Competition always entails well-being: Cofece

Q: How has COFECE promoted the development of digital financial services within the Mexican market?

A: The financial sector has been a priority for the Commission and monitored as part of the 2018-2021 and the 2022-2025 strategic plans. The latter also includes digital markets. In 2014, the Commission found non-optimal conditions for competition and low levels of financial inclusion that impact national economic development. Later research on the digital economy was further strengthened in 2017 with the introduction of the initiative for the Fintech Law. The Commission’s opinion on this issue included several recommendations for legislators to promote competition.

The Fintech Law is a great opportunity to increase financial intermediation. It can facilitate the offering of innovative digital financial services, thereby increasing financial inclusion. However, five years after the law came into force, there are still many areas of opportunity for authorities and regulators to achieve these objectives in the sector.

In June 2022, we initiated a study on the digital financial services market to analyze the structure, operation, and regulatory framework of these services. The study allows us to conduct a more in-depth analysis to determine whether adjustments are needed. We hope to have an X-ray of the sector to understand its operating structure and issue recommendations to the authorities to improve the functioning of these markets, enabling the generation of new digital financial products and services. The goal is to make more options available to financial users, reduce interest rate margins and promote credit to households and small and medium-sized companies.

Q: According to the structure, operation and regulatory framework of digital financial services, what can be expected in terms of growth and opportunities in Mexico?

A: This sector requires a structure that facilitates access without barriers to those who want to launch new companies. Competition always entails well-being. It is a virtuous circle in which the more service providers available, the greater benefit for consumers. The creation of this competitive environment will favor the creation of new domestic or foreign businesses. Certainty in the legal framework is also essential to create a level playing field so that companies can easily enter, remain, and grow in the market. Through its capacities, COFECE seeks to foster competition.

Digital financial services are a novel subject, which makes them difficult to regulate. COFECE is not responsible for the regulatory side but rather other aspects. However, we know that other countries have a regulatory sandbox that cannot be implemented in Mexico. Also, in many cases, these countries do not have sufficient and specialized human resources.

Q: In which sectors do you see the greatest potential for growth and economic recovery?

A: Mexico is being affected by the global situation caused by COVID-19 and the Russia-Ukraine war. In the current context, policies should strengthen competition. The fact that there are competition problems can be attributed to regulatory decisions that generate barriers that should be eliminated to encourage greater participation. For an economic recovery to occur, markets that have a cross-cutting impact and generate greater welfare for families must be prioritized. Cross-cutting markets such as the energy, transport and financial sectors trigger the development of other markets. Inflation is also high, so it is necessary to look at household spending and ensure that they have access to more options for food, medicine and transportation.

We have published various documents with proposals to drive the recovery from the competition perspective. The digital finance sector will facilitate the population's access to credit, generating a greater flow of information and investment. It is also important to maximize the impact of government spending. For example, through the good design of tenders, it will be possible to generate savings for the government.

Public procurement is relevant because, in addition to eliminating obstacles, it allows SMEs to acquire an important role since they are the majority of businesses and establishments in Mexico. We must promote competition without obstacles so that SMEs can develop strategic plans and obtain financing. This will reduce market concentration and generate more investment and innovation. Competition leads to economic recovery and to better conditions for the population.

Q: What are the main issues to consider when trying to build a new entity through mergers or acquisitions without impacting free competition?

A: When mergers and acquisitions exceed the thresholds established by Federal Economic Competition Law, economic agents have the obligation to notify these operations to the Commission. When this happens, the Commission analyzes the parties involved and the effects that could result from the operation. If the Commission detects any operation that could affect market share or places barriers to trade, the Commission would have to block the operation or would have to set remedies.

They are obligated to come to COFECE. Sometimes companies prefer to come to us in order to be more certain of what they are doing. Of the operations we analyze throughout a year, we block very few because most do not have a negative effect.

For example, Walmart once wanted to acquire a digital home delivery platform. COFECE concluded the acquisition of this startup by this traditional player did raise certain problems because, if authorized, it could have generated a loss of competition in related markets. The platform could have refused to provide its service to Walmart's competitors and at the same time, it would have had incentives not to engage with competing companies.

Q: How would COFECE react in a case where economic competition could be affected?

A: We carry out preventive procedures. Economic agents have to provide us with the information established by law in order to analyze the potential effects of their operation in the market, such as the generation of an entity with substantial power or the facilitation of monopolistic practices. During this procedure, economic agencies are notified that their operation may generate a market risk. They are given the opportunity to present remedy proposals as alternative solutions. If the problem cannot be solved, then the case is declined because it would leave consumers without alternatives.

Q: What is COFECE’s role in promoting innovation and the creation of new companies in Mexico?

A: The Commission cannot directly support new companies. Our role is to ensure that regulations do not create obstacles to access to the market. For example, as a result of the 2013 Energy Reform, we expected the arrival of many gasoline brands, each with a different business model. These companies would need a general regulation, which usually involves federal, local and municipal levels and sometimes they are not harmonized or duplicate requirements to operate. At the time, we identified that each market player needed the same independence to drive competition and allow consumers to choose based on quality or price.

We are doing something similar in terms of regulation for current startups. Digital financial services need some surveillance but not requirements or regulations that equate them to traditional banks. We do not want the regulation to hinder entry to the market because we want competition and better prices.

Federal Economic Competition Commission (COFECE) is an autonomous body that oversees and guarantees free competition in the country. It contributes to generate employment, boost economic growth, as well as create well-being for millions of consumers.