FDATA’s Open Thoughts

Increasing financial inclusion is vital in supporting the financial wellbeing of individuals and SMEs and to drive economic growth.

In the UK, the government plays a crucial role in enabling financial inclusion. For example the House of Commons Treasury Committee Inquiry into SME Finance, the establishment of the Centre for Finance, Innovation and Technology (CFIT) last year, as well as the UK’s Economic Secretary’s announcement of a new industry-led Open Finance Taskforce focused on how financial data can be safely unlocked to improve SMEs’ access to credit.

By leveraging open banking data, and other alternative data sources, we can improve inclusion by assessing creditworthiness for those who may not have traditional credit histories. Analysing real-time financial data such as income, spending patterns, and banking transactions allows lenders to make more accurate lending decisions and extend credit to individuals who were previously underserved or excluded from traditional financial services.

HMRC tax data can also improve lending decisions for SMEs by 25%, as demonstrated in the recent CFIT proof-of-concept led by HSBC. The trailblazing Financial Conduct Authority (FCA) makes it possible to test these novel approaches through their Innovation Hub’s Permanent Digital Sandbox, Innovation Pathways and Regulatory Sandbox services.

Lastly, financial inclusion can be undoubtedly propelled further through new technologies that improve access to financial services for individuals in remote areas, streamline the application process for loans and credit, and enable more accurate assessment of creditworthiness for underserved populations. From mobile banking apps to digital payment platforms, as well as artificial intelligence for alternative credit scoring, there is exciting tech that can expand financial inclusion and improve financial wellness and resilience.

Darren Smith

Executive Director Finexos, an FDATA Europe Member

Open Finance has been used as a promising avenue to enable financial inclusion for millions of Latin Americans, especially in countries like Brazil, Chile, and Colombia, which have made significant regulatory advancements.

In Chile, for example, the Comisión para el Mercado Financiero (CMF) has been actively working to implement regulations that favor Open Finance. The recently approved Fintech Law establishes a clear regulatory framework for integrating new digital financial services, promoting competition and innovation.

In Colombia, the Financial Superintendency has launched a series of initiatives to strengthen the Open Banking infrastructure. Colombian regulation has focused on ensuring consumer data security and privacy while facilitating collaboration between traditional banks and fintechs. This can create a more inclusive environment where more people can access modern and efficient financial services.

An essential pathway for the success of these data-sharing infrastructures will be instant payments, which will enable inclusion and the creation of more data on users’ financial behavior, allowing the development of more use cases. Pix in Brazil, for example, was efficient in this approach, including more than 75 million people and generating more behavioral data about users.

Brazil has stood out in use cases in the region thanks to the advanced framework implemented. What is essential for the success of this infrastructure is precisely the creation of use cases, and we can already see the industry innovating from it. For example, Palenca is allowing financial institutions to access gig economy data for credit evaluations. This is particularly relevant in a market where many workers do not have formal income and, therefore, have difficulty accessing traditional financial services. Banco do Brasil has also implemented solutions that allow users to better aggregate and manage their financial information, helping them better understand their financial situation across different accounts. Another relevant case is BBVA, which, through the analysis of financial transactions via Open Finance, had a significant social impact. After Hurricane Odile in Mexico, BBVA helped the Mexican government identify which regions were recovering more slowly, allowing for more effective and targeted resource allocation.

Open Finance is proving to be a powerful tool for financial inclusion in Latin America, not only by including more people but also by making the Latin American financial system more efficient. With recent advancements in Chile and Colombia and the interest of countries in the region in adopting instant payments, we will likely see more relevant use cases in Latin America. Open Finance has immense opportunities, and the main one is to ensure that those who did not participate in the financial system have the opportunity to benefit from it.

Walter Pereira

FDATA LATAM REgion Director

Financial inclusion remains a global challenge, with millions lacking access to vital financial services. Yet, within this challenge, lies an opportunity for innovation and collaboration. At Ozone API, we see open banking as pivotal in fostering financial inclusion worldwide. And it’s not just us that thinks so. A number of regulators are putting financial inclusion objectives at the heart of open banking and open finance frameworks. Done well it can create the right conditions to drive significant societal impact. Regulations must however be defined in a way that balances innovation with consumer protection and data privacy.

Put simply, open banking helps to remove some of the very real and significant barriers to financial inclusion. Through access to customer permissioned data, lenders can make more informed decisions, enabling previously excluded groups to get access to credit. It also creates the conditions which allow innovative providers to more effectively target underserved segments. Combining their specialist sector focus with the power of traditional banking and using partnerships to drive better solutions. And finally it helps reduce the cost and friction of payments, ensuring digital payment solutions can spread to more parts of society.

