Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AmericasJuly 2 2019

What impact will open banking have on Brazil?

While political turbulence continues to rattle Brazil, the country’s central bank is pushing ahead with pragmatic initiatives. Silvia Pavoni reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Brazil central bank

Just at the time when leaked phone conversations raised doubts over the integrity of Brazil’s Car Wash investigation into corruption, and far-right president Jair Bolsonaro threatened national development bank head Joaquim Levy over the appointment of a senior staffer previously linked to the rival Workers Party, the country’s central bank unveiled plans to modernise its financial sector.

At the end of May 2019, the Central Bank of Brazil released action points aimed at improving financial inclusion and education, transparency and competitiveness. The latter includes open banking, which many consider the most disruptive global initiative of recent years, not only for the payments sector but, more broadly, for financial services as a whole. Brazil is a country where the costs of transactions and bank credit are still high. Interchange fees on credit card transactions ranged from 1.54% and 2% in 2017, the latest available data collected by the central bank; in the EU these are capped at 0.3%.

Brazil’s lending rate was 46.9% in 2017, against the US’s 3.9%. Meanwhile, the country had an interest rate spread – the difference between the lending rate and the deposit rate – of 38.4% in 2017, according to the World Bank. More recent data by Brazil’s central bank puts the average spread for non-earmarked credit (credit that is not subsidised or decided by the government) at 31.45% as of April 2019. Furthermore, Brazil’s top five lenders represent more than 90% of the country’s banking sector by assets. Reducing that spread could have significant implications for consumers as well as banks’ profitability.

Improvements due

Despite a reputation for being innovative, the services provided by the highly concentrated Brazilian banking sector can be improved, according to João André Calvino, head of the financial system regulation department at the Central Bank of Brazil. “[Big banks] are innovative but we have a huge country with a lot of people that need financial services and we can improve those services,” he says. “Also, we have an issue in Brazil, which is the spread, and perhaps with more players in this market we can see some improvement.”

Increasing competition would narrow those spreads, Mr Calvino believes. It would likely also lead to a more efficient payments structure, which would follow would greatly benefit customers, according to Bruno Magrani, head of public policy at Nubank, a São Paulo-based digital bank. “We are seeing a lot of positive reaction among small banks and fintechs in general, who see the opportunity to provide a much better service to customers,” he says.

Nubank was set up in 2013, backed by Goldman Sachs among others, and received authorisation to operate as a bank in 2016. By allowing financial players to request customers’ data held by peers, open banking aims to provide the whole market, including smaller and new players such as Nubank, with as comprehensive as possible a picture of potential individual customers and a group’s typical behaviour. This would ultimately lead to a better service as dominant banks would no longer have exclusivity over their customers’ account information, history and preferences.

Mr Magrani says: “The main challenge is that we focus too much on the costs and the risks [of implementing open banking] and blind ourselves to the solutions available to us. The right combination of technology and architecture would make financial infrastructure so efficient that financial transactions could cost micro-cents.”

Looming risks

Yet risks exist, as seen in other jurisdictions that have mandated open banking. Through its second Payment Services Directive (PSD2), the EU has required banks to grant licensed third-party providers (TPPs) access to bank infrastructure and account data since March 2019. The UK had set the ball in motion even before the EU and launched Open Banking in January 2018.

Implementation, however, has not been easy in Europe. Many banks were not ready by the initial March 2019 deadline, and have only until September 2019 to put in place dedicated open application programming interfaces (APIs) for TPPs. European legislation also defines regulatory standards for sharing data through APIs, a challenge that Brazilian regulators will need to address too.

Having learnt from the experience of other jurisdictions, where incumbents pushed back, Brazil’s central bank is carefully engaging with the industry, which, in turn, is putting a positive spin on potentially highly disruptive rules, according to Larissa Arruy, partner at law firm Mattos Filho and an expert in banking and financial regulation.

Because of these experiences, some expect Brazil to opt for a softer approach. “According to what I understand, [open banking] won’t [necessarily] be mandated,” says Jorge Ruiz, founder and CEO of advisory FinConecta, and a former global head of Citi’s fintech acceleration.

Minimal resistance

But the regulator’s push towards open banking means that the direction of travel is set. And since incumbents “know it is coming”, according to Ms Arruy, there has not been resistance. Some are attempting to look at the opportunities as well as at the challenges. Marino Aguiar, chief information officer at Santander Brasil, one of the country’s largest banks, believes the challenge of open banking is not a technical one. “The challenge is being creative and innovative in how to use this technology for customers,” he says.

Mauricio Minas, chief information officer of Bradesco, another leading bank, adds: “We [at Bradesco] should not be in defence mode; we should be in offense mode, pushing very hard to be winners in this business.”

The industry expects a phased approach where information on accounts data and their branch location would be initially shared. The exchange would then include more sophisticated information on loans and investments. “It will probably take two or three years to implement fully,” says Mr Aguiar. “Banks will study how to make this [data] useful to clients, with risk assessment, risk models [and product] proposals.”

