The Barrier to Digital Wallets in MexicoBy Bruno Ramos Berho | Fri, 02/05/2021 - 09:13
The COVID-19 pandemic has been a catalyst for the digitalization of industries, with finance being among the most important. We don’t want to go to the bank to make deposits or open an account, we are starting to see cash as obsolete paper, and we want to make payments from wherever we are, whenever we want.
In recent years, the fintech industry has seen exponential growth in response to the entrepreneurial appetite, the kind of innovative appetite that craves new ideas and new businesses. It comes at the best possible time, but there is a big barrier you need to go through. It’s not as simple as starting something in your garage. That barrier is Regulation. To go through it, you need a lot of money, a lot of patience, and still, you wouldn't be 100 percent certain of success.
The Law to Regulate Financial Technology Institutions came into force on March 10, 2018. Prior to that date, there were Bank Licenses, Stock Exchange Licenses, Money Lending Licenses, but fintech companies that were holding customer funds, such as Swap, Bitso, PayPal, and others, were not yet regulated while the industry was quickly growing. With that came a lot of responsibility.
The lucky companies that operated as a fintech (crowdfunding or electronic payment funds) before March 10, fell within the 8th transitory of the Fintech Law. This allowed them to continue their service and operations, as long as they requested authorization no later than Sept. 25, 2019.
On the other hand, unlucky fintech companies that were not operating before that day, won’t be able to do so until they obtain an authorization from the corresponding authority, the CNBV. As you will read further on, getting authorization (partly because of a global pandemic) can take some time.
Getting the License
Fintech companies in the 8th transitory (the lucky ones) had around 18 months to work on their filing and make sure they complied with the new law; that is, of course, if they wished to continue to operate.
Since Swap has operated since 2015, it meant we were one of the lucky companies, so we started to work on our own filing. On Sept. 25, 2019, after months of hard work, we submitted our filling. The next day, we simply had to declare on our website that Swap was in the 8th transitory of the Fintech Law, and wait for a response. Sixty-nine companies in the 8th transitory also submitted their filing by that day.
Some fintechs decided not to apply for the license and were immediately impacted by the new Fintech Law. PayPal Mexico serves as an example. Since September 2019, Mexican citizens can’t have PayPal balances. Instead, funds are transferred directly to one’s bank account. This way, PayPal avoided falling under the regulation.
We thought we’d receive the fintech license by mid-2020, but COVID-19 changed the schedule. Not only did CNBV have to close for some time, but most of the fintechs in review also had to make changes to their business plan and resubmit. Our new expectation is to receive it sometime in the next couple of months. But again, we were one of the lucky ones in the 8th transitory; the delay did not impact our service and operations, it impacted the unlucky fintechs, those born after March 2018.
The Unlucky Fintechs
If since March 2018, you’ve had a great digital bank idea, this were/are your options:
- Acquire a company in the 8th transitory (this only worked before September 2019): If you had the money, acquiring a company in the 8th transitory was not a bad option. You would’ve been able to operate, but you had to be quick. An example of this is Rappi, with the acquisition of Payit. Thanks to this, Rappi launched Rappi Pay.
- Submit your fintech filing: It will take several months to develop, and you’ll need some funding. But with this option you probably wouldn’t have gotten the approval to begin operations yet. There is an exception with NVIO, from Bitso, which got its license in 2020, the first and only one so far.
- Fintech as a Service (8th transitory as a Service, really): This involves partnering with a fintech that is under the 8th transitory, with their filing under review. This gives you the opportunity to launch your product, but there are many liabilities. The clients are not your clients, they are with the other fintech. Also, you can’t be certain that fintech will get a license in the end. Ualá, for example, launched in Mexico on top of UnDosTres’ 8th transitory.
None of the options are great, especially for a young entrepreneur. You need to raise a lot of money, without having a product in the market. I don’t blame the regulation. I admire how Mexico has pioneered fintech regulation in Latam. It is very important that the industry is regulated, especially when it comes to holding people's money. It’s the mix of events that made it unfortunate for many entrepreneurs.
Nevertheless, this is not a deal breaker. We have more fintechs in Mexico than ever – 441 according to Finnovista, a 14% annual increase – as well as eager venture capitalists looking for a great idea led by an outstanding team shooting to revolutionize the way we interact with money.