Open banking revolutionises access to banking services, especially in regions like Latin America where cash transactions dominate due to high card payment costs and traditional credit bureaus lack insight into large sections of the population. Additionally, open banking addresses credit history challenges, enabling rapid credit profile building for gig workers in regions like the Middle East. This unlocks access to financial services and empowers individuals to achieve financial goals.

Cross-border collaboration and data sharing among regulators are key to the future of financial inclusion. Enabling consent-based access across jurisdictions allows individuals to use their open banking-based credit history globally, though challenges like regulatory alignment and data privacy persist.

Timely regulatory interventions are crucial to accelerate financial inclusion. Prioritising regulations, facilitating data sharing, promoting interoperability, and safeguarding consumer rights will foster an inclusive environment that encourages innovation and expands financial access for all.

Technologies like open banking, digital payments, and blockchain propel financial inclusion by lowering costs and improving access to credit. Conversely, technologies exacerbating exclusion, such as restrictive data practices, must be re-evaluated to align with inclusivity and affordability principles.

In conclusion, advancing financial inclusion demands collective efforts from stakeholders. At Ozone API, we’re committed to leveraging our expertise, our technology and partnerships to drive change and create a more inclusive financial future for all. Specifically, we help regulators develop the rules and standards needed to enable a secure open finance ecosystem. We also provide robust, proven open finance infrastructure to banks and financial institutions, to reduce the time and cost of implementation, thereby speeding up the benefits of addressing critical challenges such as financial inclusion.

Huw Davies

Co-founder & Co-CEO of Ozone API an FDATA Global Member

From a North American perspective, financial inclusion is a critical issue that hinges on the balance of robust regulatory frameworks, consumer protection, and innovation in financial services. In Canada, financial inclusion has been significantly shaped by the government’s initiative towards an Open Banking regime as announced in the 2024 Budget. The 2024 Budget was powered by the vision that consumers and small businesses should exert full control over their financial data. It paints a picture of an ecosystem where tailored financial products and services aren’t just a possibility but a standard. The Consumer-Driven Banking Framework established by the Canadian government is set to enhance financial inclusion through meticulously designed policies. For instance, it permits applications that develop credit scores, aiming to boost financial outcomes for “credit invisibles.” This strategy not only safeguards consumer data but also fosters innovations that dismantle barriers to access.

In the United States, the Consumer Financial Protection Bureau’s (CFPB) Section 1033 rulemaking is illustrative of a paradigm where consumer rights to access their financial data are placed at the heart of financial inclusion. This regulation, a component of the Dodd-Frank Act, is anticipated to unleash a wave of fintech innovations, thereby expanding the reach of financial services to historically underserved communities. This rulemaking envisions an inclusive financial sector where information is democratically available, allowing for a competitive environment that could lower costs and improve services for consumers.

Both Canada’s and the United States’ approaches underscore the importance of defining financial inclusion not just in terms of access but also in the quality of engagement between consumers and financial services. Use-cases and technologies that have been pivotal include digital identity verification, mobile banking, and personalized financial management tools. These innovations are instrumental in removing traditional barriers, like the need for physical bank branches in rural or low-income urban areas, thus changing the geography of financial services.

However, with innovation comes the challenge of ensuring equitable access and guarding against digital divides that could perpetuate or even exacerbate exclusion. In this regard, both countries are at a juncture where the question isn’t just which technologies should be embraced but how they can be deployed responsibly. As regulations like Canada’s Consumer-Driven Banking Framework and the United States’ Section 1033 come to fruition, a vigilant and adaptive approach is needed—one that continuously assesses the inclusivity of these innovations and the unforeseen barriers they may create. Moving forward, it’s crucial that both nations continue to foster environments where technology serves as a bridge rather than a gatekeeper to financial inclusion.

During 2023, open data regulations in Latin America have significantly evolved, with industry, governments, and financial regulators collaborating to establish a regulated data-sharing infrastructure.

Financial data sharing has been a reality in the financial system since its inception, adapting to a more digital and instantaneous reality as technology progressed. While some Latin American countries are still exploring opportunities and best practices in the open data ecosystem, others such as Brazil, Chile, Colombia, and Mexico have implemented regulated and some case mandatory data-sharing infrastructures. This aims to create a true network effect in the data economy, wherein major financial institutions, typically holding a significant portion of customer data, share this information with third parties.

The region has predominantly taken a mandatory approach for large institutions, and it is anticipated that in the coming years, countries still operating under a market-driven model will also engage in the implementation of regulated infrastructures.

Financial services is a hyper conservative industry, and a protectionist stance is common. No institution naturally wants to share customer data with a competitor, and data custodianship is often conflated to mean institutional data ownership.

