What Happens When A Government Supports Innovation, Fintech, And Open Banking?

April 25, 2024  |  Mark Hillary

The team from IBA Group will be at the Dubai FinTech Summit on May 6-7 in Dubai. Fintech is one of the fastest developing industries in the world at present, so this month I decided to take a look at the conference agenda and to theme my blog articles here on the topics being explored at the Dubai Fintech Summit.

One of the most important recent developments that is helping to fuel the development of new fintech solutions is open banking. This is a movement focused on creating open connections between different institutions so that applications can tap into information from various sources.

At a technical level, this is achieved by agreeing a standard Application Programming Interface (API). The API is a bit like an agreed protocol for messaging each other — one bank or financial service can message another using a standard and agreed system. Open banking has been available in Europe and the UK for a few years now. It’s also starting to take off in the US.

One of the potential applications that is most often given as an example of how open banking can work is the overview of a customer’s financial status. This is where they have a current account with one bank, savings with another, and a mortgage, credit card, or loan with another. An open banking app allows all the various accounts to be connected, creating a financial overview of one customer.

The reality is that it is account to account transfers where open banking has really taken off. This is where the customer can assign a key to their bank account and then use this key to make transfers very easily. Applications like this are now available in several different countries.

Brazil is a good example. The central bank of Brazil mandated that all licensed banks must use an open API that allows accounts to be given a simple key by customers — the system is known as Pix. In practical terms, this means that people can assign their phone number or email address as a key — you can ask a friend to send you some cash just by telling them your phone number.

Pix is now so popular in Brazil that it has virtually removed cash and debit card use, because it is so simple to transfer cash — and it is free for the user and much cheaper than a card transaction for a merchant, if it is being used for payment in a store.

I recently posted about this on my LinkedIn and someone asked me ‘isn’t this just the same as Venmo in the USA?’ On the surface, the Venmo system does look similar – account to account transfers. But the difference is that Venmo is a private company offering to facilitate account transfers — and they charge to move cash into regular banks (about 1.75%). It is not a fundamental change in how all companies approach banking as a service.

In contrast, Pix is an option that is available to all banking customers. I can see it on my banking app. I can send cash quickly to my wife because she is right there in my contacts list. It’s not a new app that I need to download. It is a change that fintech has created within the entire banking system in Brazil.

The Pix system is about to expand and will start offering buy-now-pay-later options — so large purchases can be broken into many smaller payments over time. This could dramatically affect the use of credit cards, as it would be a very simple way to access free credit. Time will tell, but we have already seen what happened to debit cards and cash if the system is so simple that anyone can use it.

Pix is a great example of a fintech that is supported by the government. What happens if you have a technology that is customer-centric and makes the process of banking much easier — and then the government rules that all banks must adopt the system?

Most fintech services don’t get this kind of support or such a large market, but it is a very interesting case study for financial regulators and fintechs globally. It shows how traditional banks can learn from the fintech approach and innovation does not need to be limited to a few shiny new apps.

For registration and more information on the Dubai FinTech Summit agenda click here.

Follow the IBA Group on LinkedIn for regular updates and comment. For more information on technology strategy and how tech connects to real business solutions please click here.

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