Latin America Embraces Billion-Dollar Business of Open Banking, But Progress Slow

The open banking market will be worth $43 billion in 2026, according to the Open Banking Market by Financial Services and Distribution Channel report by Allied Market Research

Latin America has been slow to embrace the business model
July 01, 2022 | 12:00 PM
Reading time: 6 min.

Open banking, which facilitates the exchange of information between all types of financial institutions through application programming interfaces (APIs), is estimated at having a global market size of $43.15 billion in 2026, according to figures from Allied Market Research’s Open Banking Market by Financial Services and Distribution Channel report.

However, open banking is not yet fully exploited in Latin America. Brazil and Mexico are the most advanced markets in this area because they even have a regulation that is already being implemented. Therefore, these are the two markets that Datanomik, a Uruguayan startup founded in early 2022 by Gonzalo Strauss and Sergio Fogel, founder of dLocal (DLO), wants to attack after realizing that solving the problems of finance teams in companies represented a great market opportunity.

In open banking, users are the owners of their financial information, and decide whether or not to share their data. In Europe, mainly in the United Kingdom, this is being used to improve efficiency and strengthen the financial system.

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Prior to co-founding Datanomik, Strauss worked at AstroPay in the product area, and it was there that he discovered that the main problem in all areas of the company had to do with access to financial information.

“We were an emerging payment processor and that meant we had a handle on hundreds of bank accounts and hundreds of integrations with different payment methods, payment processors, technology gateways and wallets, which made it very difficult, inefficient and unscalable to access financial information,” he said in an interview with Bloomberg Línea.

The way to obtain banking information was “through an army of people that every five minutes entered each of the banking and financial portals, put their banking credentials in and downloaded the banking data to proceed to the procedure they needed”, he explained. But with open banking, these processes can be automated, standardized and in real time.

So what started as an internal solution at AstroPay became a startup with the possibility of expanding to several Latin American countries. In less than six months Datanomik already has more than 30 employees operating in Brazil and Uruguay. And in addition to arriving in Mexico this week, the goal is to reach Colombia and Argentina in the next six months.

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Datanomik. Co-founders Sergio Fogel and Gonzalo Straussdfd

In Mexico, fintech Finerio Connect is also exploring the world of open banking.

Founded by Nick Grassi and José Luis López, the fintech is one of the pioneers of open banking in Latin America. Some of its solutions, such as bank aggregation, data processing and the personal finance manager (PFM) application, are already used by more than 75 companies in the region.

“When we founded Finerio Connect, we realized how difficult it is to implement an open banking solution, but we also visualized the impact it can have on the end user. We created Finerio Connect so that all the knowledge, experience and infrastructure we built can be shared with financial institutions,” José Luis López, CEO of Finerio Connect, said in June during the announcement of an alliance with Visa and British company Ozone API to promote the adoption of open banking in Latin America.

Open banking in Latin America

Despite the natural benefits of open banking, which enables access to third-party data, progress in some regions of the world has been somewhat slow.

The good news is that Latin America is one of the most fertile regions for fintech innovation, and there are several factors behind the accelerated growth and interest in the fintech sector in the region that will also affect the adoption of open banking.

The region is home to more than 2,301 fintech companies, targeting a market of more than 650 million people in 33 countries, according to Belvo’s The State of Open Banking in Latin America report.

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Open banking represents an opportunity to expand the offer of traditional financial services to new and existing customers with personalized and relevant products and services. This is crucial considering that the Latin American region still has financial inclusion problems.

Strauss assures that in order to talk about the development of open banking it is necessary to do so in three different verticals: in terms of regulatory development, infrastructure development and educational development.

“You can be in a country with a highly developed open banking infrastructure, but it may not be regulated, as is the case in the United States, for example,” Strauss points out.

And he adds that there is also the option of a market that may have regulation, but does not yet have infrastructure, as is the case in Mexico.

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Five years ago, Mexico passed a law for the regulation of financial technology Institutions, known as the Fintech Law, which stipulates the obligation to establish standardized application programming interfaces (APIs) that build bridges for the exchange of information between financial institutions, particularly in three different types of data: open, aggregated and transactional.

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“We could even say that Mexico is the first country in Latin America that has begun to define an initial specification of open banking with the fintech law,” says Strauss, who has persuaded Andreessen Horowitz, Nazca and Canary to invest in his open finance business model.

By June 2021, more than 2,200 financial institutions in Mexico should have implemented APIs to exchange open data with third parties. This phase focused only on public data, such as ATM location data and information about the products offered by each financial institution.

The next phase of regulations is expected to address the exchange of customer transactional data. A second set of rules is scheduled to be announced by the National Banking and Securities Commission later this year.

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Strauss says that, in the Brazilian case, “the Central Bank of Brazil very aggressively pushed a specification, a little over a year ago, for different banks and different players in the ecosystem to start implementing open banking”.

Phase 4 of the regulation in Brazil was introduced in December 2021. This last stage is marked by the start of open finance that will allow the exchange of investment data, pensions and foreign exchange services.

“In Uruguay, unfortunately, these are only preliminary discussions, we don’t have any kind of regulation, nor much interest yet in terms of open banking regulation, Strauss says.

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He adds that Datanomik’s main challenge is to meet the needs of the different industries to which its clients belong, which may not always be financial.

Meanwhile, in Argentina, the issue is already on the table. Although the South American country has other priorities on the financial agenda, an analysis by the Argentine Fintech Chamber and Poincenot indicates that open banking, if it becomes a reality, would bring 30% growth to financial businesses in the country.

A startup in Chile is betting on open banking. Floid has operations in Colombia and Peru and raised a $2.25 million seed round in December 2021 led by Grupo Santander, Amarena and Carao CV.

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The move toward open banking in the region obeys the need for financial service providers that want to remain competitive having to adopt big data and open banking in the coming years to provide their customers with the best possible services.

Open banking and open finance: what’s the difference?

Strauss explains that the meaning of open banking is to make the user the owner of their banking data, which is currently stored by banks. And the scope widens with open finance, which does not just refer to banking data, but also transaction information in other institutions such as fintechs and payment processors and exchanges.

In an article on the difference between the concepts of open banking and open finance, Nick Grassi, co-CEO of Finerio Connect, points out that open finance refers to the same principles of transparency and information sharing as open banking, but includes not only banks, but any financial institution.

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“This ranges from retirement savings fund managers and investment funds to credit bureaus, brokerage firms and fintech, with the idea that a user can consult and make transactions for different services from the same platform,” Grassi writes.

In this sense, Datanomik is an open finance platform that allows financial teams to link all their bank accounts in three steps and access complete visibility of their financial position, and access their aggregated balances, accounts and transactions from a single platform. It is a B2B solution that has already raised $6 million in investment and expects to close 2022 with 100 clients.

Translated from the Spanish by Adam Critchley