OPEN BANKING 101
Open banking has become the latest buzzword. You've probably seen it in more articles than you can remember this past week. But what does it mean? And how does it work?
On March 9, 2018, Mexico brought into effect a package of reforms to the financial services sector under the term “FinTech Law”, or “Ley para Regular a las Instituciones de Tecnología Financiera”. The law regulates for the first time virtual assets, crowdfunding and payments, and opens the door to Mexico becoming an international leader in the financial services field. This leadership would come in the field of open banking, which is about empowering consumers to take advantage of a range of new financial service solutions and to choose those that can best help them achieve their financial objectives. It works as a system that facilitates the safe exchange of certain types of financial information among authorized actors that offer financial services, all the while respecting data protection laws. The law has given Mexico 24 months (until March 2020) before which it must develop its own open banking standard. Although a handful of countries across the world are working towards their own standard, the United Kingdom is currently the only one to have developed and implemented it. Mexico stands in line to be next.
The main question is: what does open banking mean for me, as a consumer? The financial services industry is going to be revolutionized in such a way that gives you more control over your finances. How do you revolutionize a sector in favor of individual consumers? Firstly, you need to have clear visibility over what services and products currently exist, then you need to understand who the consumers are and how they are using the products and services, and thirdly, for truly tailored solutions, one needs to have access to information about individual’s finances. Each step outlined above will be achieved thanks to the sharing of different types of data, which will be enabled by the creation of open APIs (sharing mechanisms for data), a key component of open banking. These are the 3 different types of data set out in the Mexican Open Banking Standard:
Open data refers to available public information about banks and their value offerings, such as branch and ATM locations and products and services offered, for instance. Although this information is already available, open banking allows for better visibility and analyses possibilities by standardizing the data format across the industry. This information will be available for any institution or organization to access.
Aggregated data refers to statistical information about product use and consumers. This could include information about the most popular products and services in an institution or the average income of consumers that use a certain type of account, among others. Having this information available would allow for the identification of opportunities for the development of better financial products and services for existing consumers and the creation of new solutions aimed at groups that are currently excluded from the financial system. This is particularly interesting in Mexico, where CNBV and INEGI estimate that 52% of the population does not have a bank account. Aggregated data would only be available to institutions and organizations that have been authorised by the National Banking and Securities Commission (CNBV).
Many of these new solutions are being developed by the emerging FinTech (Financial Technology) sector, but also by innovation departments within banks. The combination of FinTechs’ innovation capabilities together with banks’ distribution channels will be key to unleashing the potential of open banking. In fact 80% of banks worldwide hope to increase their collaborations with FinTechs within the next 5 years.
Transactional data refers to your personal financial information, such as your expenses, balance and your accounts. This is where open banking becomes truly interesting for consumers, but it is also what leads to a lot of confusion among the public over its potential for individuals. This information would not be made public. You would be in complete control over your personal information: namely whether you share it or not, with whom, for what purpose and for how long. This does not mean that the burden of secure data sharing falls on you. You will only be able to share information with institutions and organizations that are accredited by the CNBV, which means they respect data protection laws. The reason you might want to share your information with third parties is so you can take advantage of the new solutions they are offering. This could include personal financial management tools, which show you a clear view of your expenses in real-time, or you might want an analysis tool to tell you which savings account is best adapted to your current situation and your expectations.
So if you were to remember one thing about open banking, what would it be? Remember that it will empower you to achieve your financial goals by enabling the creation of new solutions and their personalisation for you. If, like me, you wish you had a better understanding and control of your savings so you could get the mortgage that best corresponds to your specific needs, then you should definitely be excited about open banking.
You can keep up with Mexico’s progress towards open banking on www.openbankingmx.com, which includes a report on the potential for open banking in Mexico published in April 2018.