The hyperactive open banking market of Latin America: How the region is being APIfied

We are only in the first chapter of Latin America’s long journey to tech growth. But with the region’s thirst for innovation, the market is expected to expand nearly tenfold over the next decade, with open banking through the use of APIs leading the way and acting as digital transformation facilitators.

With LatAm businesses and startups continuously integrating with new-age platforms and services, adopting an API-driven transformation strategy has become essential — as a result, the entire financial system is being “APIfied.”

In other words, this open API ecosystem, in which third-party service providers access consumer data from financial institutions, means financial services will be optimized to lower costs and time spent on transactions and improve user experience.

The advantages of having open communication between different products and services are nearly infinite for credit scoring, moving money between bank accounts and spanning verticals like the neobanks, credit providers and personal finance products Latin Americans use every day.

In 2019, API usage was more mature in the financial and e-commerce sectors, but it is now venturing into other areas such as marketing and insurance. Fintech companies are increasingly collaborating with traditional players like banks, payment agencies, insurance providers and stock exchanges. Cryptocurrency trading platforms and companies are also fighting for their space in the spotlight and have adopted API platforms to support crypto-assets since most of their operations are already digitized.

The API revolution seems well underway. So, what’s next for LatAm?

The key to tech penetration in LatAm: APIs

Until recently, many traditional financial institutions and banks in LatAm were gatekeepers, with a bank account being the prerequisite for consumers to participate in the economy. Prior to the advent of fintech, these financial institutions’ back-office infrastructures for risk management, credit decisions and fraud detection involved manual effort and required cross-departmental coordination.

Each step was carried out by a person, from registering a user to the production of products and services. This often left customer data unexploited, increased transaction costs, impeded innovation and degraded customer experience.

As financial institutions grapple with digital transformation, Andres Meta, VP at Grupo Bind and co-founder of Arfintech, said many banks are partnering with fintechs or accessing technology-based products to create unique business models and stay relevant.

One way to revamp the back office, lower costs and improve communication is to use APIs. This will enable access to information, improve consumption of products and services, and disrupt and de-structure established value chains.

It’s predicted that the fintech market in India, Africa and Latin America could accelerate at the same pace as the U.S. because these regions are essentially starting from zero. The benefit of this is that companies across LatAm are adopting APIs at a time when digital innovation is maturing — they aren’t evolving; they are pioneers — making adoption more accessible and providing a streamlined financial experience for end users.

According to Tecnolatinas 2021: The LAC Startup Ecosystem Comes of Age, a report by Ignacio Peña, fintech firms make up 16% of all tech firms in Brazil and 30% of tech firms in Mexico. And with startups poised to create more than 122,000 jobs in Brazil, fintech is expected to generate billions of dollars in revenue over the next few years.

So how APIfied is LatAm currently?

These days, LatAm institutions mainly use APIs for retail banking, but foreign exchange is a key market that API could be deployed in, given the need for parties to obtain real-time information. Therefore, greater connectivity through APIs in the foreign exchange market is guaranteed in the near term.

A range of businesses and startups are looking to expand their operations using APIs to make it easier to enter new markets, which is usually considered a complex process. Companies can start operations quickly in new countries if they are active on an open banking platform, as they will already be integrated and able to connect with specific APIs and a network of financial institutions.

Moreover, APIs and open banking platforms can provide a “standardization” feature for identity verification to resolve nuanced problems that may arise, so possible issues with integration and local regulations can be solved quickly, too.

For example, crypto company Buenbit expanded its operations from Argentina to Peru in a matter of weeks. They could APIfy their business because they were already entirely digital. As the CEO of Prometeo, an API open banking platform in LatAm, I noticed that crypto companies view APIs not just as a benefit, but as essential features for accessing information that banks must provide.

APIs in LatAm are becoming more and more standardized — just like in Europe. Mexico opted for a regulatory path similar to that of Europe in March 2018, but the implementation deadlines are still unclear. Brazil is also moving fast after publishing new guidelines to implement its second phase of the open banking initiative in April 2021.

Revolutionizing the loan ecosystem

Credit in LatAm and the Caribbean is notoriously hard to access. According to the World Bank, just over 45% of small enterprises in the region have access to credit from traditional financial institutions.

The fintech wave has made many credit providers realize they have outdated manual processes, and some of these firms are seeking to make this a friendlier journey to show companies and consumers that mainstream banks are not the only source of loans.

But considering the differences in regulation between countries, the microfinance solutions and non-banking lenders coming out of the woodwork rarely have operations in multiple countries. Neobanks like Nubank are popping up across Latin America to provide customer-friendly lending and banking options, but APIs can further facilitate this.

LatAm credit or microcredit companies, like Juancho Te Presta, use APIs through their loan-granting process, which begins with the customer’s request for credit. With a full name, bank account number and income credentials, the system’s algorithm checks income and expenses and approves or disapproves the credit based on the information provided.

Take Rebaja Tus Cuentas (RTC), a Peruvian marketplace that connects people looking for home equity loans with investors or banks that can finance them. This type of loan was historically generated through a bank branch. RTC clients would have to go to the website of the tax office of their country, download extensive documentation to support their economic solvency, upload them to the RTC platform for processing, wait for validation to prove their debt capacity and qualify for credit.

With APIs, RTC clients only need to enter the credentials of the tax office. The API searches for the information and uploads it to the RTC platform in a matter of seconds, shortening the credit approval process from 15 days to a maximum of two. The entire application and approval process occurs in one space, which is more convenient for the customer and allows for financial inclusion.

A sea of opportunity

Just because a significant portion of the region’s population is underbanked doesn’t mean that they aren’t financially active. Some gig economy companies in Latin America, like Uber, are trying to figure out how to leverage a driver’s information and turn it into meaningful bank-grade data that third parties can use to make assessments.

Another example is Rappi Pay, which integrated with local bank partners like Itaú, Interbank and Banorte in Perú, Chile and Mexico. They plan to speed up regional scaling through industry-specific API solutions for shoppers and instant card issuance for underbanked and unbanked consumers, expanding their customer base in untapped markets.

With LatAm’s digital transformation and the rise of fintech, agile APIs are poised to be implemented in a range of companies and startups across several industries for payment benefits without commission or to upgrade processes that previously took days to be solved.