Victor Hugo Flores
Partner & Head
Fintual México
Startup Contributor

Why Does Mexico Need Fintech Unicorns?

By Victor Hugo Flores | Tue, 12/01/2020 - 08:56

As you might know, unicorns are companies that exceed a valuation of $1 billion. Historically, they have been the best proof of business development and rich innovation environments. In the last few years, Latin America started to see the rise of its first unicorns, some of them fintechs, with just one from Mexico.

Mexico's population is estimated at over 129 million but not a single fintech has become a unicorn. A country with unicorns involves not only wealthy and successful entrepreneurs but also structural changes for the country. The Mexican authorities should be the first to aim to create at least 10 fintech unicorns in Mexico in the next five years.

But why do we need fintech unicorns?

In my career as a banker, and in contrast to that life, working in a fintech taught me to look at innovation and competitiveness from another perspective. In many ways, investment in technology is the key to strengthening the Mexican economy.

Via my experience in Fintual, I can list (and explain) some of the immediate benefits of strongly developing the fintech industry and having more Mexican fintech unicorns.

A. Thinking outside the box. Leave a blank sheet in the hands of talented people who know how to code and you will have thousands of solutions that will change the status quo. Create an incentive to develop new ideas and the possibility of getting a great company is a good one. The Mexican financial sector is crying out for creativity and innovation.  

At Fintual, we have a mix between financially experienced and talented techy people (without any previous career in the financial sector) and I have witnessed the best way of solving problems.

B. Let's add fun to the party: more competition. Mexico’s financial sector is one of the most concentrated in the world. Approximately 70 percent of bank assets are in the hands of the Top 4, 60 percent of the assets under management of mutual funds are run by four companies and this pattern repeats successively across all different categories in the traditional financial sector. Obviously, this translates into high costs, poor service and low innovation in the sector. By reducing barriers to entry for fintechs, the Mexican people will be able to decide which option is best for them.  

At Fintual, we have dramatically reduced costs by applying technology to all processes, which allows us to offer investment funds with fees that are much lower than the industry average. As you would expect, we don't bother anyone as long as we manage a few assets, but as we gain market share and become a unicorn, we will probably cause some discomfort and we hope for some movement in the fees across the entire industry.

C. Come together: inclusion and democratization. Mexico's Financial Inclusion index is one of the lowest in Latam, standing at 36.9 percent. Investment is even worse. Informal saving, such as the pool saving known in Mexico as “tanda,” is the main form of building wealth for many people. Distrust of banks or the perception of lack of benefits from them make people stay within the informal segment, exposing themselves to fraud and low returns. At Fintual, 47 percent of our clients are people who have never invested or saved before. We worked hard to earn their trust by reaching a segment that has long been off the radar of traditional groups.

D.The techy world could be less unequal.  Technology closes economic gaps by providing opportunities to anyone, no matter the place or condition. Today, banks don't need branches in every town or village in Mexico if people have an internet connection. This is a huge jump in bancarization.  Another example of how fintech could close economic gaps is supporting mom and pop stores to sell, deliver and charge to compete with large stores.  Perhaps small businesses would not develop technological solutions by themselves but a fintech could find areas of opportunity. In Chile, Fintual has clients in remote towns where traditional financial groups usually are not present.

E. Data at the service of a country. The explosion in the availability of sources of data and the emergence of technologies for making use of such data are expected to have a significant impact on our lives. The potential of this is huge, from being able to combat COVID-19 more efficiently to being able to grant better credits by reducing the default rate.  At Fintual, we have data scientists specialized in analyzing the data to improve our offering but also to support our community. 

So, the question is, what has been missing for an explosion of a huge number of fintechs and for having at least 10 of them close to becoming a Unicorn? Everyone will have their own theory. Here are five points that could help:

1. Financial reform. Mexico urgently needs a deep financial reform to standardize regulations for similar markets, increase open-banking, promote financial inclusion, democratize investments, incorporate new global trends (i.e. capital structures) and innovative business models. The reform should allow a real technological transformation of the entire financial sector, foster and increase competition and make the role of the CNBV (National Banking and Stock Commission) more flexible.

2. Sandbox as a standard and not as an exception. Technology advances much faster than any regulator. This is not a criticism, but a fact. The regulation must provide a flexible framework for the CNBV to have a margin of interpretation and adjustment that allows it to authorize new models to operate (or adaptations of the current regulation) supported by innovation. This implies that the law should permanently incorporate the sandbox, making authorizations more agile. 

Similarly, the authority should streamline all authorization processes. Currently, in most of the procedures, you have to make a request, send it, wait for observations from the authority, answer them and, someday, obtain the authorization for starting operations. This burns your funds and assets, and could be the death wound for many startups. To increase market dynamics, regulatory processes should consist of having a list of minimum requirements, notify the authority and start operating; then you have time to make the adjustments that the authority requires. This is how the Chilean financial authority works, and the time frame to start operations or obtain authorization is less than a third of that in Mexico.

3. The financial sector should lower its barriers to entry. Sooner or later, most of the B2C fintechs need to go through the traditional financial sector; however, many of these put up several obstacles and barriers to acquire their services or the costs are so absurdly high that it is impossible to connect with them. Many of these barriers are regulatory but others are built by the traditional sector. Following the experience of the telecom industry, where the authority forced the predominant players to provide their services at competitive prices for the benefit of competition and end users, the same should happen in the financial sector where banks must open up to models of open architecture, use of SPEI, data, and so on. All for the benefit of the end user.

4. More and authentic open banking. Although article 76 of the Fintech Law establishes the obligation to share information through APIs, the publication of the secondary regulation has been slow and insufficient. This information should have been ready from March 2020, but to date, there is only regulation for the information of credit information companies and clearinghouses (which are the responsibility of Banxico) and the regulation regarding open data, that is, products and services, location of offices and branches, as well as their ATM information. Nothing of that causes a real impact in the fintech world. Openness is not urgent for the traditional sector, especially level 3, which implies the opening of customer information under its authorization. Do not forget that the information is not the property of the bank, but the customer. Open banking will benefit the end user by being able to automate and link their financial products to obtain a better experience.

5. Basic infrastructure everywhere. One of the most relevant projects of the current government is “CFE Telecomunicaciones.” This program would allow internet services in any town of the country through CFE's fiber optic network. The country is in urgent need of more and better internet for everybody, especially the low-income segment. It highlights that, in some cases, the current regulation does not consider the technological limitations that the lower-income segments of the country may have. Some procedures requested by law require technology that is not available to everyone. 
For example, onboarding processes request interviews in real time and with a certain minimum quality that makes them extremely expensive or inaccessible for many people, causing a kind of discrimination. Projects like CFE Telecommunications can support internet access for everyone and open up the fintech world to everyone.

The effect of developing a strong fintech environment is deep and beneficial for the entire country. Having at least 10 unicorns in Mexico in the next five years could transform the financial sector, in that it would lead to lower commissions, increased financial inclusion, democratized investments and perhaps foster a less unequal Mexico. Fintual is working to be one of those 10 unicorns that the country needs.

Photo by:   Victor Hugo Flores