Second to None

New Fintech Law

Surpassing Brazil's fintech sector, Mexico seeks to regulate—but not overregulate—fintech companies with a new framework.

According to the 2017 edition of the Fintech Radar Mexico, there are 238 firms offering financial services through technological platforms, up 50% from 2016. This figure sets Mexico as the regional leader in this sector, surpassing Brazil’s 230 fintech companies. Companies known as financial technology institutions (ITFs) deal with crowdfunding, electronic payments, virtual assets, and peer-to-peer finance, among others. In Mexico, almost half of them are dedicated to payments and remittances (23%) or lending (22%). The fastest-growing subsector between 2016 and 2017 was insurance technology (insuretech), which more than doubled over that period.

A high internet penetration rate and a strong entrepreneurship ecosystem coupled with low banking penetration and an unsophisticated credit portfolio are among the reasons for Mexico’s leading position in fintech. 46% of Mexican fintechs target underbanked and unbanked individuals and SMEs, in comparison with 28% of their Brazilian peers doing so. As Eduardo Guraieb, Director General of FinTech Mexico, told TBY, “Fintech companies will improve financial inclusion and reach out to those people who have been left out by the traditional banking system. Banks can then take advantage of this by offering their products to this larger banking population and compete with fintech companies for the clients they generated.”

The fast development of the sector has created an urge among regulators to address this booming business. In late 2017, the Senate passed the law regulating ITFs—better known as the Fintech Law—with 102 votes for and only one against, marking Mexico as a pioneer in Latin America in the regulation of ITFs. The National Banking and Securities Commission (CNBV), the Ministry of Public Finance, and Mexico’s Central Bank were in charge of drafting the Fintech Law and will also be enforcing it. ITFs actively participated in the drafting process and are satisfied with the final version.

In fact, the law’s objectives are twofold, and Mexico adopted a hybrid stance, both proactive and reactive, to regulate this industry. Firstly, it aims at protecting consumers of fintech services and preventing illegal transactions. Secondly, the law provides a legal a framework under which fintech firms can operate and thrive. The Fintech Law recognizes cryptocurrencies as means of payment for electronic transactions. Yet, it does not grant them legal tender, and cryptocurrency exchangers will only be able to receive money from clients who already have a bank account at an authorized financial institution.
Banks will be able to invest in fintech companies, which makes room for potential acquisitions, especially knowing that 39% of ITFs already hit a phase of maturity where they are ready to escalate.

The bill opens new possibilities in terms of ITFs’ access to capital to use for lending to their clients. As Eduardo Guraieb from FinTech Mexico mentions, “Many fintech businesses believe that by having a law that regulates them, this will give them official acknowledgment and make it easier for fintechs to seek investment, particularly from foreign investors.”
Moreover, ITFs will have more possibilities. They will be able to perform hard forks—splitting a cryptocurrency into two different one based on the same code but following different rules—similar to a split in stock markets.

Some observers remain skeptical about certain features of the law. It could open the way for a loss of efficiency of monetary policy if fintech loans overtake traditional ones. Besides, categories such as Popular and Communal Finance Societies (SOFIPOs and SOFICOs) are concerned with crowdfunding ITF competitors. There is a need to avoid a conflict between older and newer firms over acquired rights.

Nonetheless, the Fintech Law represents a major milestone in governmental regulation that tries to balance the risk of not regulating versus overregulating a promising sector.