Interview

Open Banking in Brazil: all questions answered by the Central Bank Brazil (Part 2)

Monday 20 September 2021 09:16 CET | Editor: Alin Popa | Interview

In this second part of the interview, Otávio Damaso, the Central Bank Brazil’s Regulation Director, provides key insights on consumer education regarding Open Banking, frontrunners in Open Banking in Brazil, and the future of Open Banking in Brazil
What is the market`s approach towards data sharing and consumer education regarding Open Banking and its implication? 

There are specific rules issued by the National Monetary Council (CMN) and by the BCB that participating institutions must follow regarding data sharing. The governance structure responsible for Open Banking implementation released customer experience guidelines, establishing requirements and recommendations for customers’ journeys. 

The participant institutions are responsible for the reliability, integrity, availability, security, and confidentiality of their customers’ data and services in the sharing process. They also must comply with the provisions of the related legislation, as Brazil’s General Data Protection Law (LGPD). 

The participant institutions are only allowed to share data and services of customers who have requested such sharing, which covers the steps of consent, authentication, and confirmation. Customers must receive information in a clear, practical, and adequate manner regarding the content and the procedures associated with each step. The client’s sharing consent must be made through a dedicated electronic interface in a secure, prompt, accurate, and convenient manner, and he or she can revoke this consent at any given time. 

Previous Open Banking initiatives have shown that encouraging the public’s engagement by bringing awareness of its advantages is fundamental. We recognise that it is critical to foster consumer trust, understanding, and acceptance of this new and innovative model. It’s necessary to educate people about the Open Banking concept, principles, and security, as well as the benefits customers can obtain in this process and their rights. 

Therefore, financial education is a key point to this project's success. The BCB is playing its role, promoting virtual events, social media campaigns, and joint actions with other institutions to clarify topics and questions relating to this theme.

The customer journey in Brazil was also built to provide a clear and simple consent process, so consumers can easily understand what is happening throughout the journey and what they are consenting to, which contributes to create trust and understanding. 

Who are the pioneers in Open Banking in Brazil? The frontrunners in Open Banking? (eg banks, fintechs) 

We believe the more competitive and efficient environment that Open Banking will create represents a great opportunity for new institutions. After the client's consent, each and every eligible institution can access data that today, in Brazil, are being primarily used by the biggest banks. Based on this information, authorised fintechs, for example, could offer products that are more competitive and a user experience that is better, which is their expertise. The most important point is that the financial system configuration could facilitate the entry of new agents and that these new agents could have the potential to challenge, with new businesses models, the incumbents, thus growing and generating more competition. 

However, we also see gains for the traditional institutions. Open Banking will speed up innovation processes, not only on business models, but also regarding these institutions’ technologies, so they can keep themselves competitive and attractive to clients. This can make processes more dynamic and streamlined and the financial system more competitive with new consumer-centric business models. 

Therefore, in Brazil, all institutions, including the bigger ones, have faced Open Banking not as a mere challenge, but also as an opportunity. This is exactly what we want, that Open Banking is not only seen as a compliance rule, but as an opportunity to create new business models and to reach new clients. 

Is Open Banking a chance to solve for issues around social and financial inclusion in Brazil? 

These issues are complex; therefore, they demand several approaches to work together. Open banking alone cannot solve all social and financial issues, but it is a part of the solution. The BCB’s strategic agenda – Agenda BC# - comprises several initiatives, from microcredit to regulatory sandbox. The Open Banking implementation is one of them, and we believe that it has the potential to give a significant contribution in reaching BCB’s objective to build a more sustainable and inclusive financial system. 

Information asymmetry is one of the main hurdles in financial service costs. By de-monopolizing data and improving information availability, Open Banking should stimulate competition, and, hopefully, cheaper and better financial products for consumers will follow. Improving information availability means more accurate credit risk assessments as well as lower interest rates and fees. In addition, the inevitable standardisation brought by Open Banking in data sharing enhances price transparency and therefore its comparability. 

Beyond fostering digitalisation and competitiveness, Open Banking is seen as a paradigm shift towards a consumer-centric model. Facilitating consumers’ ability to switch between financial institutions should encourage innovation in services and even the emergence of new business models. 

Conversely, a wider array of financial services leads to consumer empowerment and increases the suitability of financial services. New business models would serve different segments of society, reaching those that are currently neglected by the traditional financial system, improving financial inclusion. 

How would you describe banking competition in Brazil? What are banks` attitude towards Open Banking? 

Central Bank coordination was fundamental in reconciling participants’ conflicting interests, which allowed for a governance structure in which participating segments have equal status, ensuring non-discriminatory access and compliance with regulation. 

From then on, institutions started to perceive Open Banking not only as a compliance demand, but also as an opportunity, especially since the Covid–19 pandemic, as digitalisation of financial services gained even more importance as a way to reduce public agglomerations. Our expectations are that Open Banking will contribute to create new business models and reach customers that were previously unassisted, underserved or that expected a better customer experience, including merchants. 

Are there Open Banking commercial models in place/monetisation? Are banks allowed to charge third parties for using their APIs? 

Participating institutions cannot charge consumers for data sharing. However, institutions at the receiving end might be able to charge fees for services eventually rendered to consumers by processing their data, and such fees should be subject to an industry-wide standardisation. 

In addition, Open Banking will allow reimbursements among participants for API calls that exceed the gratuities provided by regulation. All of those possibilities should always respect the principles of equitable and non-discriminatory access to data.

What can you tell us about third-party providers licensing in Brazil/ accreditation system for Open Banking? 

As previously mentioned, our Open Banking strategy only covers licensed institutions (e.g. financial and payment institutions). Participation in phases 1 and 2 is generally compulsory for Brazil’s largest institutions and voluntary for other licensed institutions, as long as they comply with the reciprocity principle (have in place APIs to provide data to other participants and also observe the industry-wide self-regulation agreement on Open Banking standards). Phase 3, payment initiation services, is compulsory for account service providers and payment institutions licensed by the Central Bank of Brazil. 

The participation of institutions that have correspondents under contract is mandatory in the forwarding of loans proposals. In that manner, another possibility arises, the indirect participation of a non-licensed institution through an agreement with a participating licensed institution. Subject to a bilateral agreement and consumer consent, data from customers may be shared between them through the Open Banking mechanism. These agreements must comply with pre-contractual and contractual requirements we have set on our regulatory proposal and the licensed institution would assume full liability for the security and integrity of this particular data sharing. 

What is on the agenda for the future of Open Banking, how do you plan ahead towards an Open Finance outlook, and what timelines do you have in mind for Open Banking? 

Open Finance will kick-start this year, on December 15th, with the sharing of aggregate data on insurance, investments, open pension funds, foreign exchange transactions and acquiring services in payment schemes as well as payroll accounts. The expansion of scope to other products has increased the challenge from the regulation standpoint. In order to address issues that may arise from business models involving the jurisdiction of more than one authority, we maintain constant communication with other Brazilian financial regulators. 

Concerning the necessity of adapting the legal framework in the event that regulatory authorities do not have legal competence to issue regulation on the subject, the Central Bank of Brazil is constantly in touch with the National Congress in order to help in the discussions of new legislations deemed necessary. 

We have an ambitious schedule set out for the two next years (see details in question 3). Though this already presents an immense challenge, we believe Open Banking should be seen as an evolutionary process that will probably be part of our lives and could even transcend the financial system.

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, Open Banking, data sharing, fintech, financial inclusion
Categories: Banking & Fintech | Online & Mobile Banking
Countries: Brazil
This article is part of category

Banking & Fintech