Mexico is getting closer to releasing it’s new Fintech law, the long awaited legislation that will regulate its growing financial technology startup sector. According to industry professionals, lawmakers continue to work with some of the main players in the sector to work out all the kinks, and optimise the benefits for local fintechs.
The draft bill, officially known as the Law Regulating the Financial Technology Institutions, will regulate the organization, operations and functioning of all fintechs in the country, from crowdsourcing, alternative means of financing and investment, to firms that use cryptocurrencies.
Some of its main objectives are to encourage the growth of fintechs, expand the reach of financial markets to those who have traditionally been left out of it (due to limitations in infrastructure or high bank fees), and defending against money laundering in the fintech industry.
Most industry professionals welcome the new law, saying it will provide legal certainty for startups and will ultimately drive growth and innovation in Mexico’s fintech sector. It also includes clauses that will help put fintechs on a equal playing field with other larger financial institutions in the country.
“What (fintech owners) don’t like is operating in this space between legal certainty and uncertainty, which means that their businesses are not 100% recognized by the law,” said Eduardo Guraieb, Deputy General Manager at Fintech Mexico, an association for financial startups in Mexico. “In general, the law is welcomed and it will foster the growth of the fintech industry here,” he added.
One of the major highlights of this new legislation is the creation of a regulatory sandbox, a model that currently operates in countries all over the world from the UK, Canada, Australia and many Asian markets. Under this model, new companies can test their ideas in a controlled environment and temporarily forgo regular legal requirements. The start ups generally have to adhere to certain limitations such as client and transaction numbers, but it also allows them a space to improve their business models and make them more efficient, before having to invest in the formal regulatory requirements.
Another example is the transfer of information under Application Programming Interface (API’s), whereby banks and other financial institutions will have to provide open access to their data using API’s. According to Guraieb, this is one clause that local fintechs are still trying to tweak to ensure that the cost of accessing information through API’s does not end up providing a barrier for new players to enter the sector.
Mexico’s fintech industry is already one of the largest in Latin America, second only to Brazil, with over 158 fintechs operating in the country, and still growing. It’s also a diverse industry, said Guraieb, with some of the fastest growing fintechs being in crowdfunding and digital lending, where people can get access to loans using only their cell phones or the internet, he says. Finnovista, a fintech start-up accelerator, found that more than half of all fintechs in Mexico are focused on lending, or payments and remittances.
This focus on financial transactions is no surprise. According to the World Bank, at least 61% of adults in Mexico don’t have a bank account, but they do have smart phones. This creates a major opportunity for fintech innovators to develop alternatives to the traditional banking model. Even those who do have bank accounts may be open to alternatives. According to recent article by the Financial Times, more than 3 in 4 Mexicans with bank accounts were unhappy with, or indifferent, to their banks, who are notorious for poor customer service, long line-ups, high fees and low cash machine coverage.
But this is also similar across the region. According to the World Bank, only 51% of all adults across Latin America and the Carribbean have access to bank accounts, while only 11% have access to formal borrowing, creating ideal circumstances for fintechs to move in.
Mexico is the first country in Latin America seeking to regulate its fintech sector, but others could soon be following suit and change the fintech landscape across the region.
“We have heard that some other countries have been making inquiries to the mexican government about how they drafted the law and the processes behind it. They seem to be seeking guidance in order to draft their own laws,” said Guraieb, adding that Mexican officials refused to name names.
Mexico’s legislation is the first to acknowledge the legitimacy of fintechs in the region and their “here-to-stay outlook,” as stated by Andres Fontao, managing partner for Finnovista. If other countries do end up following Mexico’s lead, this could be a game changer for fintechs and drive innovation in the region.
But the first test will be how the bill plays out in Mexico. Could Mexico really become the next world innovation hub, on par with San Francisco or London? Guraieb said he would be very happy to see that happening. Ultimately, “that is our goal,” he said.