Banking on Open Finance to Advance Financial Inclusion: Lessons from Brazil 

Matheus Rauber: As the regulator of the financial system here in Brazil, we are the ones that want more competition because in the end this will be good for the consumer. They will have more products, more services, with better quality, normally cheaper. So that's why we are implementing Open Finance among other initiatives in the Central Bank of Brazil with the aim of increasing competition.

Lamis Daoud: For many, the days of stepping foot into a bank branch to withdraw funds or apply for a credit card – or even a loan – are long gone. Now, instead of grabbing a checkbook to issue a payment, you’re grabbing your phone. But it doesn’t stop there. For consumers living in countries that have embraced open finance, it also means using their financial data to choose the best financial products and services from different providers.  

Hello and welcome to another episode of inclusive finance frontiers, a podcast by CGAP. I’m your host, Lamis Daoud.

Today, we’re talking about open finance. Specifically, we’re focusing in on open finance in Brazil. We’re taking a closer look at how the country is leveraging open finance to increase competition in concentrated financial markets, encourage product innovation; and deepen financial access and inclusion for consumers.  

The term ‘open finance’ is really an evolution from the term ‘open banking’… let’s unpack that.  

Open banking gives people the ability to share their bank accounts’ data with other providers to access new or improved financial services. For example, think about the last time you applied for a loan: most likely you were buried under a mountain of paperwork from banks where you hold financial products and were digging up bank statements to prove you meet the lender’s criteria. With open banking you can aggregate the information from all your accounts and with a click of a button, all that info zips over to the lender.  

Open banking refers to a financial-services model that allows application programming interfaces – or APIs– to access financial data in traditional banking systems. To put it another way: it allows non-banking services, like websites or cell phone apps, to provide banking functionality. This provides more tailored product offerings to consumers, even those who are underbanked or unbanked.

Open finance takes all this a step further to include other financial services like investments and insurance.  

In Brazil, the launch and adoption of open finance has been rapid. By mid-2023, less than a year after the first implementation deadline passed, the country counted five million connected accounts…  

We spoke to Matheus Rauber at the central bank of Brazil. About the reasons behind Brazil’s rapid expansion of open finance. He’s a senior advisor coordinating the implementation of open finance in the financial system regulation department.  

Matheus Rauber: Fostering innovation, increasing the efficiency of the financial and payment systems and promoting financial inclusion and competition were the key enablers for implementing Open Finance in Brazil. We expect institutions really to start competing in different areas and we have begun to see this already with the implementation of Open Finance. We are seeing more institutions trying to get new clients, especially through credit and salary portability processes.

We are seeing institutions using data shared via Open Finance to increase their credit models. And they have been doing a great progress in this area, especially regarding the informal economy in Brazil, which is quite big. So normally people that hadn't a regular source of income, they had more trouble getting a good credit score. And through Open Finance they are able to share their data and get a good credit score even being part of the informal economy. So this is stimulating a lot the credit provision for this segment of the market here, which is quite big.

Lamis Daoud: So what’s the key to all this potential? Data.

Banks hold a lot of data. And it’s not just how much money is left in your account. They know about money coming in, money going out and exactly where and how people are spending.

Before open finance, banks kept all this information to themselves. Now… all that is changing. Information sharing is leveling the playing field, creating more competition that can produce an environment more conducive to innovation.

If data is the key, it can unlock a more inclusive financial future for the traditionally excluded and underserved. From closing the gender gap, to helping people get credit for the first time, open finance really can open doors.

Maria Fernandez Vidal leads the team at CGAP working on data and open finance. So how does it level the playing field? She explains.

Maria Fernandez Vidal: Data is typically held in silos, and it's costly for providers that want to use it to innovate. It's generally held by large providers that don't always have the incentives to innovate and go down market. And when you set up bilateral arrangements, they're happening often as very small fintech trying to negotiate with a very large company. It's an uneven situation. They're hard to set up. It can be costly, and customers are not part of those private bilateral arrangements. So when they happen, they don't necessarily set them up in a way that the customer knows that their data is being used or for what.

