MEXICO: An Introduction

MEXICO: The FinTech Paradigm in 2020  

By Andrés Nieto Sánchez de Tagle, Partner at Von Wobeser y Sierra, S.C. México City, January 2020. 

INTRODUCTION 

It is no secret that in the past decade, Mexico has been actively taking part in the worldwide FinTech revolution, developing a strong ecosystem and positioning itself as a FinTech hub with high growth potential in Latin America. From an ever-growing community of entrepreneurs – offering disruptive and innovative financial solutions – to an untapped market potential, the development of the FinTech industry has allowed the creation of new financial products and services available for almost everyone in the country.

As shown by the last National Survey of Financial Inclusion (Panorama Nacional de Inclusión Financiera), only 68% of Mexican adults hold a financial product, and only 13% of every 10,000 adults in Mexico have access points to cash withdrawals and deposits, which means that most Mexicans do not have access to the financial system. The numbers dramatically change when you consider the potential number of Mexicans with access to a smartphone or to internet: it is clear that digital technologies represent a crucial factor to: (a) increase financial inclusion, (b) reduce informality, (c) lower the use of cash, and (d) reactivate the economy.

The FinTech industry provided Mexico with an opportunity to evolve, grow and change its financial market. But at what price? It changed the fundamentals of banking and the structure of financial services as we know them. And with such huge stakes at play, it was only a matter of time for the government to regulate the industry.

Consequently, the Law Regulating Financial Technology Institutions ("FinTech Law") was published in the Official Federal Gazette on March 9, 2018 (becoming effective the following day), positioning Mexico as one of the first countries in Latin America to formally regulate the FinTech industry: a true pioneer.

The FinTech Law was met with a certain level of disapproval from the big players of the Mexican market for its lack of technical sophistication in some matters. Nevertheless, it provided a legal framework that provides certainty to the operation of crowdfunding and electronic payment fund institutions ("Regulated Entities") and establishes guidelines to, among others, promote financial inclusion and innovation, ensure fair competition and consumer protection, prevent financial systemic crisis, and prevent money laundering activities.

A FEASIBLE FINANCIAL ALTERNATIVE 

FinTech entities have become a feasible investment opportunity in developing economies such as Mexico’s. With its privileged geographical location (just a few hours away from Silicon Valley and New York City and as a hub for the rest of Latin America), Mexico will continue to lead in the development of FinTech companies in 2020.

If that development continues at the same pace as 2019, the Mexican FinTech market will remain the top market in Latin America (above more developed countries such as Brazil and Chile). This will encourage competition and the placement of new financial services, and it will ultimately generate new jobs and improve the economy. It should not go unnoticed that labour costs in Mexico are better than in other parts of the continent (and the world) and that the Mexican universities are full of young talent, a perfect recipe for the success of the FinTech environment.

FinTech companies offer financial alternatives to small businesses and people who otherwise would not have access to financial services. They do have a significant technological component, but FinTech ventures also challenge the status quo of the financial services industry. They disrupt traditional sectors, having more liberty to innovate in the type of services offered. It is all about the financial inclusion.

Today Mexico stands out as well-prepared for both continuous technological disruption and financial regulatory changes, but to maintain this advantage, the authorities need to be careful in their approach in the coming year. We should bear in mind that FinTech companies play an essential role in the Mexican economy and they represent a new opportunity for lower informality and job generation. The current government (and those who will come after) should find an adequate balance between this potential and the essence of the FinTech industry which is the minimum participation of the government: “If it ain’t broke, don’t fix it.”

THE NEW AGE OF BANKING 

One constant concern we have noticed in our clients and peers towards 2020 is the seeming expiration date of the traditional banks and the financial system as we know it. Many sometimes wonder if the FinTech industry will take over the banking institutions and the services they have historically offered their clients, based on certain comments of high ranked officials at respected banks. But while some people are concerned, others are taking advantage of the situation.

FinTech companies were conceived as a necessity in the new millennium, not necessarily as a replacement for classic institutions and services. Over the past year, many Mexican FinTech companies have attracted significant investments from consolidated financial groups. In 2019, Japan’s SoftBank Group invested approximately USD20 million in the Mexican payment startup Clip and Goldman Sachs invested USD42 million in the Mexican FinTech company Credijusto, just to name a few examples.

