Why Regulators Play a Key Role in Driving Financial Digitalization | NTT DATA

Wed, 29 March 2023

Why Regulators Play a Key Role in Driving Financial Digitalization

Compared to more digitally advanced markets like European and Asian countries, where a person can use their mobile to complete transactions, cash is still heavily used in Latin America with all the risks it entails, from losses to security issues. The growing and rapid digitalization of financial services in the region makes us dream of a future where we can have all financial services, from the most transactional to the most specific, on our smartphones.

How can we close this gap? Apart from the significant efforts made by both fintech and traditional banking institutions, regulators are another key player in accelerating the digitalization of financial services in our region.

The Case of Pix and its Multiplying Effect

Development is accomplished when new payment methods are mandated and ensured to arrive equitably, securely, and accessible to all. Pix in Brazil is the most resonant success case in the region of how a regulator can drive financial inclusion. It is an instant payment system launched in November 2020 by the country's banking authority. Brazil's Central Bank data shows that 64 million people made their first electronic financial transactions with this system in just two years. This means that more than 30% of the total Brazilian population was able to enter the financial world thanks to this tool.

The Central Bank of Brazil is starting in an emerging manner, the development of a "Regional Pix" system as an alternative for regional economic group integration without adopting a single currency.

But the multiplying effect has begun its march: the Colombian regulator has already announced intentions to replicate Pix in that country and is advancing in agreements with the Central Bank of Brazil. Meanwhile, other countries are outlining strategies to promote digital finance. Peru, for example, issued a circular last November requiring all virtual wallets and mobile payment systems in the country to be fully interoperable.

The Opportunity of Open Banking

Another approach to financial inclusion that regulators can foster is related to the world of open banking. This model allows non-financial institutions to provide financial services and thus reach social groups that banks find difficult to access. The pace of progress on this topic varies from country to country. Brazil and Mexico are already in the implementation process, while Chile and Colombia have launched regulations that have not yet come into force. The rest of the countries are working on their regulatory framework alongside financial entities. After years of uncertainty, open banking is a reality in the region, which is why financial institutions should get ready for this new stage and avoid pressure due to the deadline imposed by the regulation.

Along with open banking, many financial and technological institutions have developed a business model that provides banking operations and technology services. Known as Banking as a Service, this new business model positively impacts financial inclusion by allowing access to banking operations and technology at a lower cost, reducing the break-even point for many sectors.

Towards cross-border payments

At the same time, Latin American regulators - who are focuing on best practices and successful regulations from other regions, especially Europe - must continue focusing on guaranteeing data protection mechanisms, establishing the regulatory framework for the emerging CBDCs (Central Bank Digital Currencies), and even standardizing services provided by fintech. Robust, secure, reliable, and regulated markets are also fundamental for financial inclusion.

In the future, one of the goals that could generate significant economic dynamism and improve the region's development is everything related to cross-border payments. This challenge is taking its first steps in terms of regulations. The great news is that customers are eager to use digital solutions in all aspects of their lives, including finance. This is the healthiest acceleration vector toward true financial inclusion in the region. In this context, Latin American regulatory bodies have a unique opportunity to positively accompany this trend.

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