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LatAm turns to Mexico's year-old fintech law as a model for regulation

A year after Mexico enacted landmark legislation for the financial technology space, a growing number of Latin American countries are now looking to emulate rules for their own budding sectors.

Mexico's fintech law, which launched March 8, 2018, and takes full effect in 2020, offered a framework for key fintech groups, such as crowdfunding and electronic payment funds, while also providing a process for new fintech models. The legislation helped to spur a surge in startups — about 100 new Mexican fintechs were created in 2018 alone, representing 52% growth for an industry now valued at US$151 million, a joint study by the Inter-American Development Bank and Finnovista shows.

The regulation also has generated a "spillover effect in legislation on the rest of the [region's] countries," Directorio Legislativo, a non-governmental organization that tracks legislative agendas, noted in a report.

Members of the Pacific Alliance trading bloc — which includes Chile, Colombia, Mexico and Peru — have made the most headway. In February, Chile's financial market commission published its first draft on a broad fintech regulatory proposal, while in Peru a similar initiative is expected to reach congress in the coming weeks.

"Mexico proved that it is possible to regulate the sector without imposing regulation as heavy as it is for banks. It [is] proportional regulation," said Alejandro Cosentino, the founder of Afluenta, an Argentine peer-to-peer lender with operations in Mexico and Peru.

Most countries in Latin America have some kind of fintech regulation but lack an integral framework. In Brazil, crowdfunding and peer-to-peer lending are individually regulated, though a special congressional commission is working on a broader legislative strategy. Both Argentina and Colombia only have crowdfunding regulation.

Some believe that efforts to unify fintech regulation across the region soon could be coming into play. The IDB is expected to host a fintech-focused event in Panama in early April; regulators, central banks and fintech associations from across Latin America have all been invited to attend, leading some to speculate that converging regulatory efforts could be part of the agenda.

If it is, Mexico's fintech law is likely to be a key case study, experts say.

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Regulation and risk

An immediate benefit from enacting fintech legislation is the clarity it provides to fintech players looking to enter the market, as well as to the venture capitalist interested in investing in them.

"The law brings in certainty," Andrés Fontao, a co-founder and partner at Finnovista, said in an interview. "Before the framework, the venture capital community might have been more reticent to bet strongly in the sector as some fintechs operated in gray areas."

"I do not have to depend on the shifting mood of the regulator. I comply with a law, and I get a license," Afluenta's Cosentino noted. "Regulatory risk... across LatAm is something investors do not like one bit."

The law also provided a framework for international fintech companies looking to start operations. Research from Finnovista and the IDB shows that three-quarters of the foreign-controlled fintech firms active in Latin America now have operations in Mexico — surpassing Brazil, where fewer than half of such players have a presence.

An increasing number of European players are now looking to get involved in Mexico thanks to the law, Paula Cárdenas of Spain-based advisory firm Finnovating said, noting that the legislation provided the "indispensable stability ... for entrepreneurs, investors and users of these new financial services."

Devil in the details

Despite the optimism that Mexico's fintech regulation has spurred, there are still issues that have yet to be addressed, and some argue that benchmarks set by Mexican regulators subsequent to the law's passage threaten to inhibit good ideas without substantial funding.

To date, just one fintech company — property-focused crowdfunding platform M2CROWD — has requested a license. While a spokesman for CNBV said the regulator expects more requests later this year, less than a third of fintech startups are expected to pursue a license at all.

Most Mexican fintech firms have fewer than 10 employees, and only 4% employ more than 100. They are "garage startups — three or four people with an idea and [funding] for 3 or 4 months in total," said Ricardo Beltrán, the CEO of Indava, a web development and data firm, who founded the online community GetFinTech.io.

Beltrán noted the cost of applying for a license alone stands at between US$15,000 and US$50,000, while other requirements — such as a mandatory hiring of a compliance officer — would nearly double most startups' operational expenses. "Their strategy is not going to fall into the model as described by the law," he added.

Under CNBV guidelines issued in September 2018, crowdfunding operators and electronic payment institutions must have a minimum capital level of between 500,000 and 700,000 inflation-adjusted units, or roughly US$162,000 to US$227,000. The regulation does provide a so-called 'sandbox' mechanism, which offers small and especially novel startups to test and refine their ideas outside of the full regulatory environment, though it expires after a year.

Beltrán characterized the sandbox as a "double-edged sword" given the short timeline offered, and more broadly argued that while the initial law was "well thought" and "promising," the secondary regulation that followed went too far. "The devil is in the details," he said.

However, for some sector participants, the minimum capital threshold and other requirements are a positive move for the broader sector, reasoning that it will weed out fly-by-night start-ups that could cause reputational damage.

"We do not want to leave people out, but we must look after our industry," an executive at one midsized fintech player argued. "Otherwise, someone might join today and leave tomorrow because of capital needs, and that would harm us all."

The CNBV is expected to publish new specifications for crowdfunding and electronic payments firms later this month. Rules for cryptocurrency operations, to come from Banco de México, have yet to be publicly defined.

"The law is not perfect but at least it is a starting point," Finnovista's Fontao said. "Some will comply with the prerequisites and obtain a license, the smaller ones can always turn to the sandbox," he added, though noted that the latter's feasibility has yet to be tested.

As of March 6, US$1 was equivalent to 19.37 Mexican pesos.