Mexican lawmakers are close to passing a progressive bill to legalize and regulate fintech companies and services, a beacon of light for sector development across Latin America.
The law would define fintech entities (FTEs) in Mexico, the requirements for their constitution and collaboration with banking and finance institutions. Furthermore, it would regulate three kinds of fintech services: electronic payments, crowdfunding, and virtual assets or cryptocurrencies, and implement a ‘regulatory sandbox‘ for startups that do not fall into one of these three categories.
This is all great news for resource-strapped new fintech companies. “Regulation is a big challenge for startups, as it can be an expensive task,” said Andrés Fontao, CEO of Finnovista, an impact organization that empowers fintech ecosystems in Latin America. Fontao explained that startups usually don’t the have resources or time to lobby or push for appropriate regulation for their sector.
Such regulation could not only legalize a helpful and valuable new industry, but also help prevent terrorism and other crimes that are funded via money laundering in an unregulated underworld.
Although, the bill is still under consideration and might undergo some changes before becoming law, you can read the full draft here, courtesy of FinTech Mexico. Let’s take a look at some of its main points.
Fintech Entities (FTEs)
Fintech companies will need to comply with certain requirements in order to operate legally. The National Banking and Securities Commission (CNBV) of Mexico will be enforcing such requirements.
Legal FTEs will need to have certain amounts of capital, to respect maximum transaction amounts, to comply with transparency regarding investor identification and income/expenses records, and to provide clear risk disclosures. In addition, they will have to implement strong cybersecurity measures according to set standards.
The amount of capital needed to operate is still under discussion; some entrepreneurs and investors think securing large amounts of capital before starting operations is an unnecessary, heavy burden on new companies. However, capital funds under supervision by financial authorities provide guarantees to investors and users.
Financial institutions such as banks would be able to invest and get involved in FTEs, provided compliance with money laundering and user protection laws from all parties involved.
Types of FTEs
Electronic payments, crowdfunding and virtual assets would be recognized and regulated with the new law, as would a fourth catch-all category for other, innovative models termed a ‘regulatory sandbox‘.
- Electronic payments: platforms that issue, manage, provide accounting and transfers of electronic funds, whether in virtual or traditional currencies. These would need to deposit funds into banking accounts, are forbidden from offering interests nor other earnings to users, and would have strict requirements for capital funds and min/max transaction amounts.
- Virtual assets: Strict supervision from Banxico, Mexico’s central bank. Banxico would determine features and limits for such assets, transactions and platforms. Total disclosure is required regarding the non-legal-tender nature, volatility, and irreversibility of cryptocurrencies and related transactions.
- Crowdfunding platforms would have to disclose all risks associated with contributions, and refrain from offering dividends. Banks and other financial institutions cannot fund campaigns. Each crowdfunding project could only run in one crowdfunding platform. Strict requirements here are towards identifying funders and raisers.
- Regulatory Sandbox: Instead of dealing with heavily regulated financial services from the start, fintech startups with innovative ideas can collaborate with banks and other institutions to develop solutions in a more relaxed and controlled environment—think of it as a testing sandpit for young fintech. Startups have to request permission in advance, refrain from exposing their partner institution to unnecessary risks, and report their results after 30 days if they want to continue developing their idea.
A specific precedent prodded lawmakers to include crowdfunding regulations instead of neglecting this increasingly important sector.
A year ago, a scandal broke out when foodtech startup foodies started a crowdfunding campaign on well-known platform Fondeadora, now owned by Kickstarter. The startup offered shares proportional to funding to users. The campaign ended up raising over 50,000 USD from 188 people.
Soon after, foodies campaigner Miguel Islas vanished with the money. No fintech law meant no guarantees could be offered to funders, evidencing that crowdfunding platforms’ honor system is deeply vulnerable and flawed.
Financial authorities were befuddled about what to do, given the lack of similar precedents. Fondeadora vowed to assume the loss and give funders their money back, out of honor as there was no legal obligation from either foodies nor Fondeadora to assume responsibility.
The bill also includes provisions for the prevention of money laundering, the management of risks and obligations for fintech companies, a chain of command for the new industry, and delimitation of the areas where traditional financial institutions and fintech startups are to compete, collaborate, or remain in separate turfs.
Mexico leads fintech in LatAm
Mexico aims to remain in the lead with fintech-friendly regulation for its diversified ecosystem. Just last year, the number of fintech startups increased by 50% in the country, evidencing the attractive of the sector for entrepreneurs, according to a Finnovista report. Mexico is on the fintech podium together with Brazil and Colombia, also growing hubs of innovation in the field.
The sustained growth over the past years comes mostly as a result of innovative services being offered to the unbanked or underbanked in Mexico. Mexico’s situation is no different than that of other Latin American countries: the region has a massive percentage of people living under the radar, yet interested in accessing financial services.
Mexico’s fintech law initiative has been in the works since late 2015 and may pass through the House of Representatives, Senate and Congress of Mexico within the next few months. Its implementation would set a precedent for other Latin American countries to seize the opportunity and create a network of opportunities for the development of fintech in the region.