Aitor Chinchetru
Co-Founder and CEO
Startup Contributor

Regulating for the Benefit of People: The Case for Open Banking

By Aitor Chinchetru | Wed, 10/27/2021 - 11:27

One of the purposes of fintechs is to provide users with better services that respond to their new needs. With the pandemic, it has become clear that progress has been made in this area by providing  a wider and better range of solutions for those who already have financial products and even for those who are still unbanked. In this regard, a study by Statista estimates that by 2022, there will be a total of 74.62 million fintech users, 86 percent attributed solely to digital payments.

In this context, fintechs have been a complement to the traditional banking system in Mexico and other countries. Backed by the Law to Regulate Financial Technology Institutions, they have enriched the financial environment, aided by various technologies, such as open banking.

Open banking makes it possible to automatically and securely consult, through application programming interfaces (APIs) or web scraping, the transactional but anonymous information of financial services customers.

With this, companies and banking institutions themselves benefit from a complete diagnosis of the customer's financial behavior to offer the right products at the right time, thus gaining a more complete view of the customer. In the case of users, accessing applications, products or services based on open banking allows them to better manage their money, access budgeting tools or savings goals  to optimize their finances, as well as compare different products in one place or cheaper loans, investments with better returns and better insurance, among others.

One of the most important resources for users is the Personal Finance Manager (PFM) a result of open banking which is a tool that helps people to understand their finances and improve their financial management in a simple and fast way. According to data from ITAM and Nacional Monte de Piedad, 67 percent of the population is in a critical situation in terms of financial literacy.

With all this, we can see that open banking allows a wide variety of benefits for both parties, since it provides companies with better knowledge of users and potential customers, automation of KYC (Know Your Customer) processes, creation of new products and services, cost reduction by using third-party infrastructure, expansion and loyalty of the customer base, new business models and fraud reduction, among others.

According to a study conducted by Finerio, called Open Banking in Mexico, Diagnosis and Trends, 90 percent of the executives surveyed believe that open banking represents a great opportunity for their companies and 72 percent say that it will foster the development of better digital services.

However, this technology, like several others that fintechs have adopted, has a much greater impact on the user because it has made it possible for them to empower themselves and have the right to share their information securely with third parties to obtain added value in financial products and services with the understanding that only they are the owners of such data.

Furthermore, according to the same study, Mexico is a worldwide reference for open banking, as it has the potential to generate combinations of information exchange between around 2,200 entities, which would expand the universe of financial products and services available to Mexican users.

At the same time, Mexico can gain valuable lessons about what is being done in other countries and take note, developing user-centric laws, understanding that the democratization of data provides benefits for both individuals and financial companies. According to the study conducted by Finerio, 65 percent of people believe that open banking will generate positive competition among them.

The future of open banking is undoubtedly promising, as it has the potential to transform financial services in the coming years. We know that this is possible through the joint participation of all the actors involved. Therefore, let us look for ways to help create cutting-edge regulatory frameworks. Let us understand that digitalization is a reality and that through these models, we can reach more people.

This will bring benefits for users, such as financial inclusion, making services more accessible, secure and fair, since, according to the latest National Financial Inclusion Survey, only 54 percent of the adult population has access to a financial product, a figure that in countries such as Kenya rises to 84.8 percent.

This is the importance of open banking, since it will allow the democratization of financial products and services, reaching more people; 68 percent of people believe that there will be product personalization through automated recommendations, according to data from Finerio's Open Banking in Mexico, Diagnosis and Trends study.

Photo by:   Aitor Chinchetru