Fintech: A New Solution to Old Problems

Mexico has become one of Latin America’s largest fintech hubs, driving a cash-driven population to adopt banking at unprecedented rates. Mexican businesses, however, often face difficulties because the country’s credit issuing and lending capacities have astronomically high loan rates. Fintech solutions, which are entering the market at high speeds, could help companies obtain the credit they need. Unfortunately, they currently focus on expanding consumer finance. In this scenario, possibilities stay wide open for solutions to impulse SME credit issuing and lending, which will ultimately help the country’s economy. 

Digital credit and microfinancing have proven successful in Mexico because SMEs often have limited access to other choices for credits or loans. These emerging tools do not necessarily rely on traditional debt collection models, which rely in turn on the legal system and courts. Instead, microloans often prefer to provide various incentives for good payment behavior and to penalize clients who do not repay on time. This new model could directly affect the promotion, development and creation of new businesses. However, most of the new fintechs in Mexico have focused on making credit available to direct consumers, which is helping close only a part of the credit gap. 

“A primary way to accelerate access to credit in Mexico is by partnering with third-party distributors to set up white-label credit and banking services. With (Banking-as-a-Service) BaaS, it is a win-win situation for both the (financial institution) FI and the SME. FIs benefit from additional revenue streams, while brands are able to deliver accessible banking and credit services to the 85 percent of Mexicans who do not have access to credit cards,” wrote Jim McCarthy, President, i2c Inc., on MBN.

Undoubtedly, new technologies have the potential to improve SMEs’ finances, even in the context of weak credit market infrastructure. Fintech innovations like online lending, including platform lending and crowdfunding, stand to reach business clients that banks have been unable to serve. Technology has an important role to play in transforming this critical market infrastructure, but it will require investment and attention. Reform in these areas is complicated and time-consuming but is indispensable for long-term progress.

Data: The Tool Behind Fintech’s Solutions 

It was critical for Mexico to find new solutions so companies of all sizes could easily get loans without having all necessary requirements that traditional banking demands. At the moment, the non-bank financial sector is facing its most accelerated growth since its creation. Since the COVID-19 pandemic, it has gained terrain over the traditional banking institutions, but there are many issues that need to be addressed for it to grow responsibly. 

“Companies face difficulties in obtaining large credit amounts, this is where the flexibility of fintech companies play an important role, because digitization allows us to obtain better results than the traditional banking system,” said Alejandro Villalobos, Managing Director of North LATAM, Cumplo Mexico. 

Fintechs must aim to redesign financial systems to address their current limitations, especially by offering a personalized service that is based on each customer's demands, said José de la Luz López, Co-Founder and CEO, Delt.ai.

The technification of SMEs has reduced the financing gap, as they now produce more data that can be used to create new solutions for these companies. The significant discrepancy in the survival rate of SMEs and large companies is that bigger corporations tend to have access to mortgage guarantees, but this does not necessarily mean that they are the most productive. 

Role of the Public Sector 

“The government wants to regulate the process of money management, it wants to ensure the trajectory of these movements to avoid money laundering and tax evasion issues,” said Cristina Cacho, Regional Director, Clara. Collaboration with public institutions is critical to help a customer to offer a direct and comprehensive service, thus allowing companies to have a better management of the accounting of a company, she added. To achieve this, regulations must be designed to favor all parties involved and the end user. 

Regulations play an important role in the present and future of fintechs, which is why the public and private sector must work hand in hand. “Sometimes, the law does not know how to classify us. Authorities have to get to know us, understand us and classify us, so we can contribute to public policy,” said Cristina Valero, Vice President Card Product, Konfío. 

The Law to Regulate Financial Technology Institutions was approved in 2018 and, despite the fact that it was innovative for its time, it needs to be reviewed to address more aspects, explained Enrique Presburger, President, ASOFOM. First, it should focus more on incentivizing innovation instead of taking a punitive approach. Second, it should broaden its scope to allow the important players in the industry to be heard. Finally, it should foment the development of more technological tools. 

"If there are too many regulations within a market, they cause specialized financial institutions to face too many hurdles to be able to provide better services," said Presburger. If these problems can be solved, it would allow the Mexican businessman to focus exclusively on growing their business, allowing both Mexico and Latin America to make an accelerated economic leap and even leveling the field with other major global economies. 

Despite the issues surrounding the Mexican financial system, fintech companies can solve these complex problems with the limited resources that they have available, said de la Luz. These companies can find alternatives to help the region through technological development.