What is the open banking model and what are its implications in Costa Rica?

Diego Gallegos, Mariana García Rímolo,  May 10, 2024

Arias Law - The open banking model or "Open Banking" is the system by which users of financial institutions agree to share their financial information with a third party in order to consolidate it in a single place, regardless of whether such information is from different entities. In other words, it is the possibility of having all the information from bank savings accounts, checking accounts, credit cards and even financial products in a unified manner. This is achieved thanks to Application Programming Interfaces ("API’s"), which are standardized applications that simplify and allow the exchange of data between applications or databases in a secure and simple way. These are commonly used in payment processing systems since API’s allow, for example, to pay a third party through applications such as Paypal that serve as a payment vehicle for an account or card that is in another entity. Another example of API’s are web pages that are sometimes used to book accommodations, flights, (...).

Having all the data in one place can generate a business opportunity for banks, non-bank financial institutions and customers. For example, with the user’s information, through such a platform a bank or financial institution could offer the customer a financial product in accordance with its consolidated financial profile, taking into account factors such as risk tolerance, total assets, payment capacity, etc.. It also facilitates the user to have a complete view of their finances, since they can review their expenses, investments and income from a single place, making it possible to make better financial decisions that generate higher returns. It allows investors to acquire products that fit their profile and current assets, as well as facilitating the comparison between products and rates.

In Costa Rica, although there are several companies in the Fintech sector, there is no further development of "Open Banking" and the ease of sharing data between financial institutions. For the most part, the Fintech sector in the country offers payment services or services related to these. The issue of Open Banking brings with it the concerns of safeguarding and the possibility of sharing sensitive financial data, so any initiative in this regard would face the challenge of convincing financial institutions to provide information about their customers, even with the customer’s informed consent to share the information with the API. In some States, such as the United Kingdom, this modality is mandatory and the obligations regarding information sharing between entities are clearly detailed and standardized by government authorities. In other States, such as Singapore, there is no regulatory obligation to share information, but in practice it has been carried out through the development of APIs.

Last year the National Council of Financial Supervision (Conassif) together with the Inter-American Development Bank (IDB) and the Central Bank of Costa Rica (BCCR) opened the Center for Financial Innovation with the objective of providing space to guide FinTech initiatives under the Costa Rican legal framework. Although local efforts such as this one have been made to facilitate communication, there is still a considerable regulatory gap. In addition, one of the biggest challenges that could be foreseen in Costa Rica and that has currently generated conflicts between the BCCR, the Superintendencia General de Entidades Financieras (SUGEF) and the banks, is the issue of access to debtor information and data confidentiality. For this reason, in order to implement an open banking model there must be clarity in the regulatory model of implementation and that: (i) the client himself consents to the use of his information, (ii) the financial and banking entities agree to be sharing their client’s data.

The advancement of open banking modalities must be accompanied by an impulse from the private and public sector to agree on basic rules and principles of the form and type of information to be shared between entities, as well as the relevant security and confidentiality measures so that clients feel secure in the way their financial information is safeguarded. Additionally, the population should be educated about the benefits that such modalities can provide them, so that they agree to use open banking applications and give their consent for the use of their data.

Authors:

Diego Gallegos - Partner, Costa Rica
Mariana García Rímolo - Paralegal, Costa Rica

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