Open finance standardizes data sharing and makes it cheaper and faster. It gives customers the control to share their data with who they want, and so they can share it where they see a benefit. And it creates a level playing field between different types of providers. So if the access is standardized by regulation, then any provider will have access to the same data. It doesn't matter if they're larger or smaller. And that can improve competition, lead to more innovation, and that can help expand this bigger depth of products that we need for financial inclusion that is more than just account access.

Lamis Daoud: CGAP’s recent global landscaping study on the data trails of digitally included poor people found that about 1.8 billion people earning under five us dollars and fifty cents per day in low- and middle-income countries had owned or had access to a phone… thereby generating digital data trails. That number is slated to grow to about two billion by 2025.

More data trails means more data sharing… which leads to the potential for better inclusion. Not just from the consumer side… but for providers as well.

Maria Fernandez Vidal: It can benefit both customers and providers. [00:06:00] I think that's what makes it powerful, that we see a clear way in which it can help customers, but also a business case for providers to participate. So one of the main things that open finance can do is just lower the cost of operations. And that's partly by making it cheaper to onboard and assess new customers, and partly by reducing credit losses, by improving [00:06:30] the predictive power of their credit scores. That's good for providers because it lowers their costs, but it also means that it supports the business case of serving smaller customers and a broader base of customers. So for customers, it means that, say a very small loan, that it may not have been cost-effective for a provider to do before. Now with the lower costs [00:07:00] of providing it and the improved visibility on the risk, that loan makes business sense for the provider and those customers can be served.

Lamis Daoud: Nubank is one of these providers. In fact, it’s the largest digital bank outside of Asia, serving over 100 million customers across Brazil, Mexico, and Colombia. Its mission is to combat complexity and empower people, promoting financial access with responsible lending.  

Rafael Wowk leads the company’s regulatory affairs team, and he sees a lot of opportunity ahead. 

Rafael Wowk: The biggest opportunity on Open Finance for us is helping the client to solve their pain, choosing their finance institution as they want and not necessarily by where they have this account, where their employer pays their salary. So we believe that the benefit of Open Finance is to the consumer because the consumer we were able to choose their financial institutions.  

Of course, Open Finance is a platform. Open Finance itself is not able to improve the financial services that they offer. But Open Finance is the platform where banks can build products where they can enhance their credit data to make sure that they can return. The better data they have about the client into better products.  

Lamis Daoud: Let’s talk about the gender gap. CGAP conducted a nationally representative survey of 2000 adults on the implementation of open finance in Brazil in July 2023. A closer look at the findings reveals that women are less aware of open finance compared to men: 45% of women are aware of open finance compared to 52% of men.  

Matheus and Rafael think representation and data are essential ingredients for progress, particularly since women account ownership lags behind men’s account ownership in Brazil.  

Matheus Rauber: We have been participating in some discussions about reducing this gender gap and it involves more feminine representation in the economy in general, but also in the financial and payment institutions. It is of utmost importance to have more women working in the creation and development of financial products and services that are more geared towards women.

Rafael Wowk: Here at Nubank we have good data to show that in some services we are able to bridge that gap. For example, have data about investments of investors. Women represent the majority with 51%, while men represent around 49%. This is something good to show where we know that financial system is more accessible for men than women in general. So we have data that shows that we're being able to use this technology, we're being able to offer it more equally.

Lamis Daoud: And what about lower-income customers? The same CGAP research on the implementation of open finance in Brazil finds that lower-income customers are less aware of open finance than high and middle-income (38% vs 57% and 52% respectively) customers. So how can open finance be a part of reducing financial inequality?

Matheus Rauber: Considering different levels of income, it also fits a broader agenda of reducing inequalities in our society. Open Finance can play a key role in this area. The participating institutions still have to create more solutions based on Open Finance, more geared towards middle- and lower-income customers. Considering data sharing, onboarding can be streamlined. Customers with lower access to credit due to lack of formal income will start receiving credit, which will help small and medium enterprises to grow. Fostering hopefully an increase in social mobility. New products and services related to payment will also help improving the lives of customers from different levels of income. The central bank does not provide financial products and services directly to customers, but we can always try to nudge the participating institutions in the direction that we consider to be the best for the whole society.

