In March 2018, Mexico enacted its “Fintech law,” becoming the first country in Latin America to regulate its digital & technological finance space, as well as one of the pioneers at the global level (see last section - Global Overview of fintech jurisdiction).
The main objectives of this law are to:
- Provide certainty to investors, consumers & industry participants about what services/solution are legally approved & taking the requested security measure ( fighting fraud, protecting users data, etc)
- Ensure a better protection of the consumers of digital financial services,
- Foster the competitivity & increase the number of qualitative players in the financial sector,
- Prevent money laundering activities & terrorism risk that can be caused by electronic payment means and digital assets transactions,
- Foster financial inclusion.
Since 2013, Mexico has indeed seen an unprecedented rise of fintech ventures. In a market of 120 million inhabitants, from which over 50% don’t have a bank account, the use of technology - such as mobile phone, internet connectivity & blockchain - can impact the lives of Mexicans at an unprecedented speed and reach. Fintech services in the country are mainly concentrated in payment solutions and alternative finance platforms.
Together with Brazil, Mexico has probably the most mature fintech ecosystem in the region, with over a third of the fintech ventures older than 3 years and employing on average more than 100 people (most famous example: Konfio - online SMES loans, Kueski - consumer loans for middle class, Kubo financiero - P2P lending, Clip - mobile POS).
Finnovista Radar Mexico - last version July 2017 - more info here.
In a flourishing innovation space, is it the right time for emerging markets to implement fintech regulations?
The answer is all in the balance of promoting the growth of innovative solutions together with countering risks, such as money laundering and fraud.
Until now, fintech ventures were mostly operating under a “grey area”. Probably inspired by the fintech motherland United Kingdom and its famous sandbox model - a platform provided by the regulatory agencies, offering companies a space to experiment with new business models that currently do not have a legal framework, Mexico has also decided to provide them some transparency and clarity.
Crowdfunding, Electronic Payments & Crypto Currency
One of the actions taken to get there is the regulation of solution related to crowdfunding, electronic payments & digital assets.
Crowdfunding appears to be a relevant solution to foster access to capital for SMEs. However, the risk of fraud can be relatively high and that’s why the new regulation aims to reduce the anonymity of the participants in crowdfunding platform.
Kubo Financiero, one of the leaders in the Mexican markets, became the first authorized peer-to-peer lending platform in 2015, one of the few examples of regulators’ interaction with fintech companies so far.
From now on, these entities will be officially allowed to enter into intermediate debt, equity and co-participation agreements similar to royalties and joint venture arrangements. They will have to manage those funds and the funds of their client separately to protect to last ones from creditor’s claim or eventual bankruptcy.
Electronic payment will also be subject to the bill. One of the most relevant benefits is the right for ventures acting in electronic payment space to transact with financial institutions abroad, allowing for remittance services - a must, considering that it is estimated that over 15 million of Mexicans live abroad. Note that crypto wallet and exchanges will have to incorporate as electronic payment entities and require a license to handle virtual assets.
Furthermore, the new law also deals with virtual assets. In this matter,
(1) ITFs (Spanish acronym for Financial Technology Institutions) will only be permitted to trade digital currencies approved by Mexico’s central bank, (2) The firms have to always be in a position that would allow clients to redeem their investments,
(3) It will be mandatory to warn customers about the volatility of the digital currency and disclose that they are not backed by the Mexican government.
The most important crypto trading platform of the country, Bitso, welcomed the law and see in it a potential for Mexico to be highly competitive in the emerging crypto industry.
Bitso is a crypto trading platform. They even allowed to buy bitcoin at the Mom&Pops such as Oxxo or 7eleven.
Digital currency trade, electronic payment & crowdfunding entities will have to apply for authorization to provide these services and to register as ITFs, a process that includes complying with requirements such as lient and proprietary account separation policies, privacy policies for use of personal data, the process for client identification, anti-fraud policy, etc.
Furthermore, some Fintech companies may be required to have a Board of Directors, a Managing Director and an Audit Committee, depending on the type of the existing, or newly incorporated company.
Only for innovative models that are not under one of those two categories, a sandbox regime will be put in place so that startup can test the solution (under a period of maximum 2 years). In order for a company to be be granted an “innovative model” status, the law will list a series of requirements that must be met.
Certainly, the new regulation will definitely ensure positive effects such as increasing certainty and trust climate for foreign investors, fostering consumers protections and, last but not least, the trust of those interested in using new financial solutions. Hopefully, the law should also help startups to scale faster.
Can the law kill fundamental disruption?
However, many entrepreneurs are afraid that regulation becomes a barrier to innovation, for example, by requiring a minimum capital requirement to ITFs.
An example of regulation coming out of the discussion during our think tank workshop powered by BBVA was the case of mobile money.
