Open Banking in Colombia: the paths for an open financial system in the country
12 minutes reading
Like some of its neighbors in Latin America, Colombia shows an enormous demand for financial services to explore. And in this great universe of possibilities to accelerate financial inclusion and improve user experience, Open Banking in Colombia has evolved as a promise to transform the payment and banking industry.
But where does the project for an open financial system stand in the country? What are the local opportunities and challenges in its implementation? In this article, we’ll discuss the insights provided by the industry in the region and the paths the Open Banking movement has been taking in Colombia. Check it out!
What is Open Banking?
For those unfamiliar with the term, Open Banking is basically the name given to the worldwide movement that makes the portability of customers' bank data possible.
Based on it, customers at a certain bank can make their financial history available to other institutions, if they desire to do so.
Therefore, the account holder at a certain bank can access loans and leases with more beneficial conditions, at institutions the holder has never been associated in the past, for instance.
After all, banking institutions won’t have a monopoly over information in their customer base by leveraging Open Banking. Thus, with more democratic access to each user’s history, the industry gets more competitive and efficient..
By getting valuable data that will enable the institution to more accurately measure the embedded risk in each operation, it will have conditions, for instance, to reduce price and charges for each product and financial service provided..
Opportunities for financial services in Latin America: Banking driving social inclusion and economic development
Latin America is far from being a block showing homogeneous development characteristics. However, some aspects are common for markets in many Latin American countries, such as Colombia’s.
We’ve selected three of the most common characteristics in order to illustrate how big the opportunity is for the banking and means of payment industry in the region:
- Predominantly young population—up to 44 years of age.
- Over 70% of the population uses smartphones.
- Low use of technology for shopping and financial services.
The data show that, despite being used to the intensive use of technological devices, the local population still underuses the technology available in their hands to means of payment .
Such underutilization should not be creditonly due to insufficient funds and low Financial education, but also the need to accelerate innovation in the sector. There is still a lack of solutions that are accessible to unbanked population, as well as services for specific niches, which simplify and encourage adherence to digital accounts, credit services, among others.
It is in this context that the Open Banking emerges as a strong impetus as it promotes financial inclusion and provides significant cost reduction in the use of services. In other words, it reduces the barrier of scarcity of resources and encourages greater access.
Financial services in Colombia: A favorable market for new businesses
Holding the fifth highest GDP in Latin America, Colombia has a business environment that is favorable to opening and operating businesses. That was the conclusion in the Doing Business 2020 ranking by The World Bank, where the country was ranked ahead of Brazil and Argentina.
It serves as evidence that regulations for the Colombian business environment are promising, above average in the continent. As a matter of fact, when it comes to “earning credit”, Colombia has a lot to offer: It is 11th in the world ranking.
Another opportunity which has been recently noticed in the local market is an increase in online shopping due to the Covid-19 pandemic. Americas Market Intelligence expects that 12% of all retail companies in the country are represented on e-commerce by 2024.
According to data also revealed by AMI, access to accounts at banks and fintechs increased from 46% in 2017 to 60% in Colombia in 2021.
It is worth mentioning that—although the most common means of payment today is cash—electronic means of payment promise to grow in a short period of time.
A Mastercard survey pointed out that 56% of respondents already avoid buying at establishments that do not accept modern electronic payments such as QR Code, biometry projects, etc.
Since the country’s population in especially young—around 30 years of age in average—, modern means of payment are expected to be adopted in a broad, quick manner.
Developing Open Banking in Colombia
Unlike in other countries, Open Banking adoption in Colombia will not occur at the same time for all institutions. The country has chosen to implement a volunteering model: Institutions will individually adopt it based on how prepared they are for it.
Although that choice doesn’t offer an exact date for the adoption, it can occur quicker than expected. After all, local agencies have worked on regulatory apparatus that will securely enable the movement.
According to Felipe Lega, Director at Financial Regulation Unit (URF) until June 2022 while he was still on the job, Colombia already relied on a data protection law, which was reasonably robust for supporting Open Banking. It is an important advantage to potentially accelerate the movement.
