Open for business

Open banking offers individuals and businesses an alternative to the age-old scenario of being tied to your bank’s own offerings.

IN THE ERA OF DIGITAL FINANCIAL SERVICES, institutions have radically rethought the nature of the customer. Once an almost-passive recipient of standard services, today’s increasingly discerning customers—individual and commercial—seek tailor-made services that reflect individual needs revealed by a deep digital dive into their respective profiles.

A recent report from the Economist Intelligence Unit (EIU) and based on the canvassed views of over 300 global banking executives makes for compelling reading. With the pandemic having brought open banking and the financial technology ecosystem into sharp relief, 45% of respondents say their banks are poised to adopt a business model built on digital ecosystems, while a third had already formulated strategies to employ open bank hub initiatives.

A BUSINESS OPENING

And as the significance of big data in developing services and boosting revenues streams becomes more apparent, the financial world has become fertile grounds for new financial services. With open banking securely linking financial service providers to the clients of partnered institutions, the result is increased customer choice and wider awareness.

Digitalization galvanizes the financial sector by stimulating the circulation of money in the system. In fact, as open banking platforms become more sophisticated, they contribute to businesses’ financial decision-making. Mexico’s 4 million SMEs, accounting for just over 50% of GDP, stand to be notable beneficiaries, in many cases being in dire need of alternatives to traditional bank credit that they cannot qualify for. Since 97.4% are microenterprises, their access to competitive financial services could have a transformative effect. Meanwhile, open banking is a force to be reckoned with, obliging traditional banks to reimagine their business models.

ADOPTION UNDERWAY

Open banking is known in European legislation as the second Payment Services Directive, or PSD2, in reference to the law that came into force in 2018 requiring major banks on that continent to open up a raft of their data, coming hand in hand with the ascendency of digital banking. Moreover, uptake was expedited by the physical isolation of the COVID-19 pandemic, as more people shop around for the zeroes-andones convenience and competitive pricing of armchair banking.

MEXICO’S SWIFT ADOPTION…

Turning to Mexico, former Director General of Banco Sabadell, Francesc Noguera explains in a TBY interview how “open banking is just a technology and a capability to offer data to customers [for use] on other platforms and [by] other players.” In 2019, he added, the bank “developed our systems and opened our IT architecture with a layer of Application Programming Interface (API) so we could connect our back end, where the banking products are, with the front end,” namely, potential customers. Open banking, then, does not refer to the actual banking services themselves, but is instead the means to facilitate data sharing with third parties, who in turn provide those services.

… AND PIONEER STATUS

The regulatory framework sets the pace of adoption for innovative services—and spurs public confidence in them. UK regulation may have set the global pace for open banking, but close on its heels Mexico, too, has laid its regulatory groundwork. The first in the region to do so, in

March 2018, Mexico introduced comprehensive fintech regulatory guidelines with its Fintech Law, followed in September of that year by secondary regulation. In fact, Mexico is already the largest Latam Fintech hub with over 441 start-ups, followed by Brazil. As of March 2021, there were over 93 fintech enterprises in pursuit of Financial Technology Institution (FTI) licensing. Of those, 59 are digital or electronic payment funds institutions, with 34 being crowdfunding platforms.

In 2020, Mexico’s fintechs climbed 14% in number. This attests to an economy with prospects and the will to integrate as many Mexicans as possible. Put simply, there is huge untapped potential for the local financial services sector that bricks-and-mortar branch networks have failed to reach. By World Bank numbers, Mexico has 13.7 bank branches for every 100,000 customers. The reality is that over 40 million citizens remain unbanked, while unsurprisingly almost 90% of payments continue to be made in cash.

In short, more services are available today to a savvier population, while regulatory oversight is a confidence booster for local business urgently seeking alternative funding sources. Open banking alone is not a panacea for Mexico’s economy; no technology in isolation can ever be. And yet, it is a no-brainer that a stable economy can only benefit from a financial sector with a wider, and deeper, footprint among the population.