Welcome to another issue of CTPI Weekly, your premium newsletter on tech design and policy.

Today we'll cover:

The main reasons why development of Open Finance Brazil ecosystem is being slow,
The latest updates on open finance payment initiation in Brazil,
Some thoughts about our Systemic Approach to Technology, and much more.

It's earnings season and tech is looking good again. With the winter of tech behind us, investors seem to be ready to fall back in love with the sector. Amen to that.

This week we'll also share some of our latest thoughts about what we've been calling the Systemic Approach to Technology. There's an article coming that will explore that concept in greater detail. But we can't wait to start sharing a little bit of what that means in practice. So by the end of this issue you'll find a quick note about what our team has been thinking in that area.

Now let's get to it.

M. and J.

Open Finance Brazil: roadblocks and the path ahead

Expect delays

In April 2023, we wrote an update "Brazil is leading open finance in LATAM… but where to?”. Back then, we highlighted the slow pace of development of the ecosystem in Brazil in 2022:

In a country with one billion accounts and an ecosystem with 24 reporting participants, 18.7 million consents don't seem impressive at all. (…)

The success rate for APIs is at a staggering 84.5%, meaning a participant may have up to two months of downtime in a year. (…)

The highest conversion rate this year was only 39.7%, which suggests that more than 60% of all requests were abandoned mid-flow. This raises questions about whether this is due to standard issues, lack of value proposition, or technical difficulties.

Since BCB began reporting transaction data 16 months ago, PISPs in Brazil have made 868,149 transactions, with a total value of R$ 204 million. These numbers pale in comparison to Pix, which hit the same transaction value and volume within just 10 days of its launch.

Today we'll dive deeper into the challenges the Brazilian Open Finance ecosystem is facing. And why, after two years of operation, less than 2.5% of all accounts are connected. We'll breakdown three current issues and their potential mitigators.

Open Finance Brazil is suffering from overcomplexity, lack of direction, and unreliability. It all comes down to the technology and governance choices made very early in the process. But there is a path forward.

According to Prof. Clayton Christensen, the performance-defining features of any kind of technology product follow a specific priority order.

The first is functionality. It's the first basis of comparison between products that propose to do a job for any customer. It's the question: does it say it could solve my problem? The second is reliability. It's the question of whether the product can consistently deliver the job it promises. Those are the two biggest ones. After that comes ease of use (convenience), flexibility for customization, and, least of all, price.

Product Performance Priority Pyramid

Check out The Innovator's Solution and Seeing What's Next to learn more.

The bottom line is that no technical solution can succeed without nailing functionality and reliability first. No one will choose to use it to perform the jobs they need. And Open Finance Brazil has been facing notable functionality, reliability, and convenience issues.

If you want to learn more, you can read our full article here.

Payment initiation: updates from Brazil

The Brazilian Central Bank has allowed API payments without a second confirmation in the account holder's app. That will enable users to connect their accounts to a PISP for future transactions. This seemingly simple adjustment in the technical standard completely changes the business dynamics of this market, making it a huge win for big tech.

With that change, having an extensive network is again a huge advantage, even if PISPs do not hold customers’ funds. To put it clearly: each new payer customer in the PISP's client base makes their payment service more valuable for merchants. Each new merchant prompting PISP's payer customers to connect their accounts to the PISP makes the PISP's payment service more valuable to every other merchant.

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This scenario may be deeply troubling for smaller players and new entrants as network effects will return to the Brazilian payments game.

One of the biggest Pix wins was creating an environment where the incumbent's network effect has no use because Pix connects any two accounts. It doesn't matter if a company has 100 million customers or has just started with a few hundred customers. Every individual client from the newcomer will be able to make and receive payments from precisely the same accounts as the large incumbent.

Without an alternative to counterbalance it, the new standard will bring network effects back to the Brazilian payments game. Smaller players and new entrants may find themselves in hot water as a result.

Larger payment institutions are also pursuing the opportunity to build proprietary solutions to facilitate the Pix payment flow on mobile devices. That may be an area where first movers may get a disproportionate advantage in setting the de facto standard.

If you want to learn more, you can read our full article here.

Thoughts on the Systemic Approach to Technology #1

There was something about the frenesí over LK-99 this week that resonated with the general AI hype and even the ongoing discussions about differential privacy.

Society seems to believe we are one technological breakthrough away from salvation. The problem about energy and the saturation of Moore's Law, the issues with the so-called surveillance capitalism, and the keys to all kinds of wonderful AI aficionados say gen-AI can bring: everything seems tangible if only we can create the right kind of technology.

That line of thought is entirely missing the point, though. We can't keep waiting to be saved by tech. We need to learn to take responsibility for our future and realize only humanity can save us. Of course that technology can, should, and will continue to help us extend our capabilities.

But we, as a society, need to understand the tradeoffs between law enforcement and human rights, privacy and community, processing power, and natural resources. We need to embrace complexity and stop dealing in absolutes (*pulls out a blue lightsaber*).

Open finance, payment initiation, and thinking in systems