Open Finance is expanding quickly in Brazil, allowing financial institutions to share data about customers who agreed to participate in this scheme. This initiative brings an exciting opportunity to banks and fintechs to use and combine customer data from various sources to improve credit analysis and reduce interest rates for consumers and companies. Open Finance might also catalyse the expansion of secure lending offers, which can further reduce the cost of credit.
Lowering interest rates is essential for Brazil because it currently has the highest rates among the 40 major world economies. Reducing these rates would significantly increase access to credit and positively impact the country’s economy. Let’s discuss how financial institutions can use Open Finance to achieve this goal.
Open Finance in Brazil
The Open Finance Brasil project (initially called Open Banking) went live two years ago. Like similar initiatives in other countries, it is a Central Bank-led project requiring financial institutions to share data from customers who agreed to participate. It aims to increase competition in financial services and make them more affordable and easier to access.
Initially, the Central Bank required banks to share basic public information about their products and services, but this scope broadened in subsequent stages. The project currently encompasses information about the customer, account and card transactions, credit limits and loan contracts. Insurance, pension funds and investments are part of the scope of the subsequent phases of the project, which will go live later this year.
Open Finance is part of a broader transformation in financial services. Digital banks increased the number of consumers utilising these services from 60% of the Brazilian population to 80% in the last few years. And instant money transfers, called Pix in Brazil, have become the most used payment method in only two years since it was launched in November 2020.
Exciting opportunities
The number of consumers who agreed to share their data has advanced significantly in the two years since Open Finance started in Brazil, exceeding 18 million. Economists forecast that 60 million Brazilians will participate in the scheme in 2025. The potential benefits of this data sharing are many. Here are a few examples of things people will be able to do when Open Finance is effectively implemented:
- Create bank accounts with much less friction since banks will fetch customer information from other institutions
- Make a payment on an online shop without being redirected to the bank’s website for authentication and authorisation via payment initiators
- Pay reduced insurance premiums thanks to the availability of information about the customer’s precedent history
- Get loans with less paperwork and bureaucracy, with lower interest rates, since the lending institution will have rich data to evaluate the customer’s creditworthiness better
- Easily submit a credit proposal to different institutions and compare their offers
Notwithstanding this exciting potential, unlike Pix and digital banking, Open Finance has yet to change the financial life of Brazilians. And lending is a crucial service for this transformation.
Lending with Open Finance
Currently, Brazil has the highest real interest rate among the 40 major economies in the world, according to a recent study by Infinity Asset Management. Lowering these rates would significantly increase access to credit and positively impact the country’s economy. This is one of the chief Open Finance goals.
Since Open Finance has been around for two years in Brazil, what is missing for it really improve access to credit and reduce interest rates? There are two things financial institutions should do to accelerate this process. The first is to enrich Open Finance’s information with data from other sources. The second is to offer secured loans for consumers. Let’s discuss these two courses of action.
Enriching customer information
Financial institutions can more accurately calculate credit scores by complementing Open Finance data with information from other sources. This improvement should result in lower interest rates for creditworthy customers.
Since 2011, Brazil has had legal provisions for financial institutions to keep database records of people who pay their debts on time. However, most financial institutions don’t effectively use this “positive registry”. The main reason for this is that, until 2019, customers needed to authorise the inclusion of their data explicitly. Now the inclusion is automatic, which allows the use of this data to enrich information gathered through Open Finance.
Another prolific source of customer data is embedded finance, which tends to become ubiquitous. For example, many retailers, transportation companies, and utility firms offer financial services to their customers and collect plenty of information about them. This information would be invaluable to assess their creditworthiness.
Embedded finance data is voluminous. Traditional financial systems typically cannot deal with it because they were designed decades ago when data volumes were much smaller. Thus, institutions need a modern high-throughput payment processing platform to take full advantage of this prodigal data source.
The Pismo financial services platform is ready for the task. It can efficiently process hundreds of millions of BNPL dealings daily, and it generates a rich stream of data about users and the transactions they do.
Secured loans for individuals
Most Brazilians pay at least part of their retail purchases in instalments. These payments are typically made using a credit card, a form of unsecured lending. In fact, other than real estate and auto financing, consumer loans are usually unsecured. Nevertheless, some financial institutions are starting to offer secured loans to consumers with lower interest rates, which tend to become more common as Open Finance advances.
Credit card receivables are good collateral because they are abundant and carry a low risk. B3, the owner of the Brazilian stock exchange, offers card receivables registration to payment acquisition companies. And some of its clients already use these assets as collaterals when lending to retailers.
B3 is also starting to offer credit rights (called “duplicatas” in Brazil) registration, which brings the opportunity to use these assets as collateral, especially in enterprise lending. They amount to US$ 3 trillion yearly in Brazil, much more than the credit card transactions in the country. B3 utilises a cloud-based, high-throughput asset registration system based on the Pismo financial services platform to provide these services.
Certificates of deposits (CDs) can also be used to secure loans. However, Brazilian banks can only use their own CDs as collaterals. As Open Finance evolves, data interchange will enable institutions to employ CDs issued by other companies for this purpose.
Asset tokenisation will bring further options to secure loans. For example, a person who invested in a pension fund may need money for some reason. In many cases, withdrawing money from this kind of fund implies losses since they are long-term investments. A person in this situation will be able to tokenise their balance and use it as collateral to get a low-interest-rate loan.
An exciting future for Open Finance
Considering all the opportunities Open Finance brings to banks and fintech companies, we foresee an exciting journey ahead. We will see a transformation in the lending market that will significantly benefit consumers and businesses in the next few years. The Brazilian Central Bank has laid down the regulatory basis for this evolution. And the technology to process the massive volume of transactions and data events is already available.
It’s worth noting that the Central Bank states that institutions must share financial data through application program interfaces (APIs), which are standard in modern transaction processing platforms like Pismo. We are happy to support our clients in implementing Open Finance projects and using the corresponding data effectively to serve their customers better.
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