Mexico's financial technology law, a unique piece of regulation in Latin America that took effect nearly 3 months ago, continues to draw mixed reactions from the industry.
Although initially thought of as a regional model, some fintech leaders at Finnovista Lendit Fintech in Miami held earlier in December believe resulting legislation presents too onerous a burden for new entrants. Others, however, claim it is a necessary step to advance and formalize the industry.
"A camel is a horse designed by a committee," Adolfo Babatz, CEO and co-founder of portable card-reading hardware provider Clip, said in a panel discussion. "That is what the fintech law is."
Babatz noted that while the regulation "started as an amazing opportunity some years ago ... it ended up being a legislation that will inhibit growth of small companies, [making] it very hard for a company subject to that law to massively disrupt any part of the financial services industry in Mexico."
The fintech law was conceived in an effort to bring Mexico's growing number of fintech startups under the same regulatory standards, a move broadly cheered by industry participants and investors. However, in practice, some argue that the resulting law is too burdensome. As a result, relatively few fintechs have registered for a license under the regulation, and some companies reportedly have even adjusted their business lines to avoid falling under its parameters.
Three weeks before the law came into effect, U.S. payments giant Paypal reportedly announced it would cease offering electronic wallet services in Mexico, a product usually targeted at high-income individuals. Local fintech Conekta decided as well to position itself as a payment aggregator and refrain from offering e-wallets, which would have demanded a fintech license.
"It is positive for Mexico to have regulations on these new players, but some say it might have gone a bit too far on it," Gabriela Estrada, CFO at Vexi, told S&P Global Market Intelligence.
As of Oct. 1, Mexico's banking and securities regulator CNBV said that 85 fintech companies had filed for a license so far, with about 60 seeking to operate as electronic payment institutions and 25 filing to have crowdfunding operations. That figure is less than half of the 200 fintechs that were initially estimated to be in line for licenses.
According to CNBV, operators within the purview of the law that have not submitted a request "must refrain from continuing to carry out activities ... and must perform only acts aimed at the conclusion or cessation of existing operations."
Mexico is currently the second-largest fintech ecosystem in Latin America, behind Brazil, with nearly 400 startups, according to a joint study by Finnovista and the Interamerican Development banks. For newcomers, the fintech law provides a limited "sandbox" period in which innovative business models are expected to clear out. Yet some participants are skeptical of its feasibility.
The initial capital required for fintechs is at $200,000, yet embracing the fintech law also means complying with cybersecurity, corporate governance, and money laundering norms, all of which require human labor and entails additional recurrent costs. It also implies sharing accounting books with the regulator.
"It is opening up to a whole different world," Alejandro Cosentino, CEO of peer-to-peer lending platform Afluenta, told S&P Global Market Intelligence. "Those are lots of rules, yet at the end of the day, I feel safer," he said.
"It's how the industry develops," he added. "The natural evolution of this business is to become regulated. It provides certainty and an environment in which clients feel safe. Regulations help create markets, it attracts new investments and brings in larger competitors."
This year, digital lender Konfio garnered $200 million from Goldman Sachs Group Inc. and Japanese giant SoftBank Group Corp., while competitor Klar secured $57 million from Banco Santander México SA. Clip itself tapped some $147 million this year in a round led by Japanese giant SoftBank Group Corp.
Jorge Casara, an inspector at Brazil's Securities Exchange Commission, told Market Intelligence that though it can be "frustrating" for Latin American fintechs, in the end, the regulator is "bound by laws."
"For them, one month is a lot of time. But for us, it can take as much as two years to change a regulation," he added.