The U.S. is well behind other countries in implementing open banking and delivering its benefits to customers. Brazil's success in that area can serve as a useful model, writes Ximena Aleman, of Prometeo.
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In October of last year, the Consumer Financial Protection Bureau issued a press release stating its intent to implementa new rule providing more consumer control over personal financial data. The result proposed implementing Section 1033 of the Consumer Financial Protection Act, or Dodd-Frank Act of 2010, which would forbid financial institutions from "hoarding" a person's data and enable consumers to "break up" with banks that provide bad service in an effort to "jump-start competition."Fast forward to 2024, the CFPB recently announced the formal finalization of the Personal Financial Data Rights Rule on October 22 in an effort to move the United States "closer to having a competitive, safe, secure, and reliable open banking system."
The rule wasn't just another iteration of protecting consumers from companies misusing or wrongfully monetizing sensitive personal data — it also marked thefirst major shift toward centralized open banking regulation in the United States.
Despite this progress and the sheer scale of its market, the U.S. has been late to the regulatory party. The European Union implemented the first widespread open banking standards nearly ten years ago with its Payment Services Directive and subsequent Revised Payment Services Directive, otherwise known as PSD2. Unlike markets like the United Kingdom where open banking has been mandated, managed and regulated by the Open Banking Implementation Entity, or OBIE, a clearly defined authority which standardizes how banks and third parties interact, open banking in the U.S. had been devoid of centralized regulation prior to last year's landmark rule.
Like many examples of the country's financial regulatory enforcement regimes, U.S. adoption of open banking appears to match its historical market-driven approach to financial technology. Data aggregators like Plaid and Envestnet Yodlee have led open banking implementation through API development with financial service providers in a race for differentiation. The resulting adoption figures aren't trivial — according to CFPB estimates, at least 100 million U.S. consumers have authorized a third party to access their account data. Furthermore, nearly half (45%) of customers of U.S. national banks profess to already use or be interested in the concept of open banking, according to a Mastercard survey in the fourth quarter of 2023.
Section 1033 promised to increase competition in banking and improve the ability to offer novel payment methods, but experts say the regulation isn't clear enough to have a major impact.
With market demand clearly demonstrating consumer confidence in the technology and regulatory standards behind global implementation of open banking regulation, what can the CFPB learn from its international counterparts to ensure Section 1033 achieves its goals in creating a more price competitive and protected environment for consumers?
Latin America, which more than doubled the size of its fintech industry between 2018 and 2021, is an immediate regulatory beneficiary of reference. Brazil, in particular, serves as a global benchmark for widespread consumer adoption and increasing industry competition due to the speed, specificity and governance structure of its mandates.
In just three years since releasing its regulation on open banking in 2020, which applied to both fintech startups and banks on a level playing field, the country successfully executed three different implementation phases focusing on account information services, or AIS, and payment initiation services, or PIS, and is now in its open finance phase to bring open insurance and open investment mass market.
The results not only demonstrate the effectiveness of aggressively implementing clear, centralized regulation, but also the corresponding impacts on broader financial service adoption. On February 1, 2023, exactly two years after the launch of phase 1, Brazil's central bank announced it secured 15 million users. In June that same year, Brazil achieved 4.8 billion successful API calls, which is more than four times that of the U.K.'s 1.1 billion, according to a Mastercard analysis based on statistics from the Banco Central do Brasil and U.K. Open Banking Limited. As of September 2024, Brazil maintains 53.7 million open finance users representing 25% of its adult population — the largest adoption levels in the world.
Open banking in Brazil is also incorporated into the country's Pix real-time retail payment system launched in November 2020. The platform reached 140 million users in two years and as of October 2023, usage reached 156 million, which is over 70% of Brazil's population — a staggering figure. In that same year, transactions executed through Pix surpassed the total volume of both credit cards and debit cards combined.
In addition to its aggressive rollout, the Brazilian central bank's emphasis on oversight was another critical component to its successful adoption figures. This regulation wasn't just mandated, but closely monitored to ensure that APIs were fully functional and the different phases of implementation were executed on schedule.
Brazil's governance structure also offered another layer of clarity for market participants to implement stated mandates. While the regulatory process was led by the central bank, it is governed by three distinct entities with unique responsibilities: The Deliberative Council — which outlines decisions on issues related to the implementation of Open Finance and propositions of technical standards, Technical groups, which study and analyze proposals for the Open Finance ecosystem, and the Secretariat, which organizes the governing bodies' working agenda.
Separating oversight and governance isn't just a technicality, but rather a resource to have clear guidance on solving developmental framework challenges. The participants that comprise these entities are also not limited to banks and government leaders. The central bank included payments providers, depository institutions, associations and other market players to ensure that the methodology was not exclusionary and implementation timelines were realistic. This sits in sharp contrast to the U.S. and the CFPB, which solicited comments from banks and other financial institutions in response to its Section 1033 proposal, rather than including market actors within its governance framework.
With initial rollouts for Section 1033 set to begin with larger financial institutions and the U.S. still in its early stages of open banking development, Brazil's success in accelerating adoption with centralized rulings encompassing financial services startups and large depository institutions of all sizes from the onset should be a reference model for American regulators. With a framework noticeably behind its European and Latin American counterparts, the U.S. must move past its historically fragmented, drawn-out enforcement process to truly maximize the consumer centricity and vibrant market competition of open banking — a practice that the majority of American consumers have already proven to embrace.
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