Lamis Daoud: Nubank agrees.  

Rafael Wowk: We believe the future of the financial system is where through technology we will be able to offer personalized and adequate financial service to the whole population. It is necessary to have the low-income band with knowledge of Open Finance and what it can offer and how it can improve their financial lives.

I believe Open Finance is only starting. The features that we offer are very important and they are helping people to have financial control, but we believe that with recurring payments and other new features, it will be possible to automate new payments, it'll be possible to do smart transfer and all that being discussed in the Open Finance ecosystem will turn possible through technology to offer the same level of service that only the high-income clients have today to the whole population.

Lamis Daoud: But, as we know, when you’re changing the status quo, there’s often no such thing as an easy pathway to success. Challenges are still arising, starting with institutional resistance, as Matheus tells us.

Matheus Rauber: Since we began the implementation of Open Finance, facing challenges has become part of our daily routine. Institutions that used to be the big players, and most of them still are the big players, they are always more prone to be resistant to these changes that may bring new players, more institutions to compete. But we as the regulator of the financial system here in Brazil, we are the ones that want more competition because in the end this will be good for the consumer. They will have more products, more services, with better quality, normally cheaper. So that's why we are implementing Open Finance among other initiatives in the Central Bank of Brazil with the aim of increasing competition.

Lamis Daoud: And on the banking side, implementation can be the biggest obstacle.

Rafael Wowk: The biggest challenge for Open Finance today is the implementation. For the financial institutions, there is a complex system. Of course we want it to be very easy, very accessible for our clients, but there are complexities from the financial institution sites. So the implementation is something very important. There is new regulations of monitoring, there are a lot of implementation questions that the central bank's very mindful. So there is a challenge, but we believe that this is a challenge that is being well addressed and it's part of the technological developments that sometimes we need to look at our systems and make sure that the ecosystem is working well.  

Lamis Daoud: The central bank of Brazil is already thinking about how to navigate some challenges.  

Matheus Rauber: We were and still are all learning. The central bank, the institutions and the governance structure. Within the central bank, we have a multi-skilled team to face all the challenges. People from regulation, supervision, IT, communication, and so many other areas.  

Considering that Open Finance is not a product, but an infrastructure that will be used as a foundation by its participating institutions to devise new financial products and services, it is extremely challenging to think about communication. Should we try to explain to the general population what Open Finance is, perhaps it may be too complex. So another option is to consider new products and services built using Open Finance and to show their benefits to the population.

However, there are some products that have been streamlined by Open Finance but are not necessarily new. Such as easier onboarding, better credit assessment models, credit and salary portability. Considering new products and services, each institution may present them a little differently, which makes it hard to communicate to the population.  

Lamis Daoud: This work in progress serves as a good reminder that the building blocks of inclusive finance have to be placed correctly to create a solid foundation for the future.

To help with this undertaking, CGAP led the development of high-level guidelines in collaboration with the BIS, the international monetary fund (IMF), the office of the united nations’ secretary-general’s special advocate for financial health (UNSGSA), and the World Bank.

The goal is to provide guidelines based on emerging best practices for financial sector authorities who want to enable inclusive, open finance ecosystems in responsible ways.

Maria explains why this is such a critical moment for the effort.

Maria Fernandez Vidal: It's important to do this now because there are a lot of countries, that are considering designing, implementing open finance, and these are countries with different capabilities, different infrastructures at different levels of readiness in their market. And they would really benefit from the global experience and the best practice that we can share now as they're going through this process.

It is much harder to change a system once it's implemented and likely to be more costly. So we think there's a unique opportunity to act now because in the next say five years, a very large portion of the markets are going to have some type of open finance scheme in place.

Lamis Daoud: that’s the end of today’s podcast episode. I’d like to thank our guests for taking the time to chat with us about this exciting and important topic: Matheus Rauber at the central bank of Brazil, Rafael Wowk from Nubank, and of course, my colleague Maria Fernandez Vidal at CGAP.

Thank you so much for joining us for this episode of inclusive finance frontiers. I’m your Lamis Daoud.  

For more information on our work in open finance and other topics, visit our website at cgap.org.

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