The concept emerged in 2004 in the Philippines with the company GCash as an answer to cash transfer for a population of 90 million inhabitants widespread among 7000 islands. Then, in 2007, Vodafone launched the world-known mobile phone money based transfer M-PESA. While in Kenya almost 50% of the population uses mobile payments platforms, in Mexico the proportion was barely above 2% in 2015. In Mexico, the bank-led regulatory model of mobile payments has limited the diffusion of the service, as mobile money has been assigned to banks (you can purchase a case study comparing both countries here). However, since 2016, the number of fintech solutions leveraging mobile money has increased. For example, Payit, our 2017 Mexican winner is fintech allowing its users to make payments through an app, and already prides itself with over 130k users.
Fostering financial inclusion - a gap with the reality
Another concern is the question of financial inclusion, clearly mentioned to be one of the objectives of this law. According to some local players, the regulation will not necessarily foster financial inclusion because of too many discordances with the reality.
For example, the new law regulates electronic payment but most of the transactions are still done with cash. Entrepreneurs and, above all, government, need to find incentives and build the infrastructure for the low-income population to use digital financial services. Also, transfer of money inside the country is still a considerable challenge and this is an important problem to resolve to ensure a more efficient economy.
Another burden is the complexity of getting a bank account. Most of the banks have a long process in place, requiring physical movement. The question of identity is another important challenge to tackle for banks and the government in order to bridge the gap of financial inclusion. The Mexican startup bayonet that established a reputation network to prevent fraud and risk looks an interesting solution for this matter.
It seems that while the regulation increases the protection of the users, it forgot to simplify their lives.
An interesting point brought on the table by the participants of the workshop was also the role of fintech in financial inclusion. The base of the pyramid sector is extremely hard to reach and requires a lot of capital and resources, which goes beyond the scope of technology. Startups in this sector therefore rather target the middle class, which already has the mindset and resources needed to adopt new fintech solution.
It was suggested that the government and banks, both of which have better financial capabilities, should work on bancarisation and financial education of the population that is (auto) excluded of the financial system if IFTs want to be able to provide them with their services and products.
Indeed, funnily enough, it seems that entities that do not target financial inclusion and services at their core have actually the larger impact. Let’s take the example of Oxxo, the most famous chain of convenience stores in Mexico. The shop has a position of a banking correspondent, allowing, for example, people to pay for products and services purchased online, such as transports and entertainments tickets, mobile top-ups, etc. The banking correspondent model is something very common in developing countries to deepen the capillarity of the banking network which usually remains limited to the urban areas. In partnership with the mexican bank Citibanamex & Visa, Oxxo also proposed a debit card called Saldazooxxo that allow customers to deposit, transfer or withdraw money with no annual fee & minium balance.
The main issue related to financial inclusion is that fintech providers can only operate with money coming from bank accounts. Therefore, as an ITF, it is hard to have an impact on financial inclusion even if you wanted to, as you will not be able to offer your services to unbanked customers.
Last May 17th, Seedstars & BBVA Bancomer hosted a fintech think tank to discuss the context of disruption within the new fintech law.
Open Banking: YES!
Mexican new fintech regulation finally gives a strong implosion to open banking, permitting the sharing of user information by financial institutions through public application programming interfaces (APIs).
Thanks to this, small and medium-sized banks, as well as startups, would be able to use information from clients of large banks through APIs, provided that users give their authorization.
This is a very important step, considering that just two years from now at least 20% of the world’s large and medium-sized banks will have an open-banking strategy, and by 2025 it is expected that every financial institution will operate under some form of an open banking protocol.
The following question is: What would be the price for the startups to access these APIs?
BBVA has been working on different initiatives to become one of the world leaders in term of digital transformation and open innovation, already moving fast in the space open banking. BBVA api market place is an interesting initiative they recently started, creating - a platform of financial APIs from different BBVA entities or countries. Companies or developers interested in using the APIs can sign up and test them in a Sandbox environment, With zero cost and access to the APIs being open for everyone. Then, moving to the next level, companies will be able to apply for an access with a productive and commercial purpose which will have a price based on services consumed and the purpose of use.
Who runs the world?
Last May, Seedstars launched its first fintech accelerator in Astana, an initiative supported by a governmental organisation from Kazakhstan, AIFC.
The Mexican fintech law has placed the country as one of the leaders in the fintech world. Globally, only a few countries have adopted a similar specific regulation or at least a couple of laws directed at regulating financial technologies.
Here is a quick trip through some of the new financial regulations seen around the world by our digital nomads:
Nigeria - Last April, the Senate announced their efforts to put in place a regulation to facilitate digital financing and expand opportunity for financing for SMEs. Ultimately, the Senate has passed different acts related to consumers protections, credit reporting and secure transactions in movable assets supposed to free up capital and create opportunities for funding for SMEs.
