Written by León Lanis V. , Paralegal
In previous blogs we have discussed the pioneering reforms Chile has been pushing with the fintech law and the consolidated debt registry bill now being discussed in Congress. One of the key aspects of the Fintech law (N°21.521) is the creation of a Open Finance System. This system has various goals, including to open up the financial market for more and broader competition; help smaller (but technologically driven) companies compete with larger more established companies such as banks; to let the financial consumer be the owner of their personal data; and most importantly, to allow the free flow of financial data within the system through intercommunication systems known as APIs. In this blog we will dive into what Open Finance is, its benefits and how it will be regulated by the Financial Markets Commission.
OPEN FINANCE: CHILE’S UNPRECEDENTED SUCCESS
Open Finance represents a modern financial framework centered on the seamless exchange of data. It empowers financial consumers to securely share their information with trusted third parties, such as banks, retail companies, and fintech firms. These entities, equipped with this shared data, can offer tailored services or specific financial products. The concept hinges on establishing a dependable technological conduit, enabling customers to freely move their financial data. This portability facilitates broader access and enhanced consumption of diverse financial services.
It is reasonable to ask: where did all of this start? In 2016, the United Kingdom’s Competition and Markets Authority (CMA) started with a more limited model known as Open Banking. This model only applies to banking data, and was implemented specially for banking customers that wanted to choose what payments and credit scoring companies they wanted to use, permitting a better flow of said data. Then, in 2017 Mexico followed with their own model, based on the promises of open finance, and created a national model for the financial portability. Unfortunately, the fintech sector in Mexico has not boomed as predicted due to a number of different factors. Many countries tried to apply similar systems but from the private sector, allowing only certain companies to participate in their systems.
So, why is Chile seeing success with the open finance system? Even though we are yet to see the full extent of the Open Finance System of Chile (SFA), Chile’s fintech sector is booming like in no other country. Some 5 years ago Chile had almost 49 Fintech companies, but with the recent regulations and the government’s efforts to bring fintech companies into the country, this 2023 Chile reported over 310 fintech companies, with payments and remittances being the biggest and most successful sub sector within said market, but also over 70% of fintechs in the country reporting positive growth and revenue (source: Finnovista Fintech Radar 2023). In addition, Chile has a very well consolidated banking and finance system, having the lowest unbanked population ratio in the continent. This in contrast to most other Latin American countries. This means that people who already have at least one bank account are willing to open their options to newer and more technologically driven actors offering better, faster and cheaper financial services than the banking sector. Taking note of this, the Ministry of Finance, the Central Bank of Chile and the Financial Market Commission have been working to create reliable and strong secondary regulations to allow the safe and fast development of the market.
TYPES OF COMPANIES WITHIN THE CHILEAN SYSTEM
The fintech law details the different type of actors that will participate in the System, creating different categories of companies:
- Information Providers (IPIs): these are companies that are obliged to participate in the system, being those that gather information from the clients and have their consent to share that information. IPIs will be regulated with very specific technical requirements that will ensure the security of the customers. A very important aspect is that they can’t refuse to share information consented by the customer but can’t also charge for the gathering or sharing said data. The following companies will be considered as IPIs under the new law:
- Payment card operators
- Savings and credit cooperatives
- Agents managing endorsable mortgage loans and insurance companies
- Institutions that place funds by means of mass loan lending
- General fund and portfolio managers
- Family allowance compensation funds
- Any other entity registered as a Financial Service Provider.
- Data Aggregators (IPSI): these are companies that provide services based on the information gathered from IPIs. These companies can participate in the SFA after following requirements to be set by the Financial Market Commission. IPIs can as well participate as IPSIs so long as they comply with the requirements.
- Payment Services Providers (IPSIPs): these are institutions or companies that provide services to bank account holders that instruct them to carry out payments. The idea is that these service providers will be able to participate in the Open Finance System in order to offer their services to customers while accessing the information provided by IPIs and IPSIs. This category also includes Bank Account Providers that externalize their payment services.
THE BENEFITS OF JOINING THE OPEN FINANCE SYSTEM
The prime beneficiary from the Open Finance System will be the customer, but what is the benefit for financial institutions? Many banks and traditional institutions have been concerned that allowing open finance in Chile could lead to a free-riding effect. The Financial Markets Commission has stated that the regulations for participants will be an enormous entry barrier. As well, these institutions have been concerned of the difficulties of data sharing, especially due to prohibition of charging for the flow of that data. That said, many companies have been keen on the benefits of the entry of new actors to the market, where innovation and technology will take a very important role while limiting human-made risks and costs. Many of these financial institutions will also be able to access information from more reliable and legal sources that are regulated by the Commission, ensuring the integrity of the financial data being harvested.
WHAT’S NEXT IN OPEN FINANCE FOR CHILE
At the moment, the Commission is working hard on the secondary regulations that will rule the System, especially those relating to compliance and governance. The proposal is being drafted and many key actors of the market are working hand-in-hand with the commission to ensure the correct application of these regulations. Something that has been really revolutionary is that important pressure groups, such as the FinteChile Association, have been working on the establishment of an international open finance system, talking and signing memorandums of understanding with key figures in politics and in the market in countries like Brazil, Colombia and Argentina.