By: Patrick Phelan
Financial technology, otherwise known as FinTech, is revolutionizing the way through which individuals partake in financial engagements—without dealing with a traditional bank. “FinTech companies are businesses that leverage new technology to create new and better financial services for both consumers and businesses. It includes companies of all kinds that may operate in personal financial management, insurance, payment, asset management, etc.” FinTech companies provide both individuals and businesses with more accessible and scalable tools, relative to traditional financial institutions, and by doing so these innovative software solutions are disrupting traditional business models. According to data produced by the World Bank, approximately 70% of the population of Latin America is unbanked, and specifically in Mexico, just over 60% of adults above the age of 15 maintain a bank account. With support from the government and investors, the FinTech sector has grown significantly in recent years, 60% between 2016 and 2017, and provides an avenue to provide financial solutions to the significant segment of the population underserved by traditional financial institutions. Regulation is needed in the region; however, it must be tailored in such a way that it fosters a sustainable startup ecosystem.
In response to the rapid growth and understanding FinTech’s enormous potential, governments around Latin America are moving to introduce legislation regulating the FinTech sector. In Mexico, the congress recently enacted the Law to Regulate Financial Technology Institutions (the “FinTech Law”), which is the first of its kind in Latin America. The FinTech Law provides a legal framework for the industry, which sets forth organizational requirements and authorization requirements per the Mexican Banking and Securities Commission (CNBV) along with other guidelines regarding disclosure, information, and applicant assessment. The FinTech Law also includes an option to obtain a special temporary authorization to offer alternative financial services, termed the “regulatory sandbox.” This authorization permits entities to operate, for a limited period of time, utilizing untraditional technological tools or mechanisms. Thus, the law presents two unique avenues of operating in the FinTech space. The first way the law serves to regulate the FinTech industry, and ultimately the only way to operate as a FinTech company, is by funneling operational entities through CNBV authorization. The second way is through regulatory sandbox models, which are essentially testing grounds for new, unconventional models and methods not encompassed by existing regulation. Companies falling under this authorization are permitted to do so for a limited period of two years and are subject to oversight and reporting during the period.
Mexico’s FinTech Law follows the lead of the United Kingdom, which was the first country to establish comprehensive regulatory standards for the FinTech industry and was apparently influenced by the concept of promoting flexibility through creation of a regulatory sandbox. The FinTech Law serves as a roadmap for other Latin American countries in enacting their own legislation, and serves to promote the idea of embracing innovation for the positive impact it can have on the economy. FinTech volume in Mexico, if it is facilitated to continue at its current rate, is projected to reach upwards of 68 billion USD by the year 2022.