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The BBVA Bancomer Tower in Mexico City (far right). The recently approved law that will regulate crowdfunding companies and tech-enabled payment platforms is positive for Mexican banks, experts say. (Photo: Carlos Valenzuela)
Wednesday, March 21, 2018

Mexico Fintech: Regulations Help Investors

New fintech regulations will generate additional investments in Mexico.

Inter-American Dialogue

Mexican President Enrique Peña Nieto this month signed into law a new measure to regulate the country’s financial technology sector. The new law seeks to establish stability and prevent money laundering across a host of emerging technologies in the financial services sector such as crowdfunding, cryptocurrencies and new payment methods. The law also permits open banking, or the sharing of user information by financial institutions through public application programming interfaces, or APIs. How important are is Mexico’s new fintech measures, and will they benefit the country? What were the biggest areas of debate and controversy as the legislation was being drafted over past months? Which interests stand to gain or lose the most from its passage?

Richard Fogarty and Tony Moroney, managing directors at Berkeley Research Group: Mexico is one of the largest consumer markets in the world, with an emerging middle class, rapid growth in Internet usage and mobile phone penetration. These measures are positive and are to be welcomed as the traditional boundaries between financial service providers continue to blur. They will also underpin and support further growth in Mexico’s already thriving fintech sector; in excess of 150 firms are operating across areas including payments, remittances, lending and crowdfunding.

By providing regulatory certainty to industry participants, Mexico will generate additional investment in fintech and the digital transformation of financial services. Regulatory authorities around the world are attempting to balance pro-consumer innovation with the need to maintain stability of the financial system. The traditional descriptors of firms are somewhat unhelpful as the focus should move to the type of service being provided and regulated accordingly. The other area that regulators are seeking to prevent is the use of fintech for money laundering and terrorism financing.

Under the fintech regulatory framework, the authorities will supervise the authorized companies and their activities. Fintech and the overall digital transformation of financial services will enhance and expand the range of products and services for personal consumers and businesses. New customer-focused business models should reduce costs, which in a more competitive market should benefit the majority of customers. A further benefit should be greater financial inclusion, particularly in rural areas, as new technology-enabled services are deployed to segments, economic sectors and geographical locations not previously served.

Felipe Carvallo, member of the Financial Services Advisor board and vice president – analyst for Latin America banking at Moody’s Investors Service: The recently approved law that will regulate crowdfunding companies and tech-enabled payment platforms is positive for Mexican banks because it establishes a clear set of norms for up and-coming financial technology companies and will help level the playing field with banks, while incentivizing innovation and investment in new technologies and business models. These companies will be regulated and supervised by Mexican authorities and subject to minimum requirements for capitalization and liquidity, as well as provisions related to investor and user protection, anti-money laundering and data management.

As they invest in fintechs, banks will be able to improve customer service by enhancing payment platforms and smartphone applications, while reducing operating costs related to brick-and-mortar operations. Mexican banks’ operating costs as a percentage of total assets of 3.6 percent are well above the Latin American average of 3 percent.

Financial innovation will be key to the continued growth of fi nancial intermediation in Mexico, where the ratio of loans to GDP remains one of the lowest among large Latin American economies at 33 percent. Crowdfunding companies provide fi nancing alternatives to millennials and under-banked sectors, many of which operate in the informal economy where there is limited transparency. Moreover, crowdfunders will be required to report credit information to credit bureaus, which will increase transparency. This will benefit traditional lenders as they will be better able to lend to these clients as well. Hence, fintechs will complement banks rather than compete with them. Traditional lenders will continue to dominate lending and payment services through digital channels, such as smartphones and the Internet, and will continue to stay out of the higher-risk market segments, which fintechs will focus on.

Lindsay Lehr, senior director at Americas Market Intelligence: The fintech law is the first of its kind in Latin America and is thus a huge success for the fintech community.

Fintech startups are confident that while the law will add operational costs associated with the need to meet compliance standards, it will greatly benefit the fintech community and Mexicans in general. A large barrier to the adoption of fintech products by consumers is a lack of trust in non-bank entities, and the law serves to provide the consumer protections necessary to foster trust and promote usage. Also, the open banking provisions in the law will go a long way toward making data more accessible and enable fintech startups to develop targeted products for underserved consumer niches.

While banks are supportive of the fintech law in theory, open APIs and more access to data will make it easier for fintech companies to develop products that sidestep banks and card networks. This is desirable for the underbanked, since doing so will reduce  costs and make alternative financial services more affordable. Thus, banks are on edge.

Finally, the law also introduces a level of certainty into the sector for investors, so more investment dollars should flow to fintech both domestically and from abroad.

Fabian Saide, CEO, and Monica Velasco, vice president of global development at Paykii: The new fi ntech law has positioned Mexico in the spotlight, making it a role model within the fintech industry and encouraging other countries to follow its path. Other key aspects of this law are the creation of a financial innovation group as a consulting and coordination body for the private and public sectors. One of the biggest benefits of the law is that it will enable startups to have a clear and transparent process on a regulatory framework, encouraging more investment in Mexico and other countries, generating more jobs in fintech startups, with wider financial inclusion and innovation. One of the big surprises was the obligatory measure for financial institutions to open data through public application programming interfaces, or APIs, which will have repercussions for companies such as brokerage financial firms and insurers. One of the challenges of this mandatory measure\ will be drafting secondary provisions for APIs, which should establish cybersecurity parameters and personal data protection. On the cryptocurrency side, this was an important step helping ‘crypto-companies’ operate with a legal certainty endorsed by the Bank of Mexico, simplifying the processes to operate with financial institutions. However, we need to keep in mind that this is just the first step. This act provides for the issuance of a secondary regulation by the National Banking and Securities Commission within six to 24 months, on matters such as minimum capital, limit amounts for operations through technology platforms, corporate governance, information security, regulatory reports and other topics of interest.

Republished with permission from the Inter-American Dialogue's weekly Financial Services Advisor


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