As open finance grows in prominence globally, we discuss what it is - and what it means for financial institutions and for consumers
In Latin America, regulatory trends in favor of a more interconnected financial system are starting to emerge, which are accelerating changes in the increasingly competitive industry.
Initially, open banking led in this area. This new framework is changing the rules of the game for financial institutions, as it not only promotes competition, but also encourages new alliances between different actors to create value-added services for the end users.
Now, an even more interconnected system - open finance - is ahead. And it signals a new evolution for financial services.
“The difference is that [open finance] incorporates all sectors of the economy,” explains José María Sobrevia, commercial and digital director at Afirme Grupo Financiero, a Mexican institution. “This is a door to fintech not only for regulated institutions and banks, but for other businesses that could consume this information while meeting certain standards.”
While open finance doesn’t have a legal framework in Latin America, there is a great opportunity for financial institutions to become pioneers in this area, by taking a forward-looking view of products and services.
“Open finance is the next step within the framework of open banking, and it also opens the market to fintech - and not only to them, but other stakeholders can join too, such as Netflix, or technology companies that can connect and better understand their clients,” explains Néstor Darvy Archuleta Barrera, director of new technologies at Afirme Grupo Financiero.
The data points that are generated from open finance are the building blocks of the system and, therefore, the main driver for growth.
Still, while sharing information is key for open finance to work, the main focus should be on developing new business models, Archuleta points out.
“Let’s keep in mind that APIs won’t be profitable because of the amount of consumption that [third parties and partners] come and take part in. But it is an opportunity for the bank to start looking into the ‘why’ of information,” says Archuleta.
The opening of APIs grants access to a market where all players offer more useful products and services for their clients, potentially creating new, organic services such as as loans or savings accounts that are more adapted to users’ reality and needs.
Current clients will see that their bank offers innovative digital services, investing in a better way of functioning than traditional banking.
“Where does profitability lie? In the products you can offer [clients],” says Sobrevia. “Debt consolidations, for example: I see that you have a mortgage with this other bank and you suddenly get an offer to switch to a mortgage with Banca Afirme.”
One major challenge for banks is offering clients a personalized service. In this regard, open finance will improve the user experience.
Archuleta explains that more shared data can help the bank get to know users’ habits better: how do they spend money, where do they have more accounts, what type of credits do they have, among other things. These timely offers can help when it comes to a cross-selling strategy.
“For example, if a bank has a PFM (a Personal Finance Management app) that knows what [the client] spends money on and what they do, this will allow them to recommend restaurants, trips - or anything based on what the bank sees in that data lake of transactions,” says Sobrevia.
“That’s why it’s open finance: it is integrator of diverse sectors beyond finances.”
There are also other advantages for bank customers. By bringing together data from banks and from third parties, for instance, you can gain a complete picture of personal finances.
In this sense, the findings will allow consumers to optimize their financial position by using personal finance administration tools, a big benefit for those with less knowledge about finances.
“This is going to simplify their [clients’] life, as they won’t need to type their password, log into one bank, and then type their password and log into another bank,” explains Sobrevia. “It’s as if they had their superapp, they go into the app and they have all the bank accounts, and this superapp makes suggestions.”
Banks can readily offer these functions with technology available today. But achieving this level of digital service is a matter of adopting a futuristic mindset and starting to create new models.
“The bank’s objective goes beyond sharing its APIs or creating them in order to expose data to external networks,” says Archuleta. “If we invest in a change of mindset and we start building the process now, we, as banks, will be in a better position.”
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