In addition, institutions have a great incentive for quickly adopting Open Banking. After all, the value added to their customers is undeniable, and those that don’t invest in the required technological effort to adapt will lose ground in the market in a short period of time.
Some of the benefits expected from implementing Open Banking in Colombia are:
- Better customer experience in banking services.
- Streamlined usability, with financial information concentrated in one datacenter.
- Creation of financial products customized according to the needs of each client, promoting the financial inclusion of the population.
- Opportunities for new players to join the industry, thus increasing competition for better conditions in the market.
Felipe Lega—who was responsible for advancing the proposal for Open Banking in Colombia—also sees that imposing the same timeline for adoption to all entities showing different sizes and needs would mean ignoring the specificities involved in their adaptation. It could potentially sentence them to extinction.
As a consequence, it is expected that the competitive drive becomes a driving force in this change.
While institutions work on developing the required technology to exchange Open Banking data, official agencies formulate the appropriate regulation for a secure adoption.
However, it is also worth remembering that the country has recently elected a new president and, as a new administration takes over, new uncertainties always arise on how projects like this one will evolve or be adapted based on a new political position.
Decreet regulating Open Banking in Colombia is already published
Recently, on July 25th 2022, the Treasury Ministry published the first open banking regulation in the country. The decree aims to specify the rules applicable to sharing consumer information, structuring digital platform management and financial services provided and regulating payment initiation, among other issues.
For instance, the regulation allows entities to offer third-party services or products for selling on virtual channels and customer personal data to be sold and acquired—as long as it is properly authorized by the customer.
Also, the document addresses binding rules between companies and the low value payment system and defines that “the Financial Superintendence of Colombia can issue instructions to entities overseen so that the activities carried out by payment initiators are developed in a secure, transparent and efficient manner”.
Finally, the decree establishes that a regulatory agency has a 12-month timeframe to set standards for developing an open system architecture. Also, it determines that the definition related to initiating payments through low value systems must be in place within a year. It aims to make sure entities have time to make the required adjustments in order to meet the new regulations.
Challenges in regulating Open Banking in Colombia
When it comes to developing Open Banking, even before the specific decree was published, the country already had a personal data protection law and information security circulaire addressing many of the issues that could cause uncertainties on their implementation process.
According to the regulatory agency, another important advantage in adopting Open Banking in Colombia is the experience the country has on real difficulties the population faces every day.
In the past few years, formulating public policies for financial inclusion allowed main challenges to be identified. Therefore, the country could better prepare for implementing Open Banking in Colombia in terms of regulatory issues.
On the one hand, Open Banking will make room for new players such as startups and fintechs to revolutionize the engagement between the population and the banking system in Colombia. On the other hand, an important regulatory vulnerability can be a challenge.
According to the Finnovista study in 2021, the regulatory environment for fintechs in the country doesn’t have one centralized agency. That’s why there are various regulations spread based on each company’s activity.
For 30% of the fintechs surveyed in the study, a centralized agency should be mandatory, thus making the business environment more organized for their operations.
We’re keeping up with the advances in the financial universe in Latin America
Latin America has always been seen as a high potential market for the means of payment and banking industry.
By keeping that in mind, here at Dock we look to understand more and more about the differences and similarities in the various markets that make up this amazing territory, where we’ve started and evolved as a business, along many clients and partners.
We’ve researched, experienced and conducted pilot projects in several countries in the region, getting a lot of experience on evolving laws, the means of payment industry maturity and consumer behavior in each nation. And we’ve recently become even more connected to the Colombian market by operating and having an office in the country.
Thus, we’re keeping a close eye on the movements toward an open financial system and all the opportunities it will bring to Colombia!
Open Banking in Colombia: Takeaways from this article
- Open Banking, also known as an open financial system, is a model allowing users to share their information with different institutions by enabling access to better solutions. That is an important tool for promoting competitiveness in the industry.
- Like other countries in Latin America, Colombia is making progress in their Open Banking project. However, unlike their neighbors, institutions in the country will voluntarily adopt the model.
- According to the Financial Regulation Unit (URF), Open Banking in Colombia is supported by good regulation on data protection and deep knowledge on the population’s needs.
- A decree regulating an open financial system in Colombia was published in July 25th, 2022.
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