The Central Bank of Brazil will roll out open banking implementation

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The Central Bank of Brazil has released open banking regulation, which will mandate registered financial institutions (FIs) to share a customer’s transactional data with third parties, if the customer agrees, per Finextra. The regulation will have a phased rollout starting in November, with the goal of full implementation by October 2021. The initiative is part of a push by the central bank to promote digitization and transparency of financial services in Brazil, as well as to welcome new market players and business models.

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Brazil is poised to become a major neobank market, fueled by favorable market factors and friendly regulations. Insufficient competition among banks in Brazil — the four largest banks control over 80% of deposits and charge some of the highest fees and interest rates in the world — has made financial services largely inaccessible to consumers, leading to low financial inclusion and lower consumer trust in banks.

Those factors have driven a need for alternative solutions, and high internet penetration is creating an environment for neobanks in particular to thrive. The government has also implemented fintech-friendly regulations that are stimulating competition and allowing Brazil to spearhead Latin America’s neobank movement: Rules were passed in 2018 to allow fintechs to directly extend credit, and open banking guidelines were initially published in 2019. The latest round of regulations is further evidence of the favorable environment. 

Open banking regulations can stimulate competition for neobanks while promoting greater financial inclusion.

Neobanks can leverage open banking to provide personalization and more compelling features. Open banking in Brazil will give neobanks access to a greater pool of financial data and customer data through which they’ll be able to more accurately assess creditworthiness — even for those consumers without an established credit history — to lend more money and provide a personalized bank experience.

Neobanks can also provide features like account aggregation, allowing them to become central destinations for consumers’ finances. We’ve already seen this play out in the UK, where regulatory efforts are easing barriers to entry for fintechs and have led to more information sharing among banks, third parties, and their customers. UK neobanks like Starling and Monzo have leveraged open banking to easily build onto their platforms to offer value-added services from other providers, which can be cost-effective for them and valuable to customers. 

These regulations can ultimately fuel competition and make Brazil a more attractive market for neobanks to expand into. With 22 million users, Nubank is the sixth-largest FI in Brazil. It’s also the highest-valued neobank in the world, with a valuation of $10 billion, making it the best example of a neobank posing a legitimate threat to incumbents.

While it’s likely to maintain this lead for the foreseeable future, Brazil’s rollout of open banking could invite competition from established neobanks from other markets — like Germany’s N26 — which have already had their eye on expanding into the market. And given the significant portion of currently underbanked consumers in Brazil (1 in 3 do not have a bank account), there’s likely enough room for those neobanks to build their customer bases, despite the size of Nubank.

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