

Phase I – Public data: up to February 2021 – already in place 

Aggregate information on banking products and services related to deposit, savings and pre-paid payment accounts, credit card, and retail credit transactions available for contracting. Additionally, aggregate information regarding service channels such as offices and branches, correspondents, and other channels available to customers. 

Phase 2 – Customer data: Starting in August 2021 – already in place (The sharing of this data requires the customer's prior consent) 

Registration and transactional data related to the products and services included in Phase 1 

Phase 3 – Payment initiation transactions and the service of forwarding loan proposals - Starting in the end of October 2021, this phase will be set up gradually until 2022 and includes debit to account, book transfers, transferência eletrônica disponível (TED), instant payments (Pix) and payment slips. Also in this phase, the sharing of data requires the customer's prior consent. 

Phase 4 – Open Finance: Starting in December 2021, this phase will also be implemented gradually. It includes: 

a. Products and services related to foreign exchange transactions, acquiring services in payment schemes, investments, insurance and open pension funds – December 2021. 

b. Customer transactions related to payroll accounts, foreign exchange operations, acquiring services in payment scheme investment, insurance, and open pension funds (the sharing of this data will also require the customer's prior consent) – May 2022. 

What is the potential of Open Banking in Brazil? (promising use cases, innovative products and services) 

The greatest merit of Open Banking is putting consumers back in the driver's seat while managing its own financial data. This occurs from the recognition that the consumer is the owner of its data and has the right to its portability to other regulated institutions. 

As the ownership of data shifts from incumbent banks to the consumer, one could also expect a power shift in the same direction. Innovation and the emergence of new models could then focus on a frictionless customer experience, with security, agility, and convenience, favouring the population's financial inclusion and education. 

Specifically, this will lead to a greater variety of products to choose from, more comparability between products and services offered by different institutions, and the possibility of initiating payments transactions in different digital environments and of transferring financial relationship to other institution(s) in a convenient manner. 

Other promising use cases worth mentioning are: location of service points; transactional data aggregation; transferring resources through social media; initiating payments in ecommerce; financial management and advisory tools; credit marketplace. 

What can you tell us about Open Banking in Brazil in terms of applicability? (eg in the EU, all retail and corporate banks that offer online accessible payment accounts are in scope) 

Due to the BCB’s legal mandate, our Open Banking strategy only covers licensed institutions (e.g., financial and payment institutions). To guarantee non-discriminatory access and compliance with regulations, a governance structure was built in which the participating segments have equal status. 

In the case of data sharing, participation is mandatory for Brazil’s largest institutions (part of conglomerates that have more than 1% of Brazil’s GDP or that have relevant international presence). Other licensed institutions are allowed to participate observing the reciprocity principle (they must have APIs in place to provide data to other participants and observe the industry-wide self-regulation agreement on Open Banking standards). Regarding payment initiation services, participation is mandatory for account service providers and payment initiation service providers. Institutions that have in place domestic correspondent agreements are required to participate in the case of the service of forwarding loan proposals. 

Non-licensed institutions can reach agreements with licensed institutions in order to share their clients’ data through the Open Banking mechanism. This kind of partnership is subject to a bilateral agreement between both parties, which must observe several pre-contractual and contractual requirements we have set on our regulatory proposal. The licensed institution assumes full liability for the security and integrity of this particular data sharing. 

In the second part of the interview, you`ll find key insights regarding consumer education regarding Open Banking, frontrunners in Open Banking in Brazil, TPP licensing, commercial models, and the future of Open Banking in Brazil.

About Otavio Ribeiro Damaso

Deputy Governor of Regulation at the BCB since 2015, Otavio Ribeiro Damaso specialised in Applied Mathematics for Economics and Business Administration at the University of Brasília (UnB) and has a bachelor’s degree in Economics from (UnB). Prior to his current position, Damaso was Chief of Staff to the BCB’s Governor, and Senior Advisor to the Deputy Governor for Regulation at the BCB, having also worked at the Brazilian Ministry of Finance.


About Central Bank of Brazil

The Central Bank of Brazil (BCB) performs its roles as the monetary, regulatory and supervisory authority in Brazil, according to the guidelines issued by the National Monetary Council (CMN). The mission of the BCB is to ensure the stability of the currency purchasing power, to foster a sound, efficient, and competitive financial system, and to promote the economic well-being of society.

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Keywords: central bank, regulation, Open Banking, regulatory sandbox, Open Finance, data sharing
Categories: Banking & Fintech
Countries: Brazil
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Banking & Fintech

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