José Villafuerte Mendoza
Rodrigo, Elías & Medrano Abogados, Lima
jvillafuerte@estudiorodrigo.com

When companies developing new technologies are planning to test their product in the real world, they usually choose a ‘show, don’t tell’ approach.^[1] They do not ask for government approval to perform an unregulated activity nor do they lobby for legal change. They perform the activity and hope to show the public and the government a workable product, capable of solving inefficiencies or taking advantage of features that no other entrepreneur has considered before. Using this approach, these companies can achieve significant improvements in the development of their product without concerns about other economic agents lobbying against their efforts, nor about the collective action problem of mobilising public opinion in favour of the untested technology. This is the case, for instance, with ridesharing platforms that landed in several countries showing evidence of a technology that could generate more trust than the government’s regulation of taxis.

This feature of new technologies is not the widespread culture among banks. Regulated financial institutions are generally more conservative in their approach. Traditional banks are inclined to wait for regulatory approval or, at least, some kind of a signal from the regulator before testing a disruptive technology or a new product. Such behaviour, whether explained by banks’ culture of safety, reputational concerns, the relationship with regulators, current regulatory frameworks, or market rejection of a ‘laissez-faire’ approach in the banking sector, can be perceived as a disadvantage if the two worlds, the ‘financial economy’ and the ‘real economy’, converge.

This could be the case with open banking technology, which can be described as the creation of a platform or group of platforms in the financial sector making available to customers and third parties customer data (including their financial data, customer behaviour data and other personal data provided by traditional financial entities) for the purpose of allowing such third parties to provide specialised services tailored to consumers, improving competition and the customer experience with products adapted to the needs and characteristics of each client.

Benefits and regulatory strategy

The importance of developing an open banking ecosystem is widely acknowledged among regulators and academics. Some of the benefits that have been pointed out include a reduction in  transaction costs within the financial market (including costs derived from search, coordination, and information asymmetry) and network externalities, which describe the - ideally positive - impact of the number of providers on the utility of each customer of the open banking platform.^[2] To explain these benefits in simple terms we could refer to the example of the mobile operating systems developed by the major producers of mobile  phones. The technological platform they share with app developers allows the creation of specific products (applications) in a quantity and quality that would otherwise not be possible if only the platform provider was entitled to develop them. Thus, such platforms reduce the transaction costs for app developers and customers and create positive network externalities for the customers as they benefit from more competition as well as tailor made products and services.

However, the question that arises almost immediately is how a functional open banking ecosystem should be promoted and whether regulatory intervention or signalling is necessary or advisable to promote this ecosystem.

The United States experience shows that it is possible that open banking might grow without the need for regulatory intervention or signalling merely because open banking platforms are a profitable business model. Still, this does not have to be the rule applicable to all markets. As explained earlier, there are many reasons why banking entities might be less prone to technological disruption or a shift in business strategy. Whether  the same regulatory approach should be applied to the Peruvian market will depend entirely on the characteristics of the Peruvian market, that is, whether  traditional banks have the same incentives to operate within an open banking business model, how competitive the Peruvian financial market is, and the perception that Peruvian banks have regarding their competitive advantages and disadvantages when compared to technology companies with extensive experience or other companies without much experience but that are more agile and willing to take greater risks.

As we know from international experience, there are other strategies that the regulator can take. For instance, a medium approach includes some policies and standards that the banks could eventually follow if they are willing to create platforms. A more interventionist approach, on the other hand, includes a set of mandatory rules and regulations to force banks to open their platforms to new competitors.

First steps towards a regulatory framework

The leader of the FinTech Group of the Peruvian banking regulator (Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones, or SBS) announced that the agency already has the first diagnosis of open banking in Peru and that it is inclined to evaluate the entirety of open finance, a broader approach that involves not only banking data and services, but all the financial market in general, including insurance and pension funds.^[3]

Likewise, in March 2022, a group of congressmen submitted law proposal No 1584/2021-CR, which has the purpose of declaring the national interest and public necessity in the implementation of a public policy that promotes the massification of open banking. The proposal seeks to delegate to the Peruvian banking regulator, SBS, the design of strategies to achieve such a goal and is mainly based on the need to increase financial inclusion in the  post-pandemic context.

The legislative committee that is analysing this proposal has received official opinions issued by state agencies and the Peruvian banking association, Asociación de Bancos del Perú (ASBANC). The Central Reserve Bank of Peru has highlighted the benefits of open banking (to empower the consumer, drive innovation, promote competition, lower interest rates, expand credit and financial inclusion, and accelerate digital transformation) and requested a change in the proposal to declare that the Central Bank will have the regulatory capacity for the development of open banking in Peru, due to its relevance for payment initiation and account aggregation services.

Peru’s SBS, in turn, has issued a report in which it clarifies that the implementation of open banking, whether through guidelines or mandatory regulations, involves aspects that need to be analysed, which includes the consideration of the dynamics of the ecosystem of each jurisdiction. Likewise, the regulator has restated its preference for an open finance model, although it recognises that implementation would be carried out in stages (starting with banking entities) bearing in mind that the most relevant risks the regulation would have to address are: cybersecurity, interconnectivity between entities, and the improper use of private customer data. Finally, the SBS reported that it conducted its first study in 2020, with the support of the World Bank, on the opportunities and challenges to implementing open banking in Peru; and that, together with the Central Reserve Bank of Peru and the World Bank, it is working on the design of a roadmap for implementation.

The opinion on the law proposal submitted by ASBANC is instructive. The banking association, whose members are banks authorised to operate in Peru, has shown a favourable view of the law proposal but, because not all banking entities are at the same level of technological development, it considers that the adoption of open banking schemes should not be mandatory.

Final remarks

At least from a theoretical point of view, it seems that the ‘open banking business model will be a disruptive evolution in the banking services market. This evolution has generated considerable expectation in developing countries, where the financial inclusion gap cannot be closed for structural economic reasons, the absence of public policies, and due to the characteristics of the financial market in each jurisdiction, where the costs of transactions are high and the entry costs for new companies are insurmountable for entrepreneurs.

In this context, the Peruvian banking regulator is working on the regulatory strategy to promote open finance (open banking being the initial focus). The regulator must decide on the advisability of a mandatory regulation, the creation of general guidelines or a detailed regulation, the determination of how open the financial market will be, the gradualness of the implementation, the information security standards, the requirements to use open banking platforms and the competition promotion mechanisms that must be implemented.

It is not an easy task, not only must the regulator start from an objective diagnosis of the market, but it will need to fight against a culture of regulatory conservatism and risk aversion that permeates most financial regulators and markets, otherwise there will be a risk that an open banking ecosystem that should be friendly to innovation and entrepreneurship will be lost in favour of a restricted platform where only certain third-parties – willing to operate with underbanked customers – will be allowed.