Open Banking: Creating a System of Inclusion, Openness, and Trust for Mexico
By Kushlani De Silva
- 28 Jun, 2019
Open banking is reaching global adoption. Regions like Singapore and Japan were strong advocates for open banking even before the Second Payment Services Directive (PSD2) regulation and they experienced tremendous success in doing so. Post PSD2, other countries like Mexico, Brazil, Hong Kong, Australia, and countries in the Middle East are coming up with open banking regulations. They are opening up their APIs in an effort to create a more open, competitive and customer-driven financial ecosystem.
Mexico is a great example of a region adopting open banking, not just to change the dynamics of financial services, but to solve larger problems of financial inclusion and consumer mistrust. This article captures the need for open banking in Mexico, key aspects of the regulation, and why a long term vision for open banking is critical for success.
A Look at Financial Inclusion Data in Mexico
Source - Global Findex Database
In a time where digital banking trends are on the high rise, these numbers cause concern. It paints the picture of a financial ecosystem which needs a reboot in order to keep up with the rest of the digital-first banking centric nations.
Making Sense of the Numbers
If you closely analyze these numbers, a couple of key points are evident about financial services in Mexico.
The Lack of Consumer Trust
The lower penetration of financial services, even those as basic as opening up an account, can tell us one thing. Mexican consumers have their apprehensions around trusting banks to take care of their money and the ability they have to provide products, services and experiences they need. Due to the vast geographic distribution of Mexico, not all consumers have access to banking services. This could be due to the inability to set up the infrastructure required for physical banking services such as setting up branches and hiring banking staff. Research conducted in 2016 shows that the services provided by banks don’t always live up to expectations and less than 40% of banking customers trust their bank.
In an era where the Internet has taken over the world, the numbers from Mexico paint a different picture. The question arises — do consumers not trust technology provided by banks for online services? Or are they simply unaware of the host of benefits that these online services provide for them? A similar question arises about banks — have they understood that a large part of financial inclusion relies on providing access to banking services beyond traditional means? And are they prepared to put the work in to do so?
The ray of hope in this scenario is the mobile phone penetration for the unbanked, which stands at a steady 50%. It is not that the market is unreachable, it just needs the right penetration channels.
The Need for a Strategic Change in the Way Banking is Perceived
The factors discussed above point to a lot of uncertainty in the financial services ecosystem. Banks and the government of Mexico need to make an important decision. Will financial services continue to exist as is, with a large percentage of the population choosing to exclude themselves from consuming it? Or will banks, the government and regulatory authorities come together and see the bigger picture around banking and make it more accessible?
They should aim to create a world where consumers trust in a financial ecosystem and enjoy stellar experiences provided at competitive packages. Consumers should consider financial services to be more than products, but a lifestyle.
Open Banking: Bridging the Gap Between Consumers and Banks
Open banking requires banks to open up customer data to third-party providers (TPPs) via APIs. Since Europe and the UK implemented open banking regulations, Australia, Hong Kong, Singapore, Malaysia, and Canada have made plans to adopt open banking into their legislation. The efforts for Australia are already underway, with the Big 4 banks scheduled to open up data in February 2020 and the rest in July 2020.
Open banking eliminates the barrier of a traditional financial services ecosystem and encourages more competition. This translates into better experiences for customers. In Mexico, it aims to address a much larger challenge. It is meant to bring back confidence in banking through openness and the ability for other players to use customer data for personalized services, all while keeping this data safe. Here are a few ways this objective is met.
As the competition intensifies, both banks and other TPPs will have to provide products, services, and experiences that are of the highest standard at competitive prices. Progressive global banks like Citibank have launched open API portals in Mexico a while ago hoping to leverage the benefits of open banking to stay ahead of the competition.
Financial Inclusion for the Unbanked
Open Banking is a technology-centric regulation. It uses APIs to allow third parties access to data and payment services. These Open APIs can potentially help connect with consumers who are unable to access traditional banking services. The fact that mobile penetration in Mexico is relatively high helps take these services to a broader group of consumers.
A Collaborative Ecosystem Built on Trust
Open banking requires customers to provide consent before a bank can expose their data to TPPs, thereby putting the customer in control. This means banks need to put in place strong security measures to ensure that no data breaches take place. At the same time, TPPs should reassure their customers that data usage is for the intended purposes only. They should communicate the measures put into place to ensure security so they can trust in the system. Being transparent helps build a stronger relationship between all stakeholders in the ecosystem.
Important Facts Around Open Banking in Mexico
The table below covers some of the must-know facts around the open banking regulation in Mexico.
|Who is involved in the regulation?||Comisión Nacional Bancaria y de Valores, The Embassy of the United Kingdom, the FinTech Hub, C Minds, ODI and the Government of the Republic|
|Who needs to open up the data?||All 2200 financial institutions|
|What is the scope of Open Data?||
|What are the timelines?||
|Is there a technical standard developed already?||It’s not available yet, but the Open Banking UK API Standard will be used as a base.|
Technology: An Infinite Need for Open Banking Success
Open banking puts the spotlight on technology. It lies in the hands of a stellar technology program to tackle the problems of financial and digital inclusion and provide competitive offerings and digital services.
