This article summarises the regulatory status of open finance in Chile, depicting the objectives and stages of the Fintech Law.
In September 2020, President Pinera’s government presented Congress with what is known as the ‘Fintech Law’. The draft law incorporates open finance as part of a set of principles intending to modernise and transform how financial services are delivered in Chile. It promotes competition, with the overarching aim of increasing financial inclusion.
Objectives of the Fintech Law
The Ministry of Finance has recognised that technology is enabling new ways of providing financial services, which complement and enrich how financial products are created. Through the Fintech Law, the Ministry of Finance aims to provide regulatory symmetry, in other words providing equal opportunities, for fintechs and traditional financial institutions, as well as reducing the barriers of entry for new technology-based financial services providers. It is hoped that this will lead to increased competition in the sector.
Secondly, the Ministry of Finance acknowledges that the increase in digital adoption can benefit a large proportion of the population which currently does not have access to financial services. This will bring about increased competition and efficiency, leading to better products at a lower cost.
Specifically, the key elements set forth when presenting the proposed Fintech Law to Congress were:
- To facilitate new actors entering the market, creating more competition
- To encourage the development of new products and services
- To reach segments of the population which are currently under-served
- To promote digital adoption and thus financial inclusion
Reliance on digital financial services soared during the pandemic, leading to a fintech adoption rate of 66%. To accommodate this new reality, the Ministry of Finance acknowledged the need to adjust the existing legislation. Alongside other regulations around data protection, portability, and payments, the Fintech Law aims to modernise the financial system, responding to these new services and risks.
Open Finance Model
Open finance is a way for consumers to leverage the benefits that technology can bring to financial products and services. It levels the playing field by eliminating the ‘information asymmetry’ which exists today. In other words, it allows all fintechs and payment service providers to access the financial data of their customers, as long as prior customer consent has been given, and use this data to provide them with tailored, relevant and enhanced services.
In this new expected model, consumers will have the right to choose who provides their financial products. Consumers will be empowered to share their data with those providing solutions which fit their needs, which are easy to use and are offered at the right price.
This ecosystem is founded upon the use of APIs, which enable secure and efficient data exchange. Both financial institutions and fintechs agree on the merits of regulation to guide the evolution of this API economy. But for the ecosystem to grow quickly and safely, standards and a common framework must also be developed. Market players should collaborate to find common ground and establish standards that benefit all members. To drive innovation, a neutral and modular approach is critical. Without this, fragmentation can ensue, and the cost of implementation will rise.
Current State of the Law and Next Steps
The decree has now passed its initial approval and is headed to the Senate for its final vote. Once approved, the Financial Market Commission (CMF) – the financial regulator for the country – will take charge of drafting the required regulation to instigate a swifter implementation of open finance in Chile.
The Ministry of Finance also published an accompanying document, “Guidelines for the Development of an Open Finance Framework in Chile, with a Focus on Competition and Financial Inclusion”. The document, which aligns with the objectives of the original proposal presented in August 2021, looks in depth at comparable regions where open finance is being developed, as well as discussing the specific challenges within the Chilean ecosystem. The overarching goals are:
- Better financing for both retail and SMEs
- Protective measures for consumers
- Enabling new players to enter the market and provide innovative services
- Developing standards, and legal and regulatory symmetry
To help the market achieve these goals, Open Banking Exchange (OBE) hosted a summit with the CMF and other market participants, which marked the beginning of OBE’s operations in Chile. The themes of the summit were clear: partnerships and novel solutions are beginning to appear as the pandemic has forced the providers to establish new business models, and digital adoption is rising, creating space for regulation to advance innovation.
But as the market opens, the challenges around fragmentation are considerable. It is up to all market players to embrace the power of collaboration and avoid the pitfalls of a fragmented approach. Open Banking Exchange will work to this aim, facilitating dialogue around market issues and best practices.