Can Mexico Light the Way for Fintech in Latin America?By Omar Larré | Tue, 08/23/2022 - 15:00
Access to formal financial services in Mexico is particularly low. According to the 2021 National Financial Inclusion Survey (ENIF), the share of population with past or present access to at least two or more financial services is a poor 56 percent of the population. When asking about access to at least four financial services, such as the share of the population with high accessibility to the financial sector and being able to choose between many competitors, this figure decreases to a meager 15 percent.
Access is also unequal across income levels, educational level and gender. For instance, according to ENIF, access to banking services like a deposit account is 28 percent of the population with only a grade school education, but 76 percent with a bachelor’s degree.
However, internet penetration has been growing steadily over the last few years, reaching an outstanding 76 percent of the total population in 2021, according to the National Survey on the Availability and Use of Information Technologies in Households (ENDUTIH).
An obvious question is whether we have any alternatives to boost financial inclusion supported by this healthy number of internet penetration.
I would dare say, confidently, that the answer is yes.
Technology: The Key Enabler
In the 21st century, a period later to be called the golden age of technology, this huge gap between financial inclusion and internet access should be closed for the betterment of Mexicans through financial technologies, better known as fintechs, that democratize financial access, enable a competitive environment, and can offer unparalleled user experiences and lower costs to established investors as well as to new players.
Fortunately, Mexico has taken some steps in the right direction.
Mexico’s legal framework for fintech, the first of its kind in Latin America, is expected to expand financial service access through innovation. This regulatory framework for fintech in Mexico, known as the Fintech Law, is designed to regulate the activities or entities that do not fit under the existing financial regulation but warrant regulation. Therefore, the Fintech Law enables the authorization, operation, and supervision of fintech institutions (ITFs), focusing on just two particular types: crowdfunding institutions (IFC) and electronic payment funds institutions (IFPE).
Thanks to the Fintech Law, many new players have emerged, ensuring better accessibility to formal credit products (the new crowdfunding institutions) and formal deposit accounts (the electronic payment funds institutions).
But this big step is not enough.
For the premise of competitiveness to be true, Mexico must update some aspects of its financial regulation, both in the traditional regulatory framework (the traditional legal framework that includes traditional financial institutions like banks, brokers and asset managers), and in the new Fintech Law. These updates seem to be necessary to enable new competitors, otherwise, I am afraid that new players might not see the light in the coming years.
Let me dive into what I think could be necessary for improvement.
Teamwork and Agile Processes
Policymakers should encourage regulatory approaches that promote flexible oversight and agile authorization processes. Secondly, regulators, which often contend with competing priorities, such as encouraging competition while ensuring financial stability, safety and consumer protection, should be equipped with broader tools that allow efficient authorization processes through flexible but trustworthy criteria. For the latter, it is necessary to lean on civil society organizations and private actors that offer their experience and knowledge as third-party experts.
The authorization process may seem to be a trivial element within the whole regulatory framework, related mainly to paperwork and legal details, but for companies and startups with funding from at least one venture capital investor, this step forward, being supervised, could turn into a nightmare consisting of waiting and analysis periods that could take years, where the focus is the capital structure and, in particular, the “final beneficiaries,” referring to the last person in line to benefit from the venture capital fund or other types of venture capital property when the original owner assigned multiple beneficiaries.
These long processes and wait times could materialize even in cases when the venture capital investor or funding satisfies every check on a standard compliance checklist, including anti-money laundering regulations and guidelines.
For the Sake of an Industry
In addition, the fragmented regulation in Mexico means the advantages of the Fintech Law are not reflected in the traditional regulation. For instance, the identification of final beneficiaries in the case of ITF applies to shareholder stakes greater than 10 percent, for banks and brokerage firms this threshold is 4 percent, and for asset managers, the figure is 0.001 percent; that is, the latter is 10,000 times more restrictive than for an ITF and 4,000 times more restrictive than for a bank, which is complete nonsense and especially affects new firms looking to participate in the asset management business.
Fresh capital from venture firms must not be considered as a small constructive force in a competitive environment. Despite its modest size in appearance, several studies have shown that by creating an economic and societal impact, venture capital adds a lot more than it seems. Indeed, venture capital has an impressive history of helping build world-leading companies, good products, useful services and generating jobs for the economy. In fact, between 1980 and 2020, over a third of all IPOs (39 percent) were venture-backed, according to a 2022 study published by Jay R. Ritter from the Department of Finance at the University of Florida. Furthermore, eight of the biggest 10 firms in the world by market capitalization were built with the help of venture capital firms: Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Tencent, and Alibaba.
All in all, a sensible and agile authorization process for venture capital-backed tech firms that look forward to being part of the financial system in Mexico would not only be beneficial for customers but also for the entire local economy.
With all this, I believe Mexico could light the way for fintech development in Latin America. I really hope so.