The benefit of a mandatory approach is that it often enshrines a consumer data right, which clarifies the ownership vs. custodianship conundrum. Mandatory approaches also often consider consumer outcomes first and foremost, something that is not first priority when industry is left to voluntarily design delivery and outcome.

There is ample evidence to show that without a regulatory push, certain markets are reluctant to move towards a standard open data sharing scheme of their own volition. Even in voluntary markets, the regulatory pressure to deliver open banking is so strong it might as well be considered mandatory (it’s a case of “do it, or else we’ll do it for you”).

The advantage to a voluntary approach, though, is that incumbents recognise the incentive to participate, and often see economic and commercial value from participation; the ROI is there in some form, and the business case for broad data sharing is compelling enough to participate because the majority of FIs have a similar POV.

However, experience seems to prove that a mandatory approach is needed to accelerate open data sharing at scale.

In the evolving world of open banking and finance, the United States and Canada initially adopted similar voluntary approaches. FDATA North America has closely monitored this landscape, recognizing the importance of these nations’ transitions from voluntary to more mandatory frameworks.

In the United States, the shift towards a mandatory approach in open banking has been a significant development. Initially following a voluntary regime, the U.S. saw a notable change with the Consumer Financial Protection Bureau’s (CFPB) introduction of a proposed rule under Section 1033 of the Dodd-Frank Act. This proposed rule, aimed at enhancing consumer control over their financial data, signals a move towards a mandatory regulatory framework. This transition marks a major alignment with global financial technology trends and opens new opportunities for consumer benefits and innovation. Departing from the market-driven solutions that once dominated, this shift suggests a more competitive and innovative financial market, breaking away from the traditional dominance of large financial institutions.

Canada, following the U.S.’s lead, has also begun to shift away from its voluntary stance. This movement was highlighted by the Canadian Government’s Fall Economic Statement, which included a comprehensive framework for consumer-driven finance and open finance directives. This development indicates Canada’s progression towards a more structured, mandatory approach. This transition aligns Canada with other G-7 nations and reflects a global shift towards consumer-centric financial services, signifying a substantial change in the country’s approach to financial services regulation.

For FDATA North America, these developments in both the U.S. and Canada represent pivotal moments. The U.S.’s move towards a more defined regulatory framework under the CFPB is expected to lead to a more dynamic and competitive market, in line with global consumer data empowerment trends. In Canada, the enactment of consumer-driven finance will mark a significant step from a voluntary to a mandatory approach in open banking. As both countries refine their open finance strategies, the potential for transformative changes in consumer and business interactions with financial services is substantial. These shifts open exciting prospects for innovation, competition, and financial inclusion, reshaping the financial landscape in both countries.

Acknowledging the global context in which Open Finance operates, it’s important to understand the distinct roles of mandatory and voluntary approaches, particularly when contrasting Latin America’s experience with other regions. While the voluntary approach is more prevalent in other parts of the world, Latin America has been more inclined towards a mandatory framework, as highlighted in the report by FDATA LATAM in collaboration with the Inter-American Development Bank (IDB).

The mandatory approach in Latin America, as the report suggests, brings numerous advantages. It sets a clear regulatory framework, ensuring standardized practices across the financial sector. This is essential in a region with diverse economic and financial landscapes, as it provides a consistent and secure environment for data sharing. Mandatory regulations drive competition, lower barriers to entry for new players, and foster innovation, which is crucial for a dynamic financial ecosystem.

In comparison, the voluntary approach, predominant in other regions, allows for flexibility and market-driven innovation. Financial institutions and fintechs develop data-sharing practices organically, which can lead to highly tailored solutions. However, this approach may result in uneven adoption and standards, which can be challenging for ensuring universal access and consumer protection.

In Latin America, the emphasis on a mandatory framework reflects a proactive stance towards creating an inclusive and competitive financial environment. This approach aligns well with the region’s goals of accelerating financial inclusion and leveraging technology and data to empower consumers and businesses. It ensures that all stakeholders, regardless of size, have equal opportunities to participate in the evolving financial landscape.

Thus, while recognizing the value of voluntary systems globally, the mandatory approach in Latin America, as advocated by FDATA LATAM and the IDB, is particularly well-suited to the region’s objectives. It strikes a balance between regulation and innovation, paving the way for a more equitable and progressive financial sector.

I have two special requests for the New Year:

I would love to see more institutions, government sectors, and private entities embracing the principles of Open Data, making datasets publicly available in machine-readable format.

Equally important is helping people to become more aware of the value of their own data and how useful it is when used in an Open Data environment.

It is so important to remember the power of Open Data lies in its use, so the ultimate wish would be to see more innovative applications of Open Data in solving real-world problems and enhancing people’s lives.