Colombia Adopts Open Finance Framework

July 29, 2022
Colombia has become the third Latin American country to establish an open finance regulatory framework, which will include supporting third-party payment initiation services.

Colombia has become the third Latin American country to establish an open finance regulatory framework, which will include supporting third-party payment initiation services.

The financial regulations unit (URF) of Colombia’s finance ministry has approved a decree laying out regulations for the transfer of consumer data between financial entities and promoting data sharing.

In particular, the new framework establishes third-party payment initiation as a regulated new activity in the payment ecosystem. It mandates financial institutions must allow payment initiators to access the financial data of their customers based on the prior consent of the consumer.

Payment initiation can be carried out only after the authorisation by the payer and the transfer must be processed via a financial entity connected to the low-value payment system.

The decree prohibits financial institutions from restricting payment initiators’ access to their systems or arbitrarily blocking payments initiated by third parties.

Payment initiation may be developed by credit institutions, companies specialising in deposit-taking and electronic payments, participants of the low-value payment system and other companies not supervised by the Financial Superintendence of Colombia (SFC).

Colombia currently has two low-value payment systems operating in the country: the central bank-owned ACH CENIT, which mainly supports government collections and payments; and the privately-owned ACH Colombia.

The decree requires payment initiators to comply with the operational, technical and security rules and standards of the partnering financial institutions.

In addition, it limits payment initiators’ data collection to information that is “strictly necessary” to initiate the payment order and “in no case may they have access to the keys, passwords or authentication mechanisms of the payor with their issuing entity”.

Under the decree, financial entities may offer third-party products or services for sale via electronic channels and open up their technology or infrastructure to third parties for a price.

Lawmakers tasked the SFC with setting standards for the technology, security and other parameters that it considers necessary for the development of the architecture of open finance.

Colombia is one of the most undeveloped markets for payments in the region, as reported by VIXIO. Its 50m population is heavily reliant on cash and only half of businesses accept some form of electronic payment.

In recent years, however, Colombia’s leadership has been trying to promote the development of digital payments and position the country as a fintech hub in the region.

According to the Colombia Fintech trade association, 76 percent of the population who use financial services do so via fintech solutions.

Currently, there are 322 fintech firms operating in the country, most of which (33 percent) engage in digital lending, followed closely by digital payment firms (26.4 percent).

In the decree, lawmakers acknowledge that the country’s financial system is undergoing a “profound transformation process” and is facing a new competitive dynamic whereby consumers’ demand for digital solutions is growing and there is a greater diversity of players in the market.

The decree intends to promote competition, inclusion and efficiency via open finance, which allows financial institutions to better profile users and develop strategies and partnerships with entities from other sectors.

With this move, Colombia joins the likes of Mexico and Brazil as the third country in Latin America to implement open banking regulations.

In addition, Argentina is inching closer to an open banking regime. In May, its central bank adopted a measure that mandates financial institutions to enable their customers to link their digital wallets to their bank accounts.

Meanwhile, Chile also has plans to embrace open banking as part of its proposed wide-ranging fintech law. The draft legislation is actively being discussed in the Senate and enjoys the almost unanimous support of the upper house.

Uruguay is also considering developing an open banking environment, but is at a very early stage. The country’s central bank set up an open banking working group last March and met with its Colombian counterpart last October to discuss design questions.

Although only a handful of countries in the region have established regulations for open banking or open finance, the growing interests, particularly among the leading economies in the region, suggests we might see more countries embracing open banking to further innovation, economic growth and financial inclusion.

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