Although APIs are the underlying technology component for open banking, there are several other technologies that need to come together to create a complete ecosystem. The section below analyzes how to leverage technology to create a competitive advantage for open banking.
APIs for Access - Reaching the Unbanked
APIs are the underlying technology that facilitates data sharing via open banking. Just like any other open API implementation, the basics apply. They should adhere to API security requirements such as OAuth2/Certificate based API authentication, and OpenID Connect (OIDC). These APIs should also support API publishing, governance, throttling and more.
When it comes to open banking, there are several other factors that determine the success of APIs. The first one being standards. As discussed previously, Mexico is in the process of compiling an Open API standard based on the Open Banking UK API standard. So if you are a Mexican financial institution, you should start doing your homework on the UK API Standard.
Open Banking in Mexico will happen under a phased implementation and the first phase will require a sandbox to test Open APIs. If you take this requirement into consideration at the point of creating your open APIs it makes it much easier to get them ready when the deadline for sandbox testing comes into play. Our blog covers how UK and EU banks needed to prepare for a similar deadline in the EU and UK.
Finally, remember that Open APIs are an essential component of creating financial inclusion through open banking. Therefore when creating your API management strategy you need to look at it as more than a technology component but as a channel towards reaching larger audiences.
Secure the Customer Journey
Security is a large concern within the open banking movement in Mexico. With fraud numbers taking an uphill trend over the past couple of years, data security is of utmost importance.
So how do you ensure this happens? One way is to secure the data sharing process using mechanisms such as strong customer authentication (SCA) and consent management. These mechanisms enable you to put the customer in control of data sharing and initiating payments via third parties. As SCA can sometimes deter user experience, a bank should consider implementing adaptive authentication which can exempt SCA based on predefined rules. Our webinar covers some key SCA aspects in reference to the Open Banking UK API Standard.
With the increase in fraud, banks should take some time to invest in appropriate fraud detection mechanisms. This will greatly help reduce the risk of data being misused within the open banking ecosystem.
Provide Seamless Integration with TPPs
Collaboration is a key goal of open banking. As a bank, you should consider two stakeholder journeys to be of importance; the customer journey and the third party journey. Other financial services players such as insurance companies, mortgage providers, and even challenger banks should be able to access and integrate with your open APIs to derive customer data in a seamless manner. This also determines the level at which you can compete. A negative experience for a TPP could result in them choosing a competitor bank’s APIs over yours. Plus, the more TPPs accessing your APIs the broader the distribution to consumers. A TPP could easily be the way you take your banking services to the unbanked.
Use Data Analysis to Create Digital Customer Experiences
Open data is synonymous to open banking. But there is a lot of work required to turn this data into actionable insights. Technology plays a key role here. Data analysis can be as basic as using API analytics to identify top performing APIs for monetization. It could also include more advanced techniques such as behavioral analytics, which can give you a 360 degree perspective of a customer's lifestyle. Working collaboratively with other service providers in the open banking ecosystem can help you identify customer purchase patterns, their preferences towards financial and other services and the kind of digital experiences they are after.
Build a Vision for a Future Beyond Open Banking
Progressive banks must understand the bigger picture of open banking. While the immediate needs and goals revolve around creating more access to financial services, open banking has greater benefits. It converts traditional financial services to a technology-centric platform enabling every stakeholder from banks to customers to financial and non-financial service providers to reap the benefits.
So in the long term, open banking not only changes the way you do banking but yours and your customers quality of life. It can truly revolutionize Mexico’s digital ecosystem and bring it on par with regions like Singapore and Hong Kong, whose digital ecosystems are of a high standard. Therefore, creating a vision that extends beyond the regulation and towards a bigger digital agenda puts your bank ahead of the competition.
This article summarises the key requirements for open banking in Mexico, what to consider when implementing technology and how to create a long term vision for open banking.
There is much to look forward to in the progression of open banking in Mexico. WSO2 commits to being involved with these efforts. We conducted an Open Banking and Security Forum in Mexico together with our partners X4. We continue to work towards supporting the regulation and its larger objectives of creating financial inclusion, trust, and openness in the banking ecosystem. Our experience with Europe, the UK, and Australia have paved the way to help us understand how different regions react to regulations and how technology can essentially be a method to the madness.
-  https://www.adb.org/sites/default/files/publication/159308/adbi-financial-inclusion-asia.pdf
-  https://data.worldbank.org/indicator/FX.OWN.TOTL.ZS
-  https://datatopics.worldbank.org/financialinclusion/country/mexico
-  https://news.gallup.com/businessjournal/203837/mexico-banks-customer-problems.aspx