Mobile taxation in the region - Kenya, Tanzania and Uganda have all imposed a 10% excise duty on mobile money transaction fees. Other countries have followed suit, with Zimbabwe imposing a $ 0.05 tax on each mobile money transaction and the Democratic Republic of Congo planning to introduce a 3% mobile money tax on turnover (Source: GSMA - here)
South Korea - South Korea was the first country to launch a common API infrastructure across financial institutions.
Japan - Japan proposed a series of rules in March 2016 to recognize crypto as a legal tender, they also formed a government backed group to work on ICO regulations. Since then, exchange and crypto trading are booming in the country.
Singapore, Malaysia, Australia and Hong Kong - All four countries have their own regulated sandboxes, which makes the Asian region the leader on the topic. Indeed, there are less than 10 countries in the world that have their own sandbox model, which means almost half of them are from Asia.
Belarus - The country just created a legal framework for cryptocurrency in December 2017. They legalized cryptocurrency transactions to attract foreign investment, and decided thatmining, purchase and expropriations of token by natural person will not be taxed till 2023. The country aims to become a regional center of competence in this area.
Kazakhstan - In order to counter the dependence of the fast growing economy of Central Asia, Kazakhstan has decided to bet on fintech. With this in mind, they launched the Astana International Financial Center with an independent legal framework based on English common laws to attract foreign investors. Besides, they are aiming to create a fintech regulatory sandbox and he government is putting fintech on its list of priorities. The Astana International Finance Center (AIFC) has also recently launched a fintech acceleration program, Fintechstars, powered among others by Seedstars.
Abu Dhabi (United Arab Emirates) - Not only is the city the leader of the MENA region, but it also took a pioneer position at the global level for implementing its own fintech regulation and sandbox model.
Finally in Latin America, Mexico is the only country that has adopted a specific fintech law so far.
Chile - The country has not yet enacted a law, but earlier this year, the crypto trading services Buda was suddenly cut off banking by 10 local banks. An anti-monopoly court has ordered to the banks to restore the accounts to Budda, at least until the case is resolved in court.
Colombia - the Superintendencia Financiera de Colombia just launched its own program InnovationSFC which provides the fintech players with (1) a hub to connect different actors and share knowledge (2) a Sandbox for experimentation (3) a regtech commission to work on regulations. More info here.
Ecuador - In 2014, the country launched its own cryptocurrency, dinero electronico, which failed to gain large adoption. Crypto is still used in the country, even if the Central bank does not recognize it.
Venezuela - Similar case as Ecuador, Venezuela also created its own cryptocurrency - the Petroleum - but seems to struggle to make it successful. Last April, they decided that companies operating in crypto trade, exchange and wallet will have to get a license to operate.
Brazil - On April 26th, Brazil has issued the resolution which provides for the creation of two new types of financial institutions that originate credit transactions through digital channels: P2P loan company & Credit company (secured loan). Although they recently prohibited local investment funds from buying cryptocurrencies ruling that they are not financial assets, they are usually adopting a positive measure to support financial technologic innovation (more info about the fintech regulation here).
UK - United Kingdom is the counterpart to which everybody looks and learns form. It was the first country to put a regulatory sandbox into operation. Brexit did not cause a lot of damage in the fintech industry and London remains the capital for its expertise and flexible regulation.
Europe - Last March, the European Union released a fintech action plan that counts with 23 steps to enables fintech model to scale up(more info here). Therefore, it should exist fintech firms passport, a kind of license that helps fintech to scale faster from one country to another. Among other the EU is supporting Open Banking initiative, and financial institutions are now required to share customer data with third parties if those customers give consent.
US - Since the United States do not have unified national law, each states is in charge of their own regulations but they have implemented a passport to simplify inter-state and international operations.
Switzerland - The country takes a liberal approach to fintech rules without having a specific regulation. The State of Secretariat for International Financial Matters has put together a blockchain/ICO working group to review the current legal framework. Besides, in June 2017, the country introduced a sandbox exemption which allows, among others, that from now on the acceptance of public deposit for up to 1 million CHF will no longer trigger a license requirements. Last, but not least, the tax incentives for startups are especially attractive.
If you have more insights about fintech regulation around the world please reach out to Juliane@seedstars.com so that we can constantly update the article. Relevant expert will be invited to join our online community about fintech regulation in our app.
Note: This article is the result of a fintech workshop that gathered 15 Mexican financial players & experts on May 17th, in Mexico City. It aims to give an overview of the new fintech law enacted in Mexico early March 2018 and some suggestions of potential opportunities & challenges caused by the regulation. Finally, it gives an overview of similar fintech regulations around the world. The article is not a scientific or exhaustive report done by an expert of the topic, therefore if you are interested to have more in-depth insights, we recommend you to reach out to us and we would be happy to connect you with one of our experts on the topic in the region of your interest.