The Central Bank of Brazil has envisioned open finance as a game changer for the financial system. After two years, it is finally taking off, and fintech companies like Nubank seem to make the most of it.
The neobank emerged as the first receiver of data through open finance this year, a framework that facilitates communication between banks and fintechs via APIs. The general idea is to eliminate information asymmetry and help institutions provide a more personalized client offer. Also, to reduce the cost of financial services.
A purely digital company, Nubank has been by far the most active player. According to data from the governance structure Open Finance, it obtained 7.4 billion requests for information from other institutions in Brazil. This accounted for 46% of all communications, far more than Itaú, the country’s largest traditional bank, with 23%.
A digital approach first
The data reflects Nubank’s proactive efforts to promote the adoption of open finance among its customer base. Given their challenger status, it is only natural that neobanks will leverage the system more than well-established banks that have already secured leadership positions.
“From the beginning, fintechs saw more value and opportunities with access to relational data for a better understanding of customer habits,” said Carlos Augusto de Oliveira, executive director of ABFintechs in Brazil. “They have been more active in proposals to attract customers to the ecosystem.”
Certainly, other fintechs have also unveiled a similar strategy. Mercado Pago, the fintech arm of online marketplace Mercado Libre, accounted for 7% of all data requests during the period, which runs through the end of May.
Communications within the Open Finance framework are done through APIs. These allow institutions’ systems to share information with each other. In accordance with the regulations, all these data transfers require the explicit consent of the user.
Open Finance to improve Nubank’s credit rating
For fintechs, the opportunities arising from this framework are enormous. As a first step, Nubank is looking to use this information to improve credit reporting skills, whether for cards or personal loans. The digital bank, which has more than 75 million customers in Brazil, has taken steps in the lending segment in the country in a bid to increase its profitability.
“We’ve collected significant data on top of a sophisticated data infrastructure, which is increasingly a key part of our product design and artificial intelligence strategy,” co-founder and CEO David Velez recently said. “We have developed unique capabilities in credit underwriting and financial services.”
But the opportunities go beyond credit. According to Nubank, Open Finance could also pave the way for other products and services, such as viewing all bank accounts through the same enterprise application.
Experts say a leaner, more modern structure is helping fintechs like Nubank take the lead in open finance. Banks are struggling to adapt to their legacy systems to better access and process data. However, this technological advantage could diminish over time.
“Banks are working on the project as much as fintechs,” Oliveira said. “Naturally, this poses a bigger challenge for them. But once this preparation phase is over, they will certainly apply strategies to attract customers.
First steps of open finance in Brazil
Admittedly, Open Finance is still in its initial phase. Beyond Nubank, most institutions are building the infrastructure necessary to take full advantage of a more competitive ecosystem.
The central bank began phasing in the framework more than two years ago. Eight hundred institutions — from banks to fintechs to credit unions — are now part of the data collaboration system.
Admittedly, there are still few concrete benefits for customers who give their consent, and much needs to be adjusted in the future. Replicating the runaway success of Instant Pay Pix is out of the question. But the longer-term consequences for the industry, experts say, could be significant.