Banks and financial institutions are understanding that the market requires adaptability and that many FinTech companies need funds. In this new economic environment, many FinTech companies are still in a stage of growth and expansion, but they are ready to take other steps and escalate. Many companies are looking for commercial launches and need money and investors with big pockets to strengthen their opportunities. Who is better suited for this challenge than the big players of the financial sector? Banks are (and will remain) as the main pillar of the financial system in Mexico, but this wind of change will bring interesting and enriching ingredients to the table. In the end, it is necessary to understand (for the sake of fair competition) that unlike the U.S. (which has nearly 7,000 banking institutions), Mexico has 50+ banks, out of which, 4 have nearly 70% of the market. The system required a change.

2020 may lead us to realize that FinTech is the next step in the evolution of the financial system and traditional banking institutions will come to understand this and invest in its opportunities. Banks can become the nexus between people and all financial services available. The co-existence of the FinTech companies and banks is crucial for an organic development of the FinTech industry and the satisfaction of the general public. Those financial institutions not willing to accept the future will be forced to upgrade their services and offer more technological products to their clients, facilitating access to their services and promoting financial inclusion. We are potentially on the verge of a new golden age of banking.

THE “DESIRED” AUTHORIZATION PROCESS 

Considering the importance of the FinTech ventures for Mexico, both as a financial alternative and as a disruptive revolution for banking, the regulation of who is entitled to operate as a FinTech company (and most importantly, how) becomes an essential topic to analyse and discuss. The FinTech Law set forth September 25, 2019 as the deadline to file the request for authorization to operate as a Regulated Entity before the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, the “CNBV”); the mere filing would grant such entities the permission to keep operating. As expected, this deadline was exclusively for those entities that operated as FinTech companies prior to the FinTech Law taking effect, implying that anyone else would need to wait for the issuance of the authorization to operate as a Regulated Entity.

According to official numbers from the CNBV, 85 companies filed the request for authorization on or before the deadline, out of the more than 400 existing FinTech companies and the 200 that were expected to file. This regulatory setback, along with potential investment opportunities on the horizon, and the new political mindset of the current administration, promise to make 2020 an interesting year in the industry. Everyone seems eager to understand how the authorizations and the regulation will work.

On the one hand, those who filed the request for authorization to operate as Regulated Entities before the deadline will not be affected by an apparent delay caused by recent changes in several departments of the CNBV (which were directly involved in the process) and will be able to continue operating for at least the first half of 2020. On the other hand, those that did not file the request for authorization before the deadline or that intend to initiate operations as Regulated Entities, face uncertainties regarding timing.

It remains to be seen whether the CNBV will insist on the formalities of the authorization process. The filing process has been criticized for being burdensome and costly, especially considering that many of the companies seeking authorization are startups with a limited budget to spend on regulatory compliance, requiring them to implement a bank-like corporate structure. And with only one chance to answer and comply with comments from the CNBV during the process (in terms of the FinTech Law and related regulations), it is our job as lawyers to help our clients fully understand how this complicated process works, guide them in the legal and technical aspects of it, and walk them through the basics of touching base with the authority prior to the filing, to avoid any hindrance or delay. A good interaction with the authorities and an exceptional lawyer-client communication will facilitate the understanding and compliance with the related legal, tax and technical matters, making the process simpler.

We are certain that the current administration understands the importance of the FinTech industry and the urgency of granting the authorizations necessary to keep those financial services operating. Thus, although we cannot know for sure, we expect that once the CNBV begins issuing the authorizations, it will gain momentum and the process will go more smoothly. Anyhow, both investors and FinTech companies are aware that the FinTech Law does not regulate all the business models related to the FinTech industry, leaving space for other opportunities.

FINAL REMARKS 

The political and economic uncertainty that Mexico faces at various levels (from the world, the Latin America region and internally) may have short-term negative effects on the FinTech agenda in 2020 for two main reasons: (i) regulatory burden; and (ii) the lack of direct investments. Nevertheless, we believe both issues will be overcome by popular demand for new services and products in the financial market.

History has taught us as lawyers that the social context dictates the laws, not the other way around. The following round of regulations of the FinTech Law will be enacted early this year and with them, Mexico will have a more complete legal framework that will bring certainty to the FinTech companies and to their investors.

Also, notwithstanding that predictions do not show high economic expectations for Mexico, our economy has been very dynamic in the past 25 years, proving that when there is demand there is investment. Our culture must continue to encourage the development of technological tools and systems that allow the Mexican FinTech industry to grow.

And although Mexico is a leader in the FinTech industry in Latin America, there are still obstacles we need to face, like access to monetary and human capital. The FinTech industry requires human capacity and expertise in the financial sector to transform it and advanced knowledge in the banking and finance sectors to increase the chances of success in these types of companies. In any case, we expect 2020 will mark the year of the opportunities for FinTech companies in Mexico and everyone should be excited about it.