Implementing this is no trivial task. There are legal issues regarding the exchange of information; the challenges of gearing up businesses to deal with data exchanges and analysis; plus the costs and complexities of complying with such requests while also respecting Brazil’s General Data Privacy Law (LGPD). 

LGPD was approved in August 2018 and comes into force in 2020. Similarly to Europe’s General Data Protection Regulation (GDPR), it prescribes a joint liability for parties involved in the transfer of data.

Liability concerns

Ms Arruy believes that the LGPD is a material concern. She says: “For banks that have invested for years in data protection mechanisms [and which will be forced to share data under open banking rules] this is an important and a legitimate concern.” She adds that they “can’t [be expected to] be held liable for breaches by a third party”.

This is also a worry for new players. “There are open issues that must be tackled, such as the definition of liability of each entity, since the current privacy and customer protection regulations could warrant an interpretation favouring joint liability in all cases,” says Nubank’s Mr Magrani.

Ms Arruy adds that in Brazil’s case, and unlike in Europe, because of the timing of each piece of regulation – on consumer data and on open banking – it is up to the central bank to define data liability in financial services. “PSD2 came into force before GDPR in Europe. In Brazil it is the opposite, so [the central bank is] trying to mitigate this joint responsibility,” she says.

“Central bank regulation [cannot supercede] the law, but in terms of technical aspects and how entities interact with each other within open banking, it can be [mindful of existing legislation] in the way it creates the system.” 

Mr Calvino says that while, according to the customer data protection law, the demarcation of responsibility is not defined and if a dispute arises it can only be settled in the courts, open banking rules will provide certainty. “A change of systems in big banks is a challenge, the cost of implementation is a challenge. [But we mostly] have a challenge about responsibility in Brazil. Our consumer law is very strong. All agents [in the provision of a financial service] have joint responsibility. Big banks are concerned about that, and... the open banking rules will make it clear where responsibilities begin and end,” he adds.

Brazil’s central bank is intent on allaying these concerns as much as possible, and getting the whole industry on board. The results of its first consultation with the industry were available in April 2019 and those for the second and final consultation will be released in the second half of 2019. Some expect the final legislation to come into force later in 2020.

A question of payment

There are other issues for Brazil’s banks. One relates to servicing costs, according to Santander’s Mr Aguiar. “In Brazil, banks are very large, with tens of millions of customers. How will the dynamic between entities that will provide information and entities requesting information work? The processing of information that a client has asked for and authorised to be shared, the costs of servicing [that data], who’s going to support these costs?” he says.

There is also the challenge connected to the self-regulatory body that the central bank envisions will be in charge of fine-tuning rules in this area, according to Ms Arruy. “Another legal aspect [to consider] is that the central bank wants to leave some room for self regulation, it wants the market to organise itself,” she says. “Since you have many entities involved with different interests, the creation of this [industry body] is not trivial. How will this self-regulatory body be monitored? The governance for the body is also a legal consideration.”

Updating systems might not be the biggest worry, according to Mr Calvino. “Of course there’s concern, legacy systems are big, [they are] difficult to change, similarly to the UK when the process started there. But... big banks here have learned from [the early-mover] experience of the UK and see open banking as an opportunity,” he says.

As Brazil continues to wait for changes that will affect the whole economy – from the pension reforms which bankers believe will be finally approved, in some form, by September 2019, to an overdue tax reform that simplifies the system and slashes compliance costs – Brazil’s central bank is pushing ahead with other plans.

Mr Calvino notes that the changes to the rules governing the ‘positive credit bureau’, recently approved by Congress, will now allow for the gathering of substantially greater amounts of consumer data, which will assist in creating a positive credit score. Banks can rely on this when evaluating new customers. Before the change, payments history data could only be collected with prior consent; now consent will be assumed unless otherwise stated. “The positive credit bureau... wasn’t working in Brazil. It was [cumbersome] for people to [opt in]. We only had [data on] 5 million people. Now we think we’ll have data on 100 million people,” says Mr Calvino.

This will further improve competition, he adds, as smaller players will have access to large pools of payment history information and it will narrow the information asymmetry gap with their bigger peers, who already possess large customer data sets. And there are other initiatives devoted to improve competition, such as regulating the treatment of invoice and credit card receivables as collateral to make it easier for small businesses to use such instruments as collateral, for example.

A brighter future

At a time of heightened uncertainty around Brazil’s economic prospects, which are often hindered by political disputes and stubborn inertia, greater pragmatism would help, and not just in financial services. As for the wider economy, blessed with natural resources and a large, young population, the financial services sector has much promise.

Sylvia Brasil Coutinho, CEO of UBS Brazil, is convinced that open banking will have a dramatic impact on the market, and wholeheartedly supports the skill, creativity and innovative spirit of her sector, saying: “As a customer, I have [a number of bank] accounts around the world: the best apps are in Brazil.” 

Was this article helpful?

Thank you for your feedback!

Read more about:  Americas , Americas , Brazil , Digital journeys
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
Read more articles from this author