Mexico is making the greatest strides in Latin America when it comes to regulating the fast growing fintech industry.
A new bill doing the rounds promises to protect consumers and stimulate competition, keep a watchful eye over payment security and cryptocurrencies, and prevent money laundering or terrorist funding.
It’s a notably progressive step for Mexico to take. It will join a select number of other countries like Germany that have introduced explicit fintech legislation. According to Federico de Noriega Olea, partner at the Mexican offices of law firm Hogan Lovells, the law should provide more legal certainty for firms to carry out and expand their businesses, which may also mean greater access to funds.
It will at the same time place greater responsibility on companies to adhere to the rules, such as meeting capital requirements and reporting obligations. The more mature companies that have been carrying out some form of self-regulation may be better equipped to deal with this change. Younger companies that have just launched may struggle to adapt.
“The rules will definitely create a barrier to entry,” says de Noriega Olea. “Any regulation is in itself a barrier to entry. Again, the degree of such a barrier will depend on secondary regulation. I don’t believe the regulator is planning to create a high barrier to entry because one of the main goals of the proposed law is to foster competition.”
Bridging the credit gap
As per figures from 2015 from Encuesta Nacional de Inclusion Financiera (ENIF), a survey on financial inclusion, 44% of Mexican adults do not have a bank account. That figure may have changed slightly in the last two years but it speaks to a problem in Latin America’s second largest economy where adults have little or no access to credit or financial services. While there’s plenty of bluster and big promises, fintech is trying to bridge that gap and regulation can either be a friend or an enemy.
The International Finance Corporation (IFC) has been supporting fintech companies already active in the country, such as online and P2P lenders Afluenta and Kreditech, which provide a new bent on traditional services. Fintech has regularly threatened to upend traditional financial institutions but both sides of this coin will be affected by a change in the law.
“We consider that the legislation, as it is now, has the right elements to promote innovation in the financial industry,” says Carlos López-Moctezuma, head of new digital businesses and financial inclusion at BBVA Bancomer, one of Mexico’s biggest banks. “However, we need to keep track of the secondary legislation because those are actually the operative guidelines on how the fintech legislation is going to be implemented.”
BBVA Bancomer is very active in the fintech space itself. In August, it launched its startup sandbox programme, inviting startups inside the bank to work on new fintech services. These very companies will fall under the rules of this new legislation.
“However this is not something new for us in the way that we as a bank have been supervised, and prior to beginning working with another company, depending on the services offered by them, we have to be authorised by the authority,” López-Moctezuma adds.
“This is something that will affect fintech [companies] that haven’t been working with banks so far because they will have to spend resources in order to comply with the new regulation.”
Ahead of the pack
Mexico is the most forward in the Latin American region as far as implementing fintech regulations. Other countries haven’t moved as prominently but are starting to take notice. Brazil, the region’s biggest economy, is evaluating new legislation on how the technology should be regulated.
The Brazilian central bank published the draft law for consultation in August. According to an official from the bank, the law is specifically designed to address crowdfunding and online lending.
“The proposed regulation is expected to improve the regulatory framework for this type of electronic credit contract while contributing to the enhancement of efficiency and competition in the credit market,” he explains. “Such benefits are likely to reduce banking spread and boost the real economy, reaching microfinance operations.”
The Mexican law has not yet been passed and it’s expected that there will be many amendments made to the final document before the consultation period ends. Following the public consultation, the bill will eventually make its way to Congress but it’s difficult to pin down any time frame.
“Hopefully, it will be approved before year end,” says de Noriega Olea, “but I personally don’t believe that will happen because Congress has other priorities now, including discussing of the 2018 budget.”
That budget of course will be under much scrutiny in the wake of the earthquake in September which will mean funds being allocated to rebuilding and recovery, so fintech regulations may not exactly be on the forefront of Mexican politicians’ minds.