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The State of Open Banking in Mexico

By Cesar Cotait - Exadel

CEO Latin America

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It’s been over five years since Mexico passed its Fintech Law – officially titled, Law to Regulate Financial Technology Institutions.

Initially, lawmakers intended to make Mexico one of the most advanced fintech hubs in the North American region. However, with multiple legislative bumps and hurdles, the last five years have not been an easy journey.

Put simply, Mexico hasn’t quite reached the goals its lawmakers were hoping to achieve, but the journey is still far from over. Here is more about the state of open banking in Mexico and what can be done to help the country step up its game.

A Brief History of Open Banking in Mexico

In 2018, when the Fintech Law was first passed in Mexico, the aim was to allow businesses, citizens, and the banking industry to usher in the age of digital banking and financial inclusion in a country where the majority of adults didn’t own a bank account, and even fewer had ever made a digital payment.

It didn’t just end with financial inclusion, though. The fintech Law also sought to accomplish the following:

● Provide improved security to the users of technological financial services, including banking apps, credit score apps, among others

● Inspire more competition in the Mexican financial market

● Aid in averting money laundering activities and transactions that are often carried out through electronic services

● Inspire more overall participation in Mexico’s financial sector

● Regulate digital asset transactions in Mexico

There’s a wide array of fintech players in Mexico, with over 650 companies nationwide. However, the country’s Fintech Law began by covering regulations for only two types of fintech companies: electronic payment institutions (EPIs) and crowdfunding institutions.

Unfortunately, the vast list of other fintech players was not addressed by the Mexican regulatory system. They also did not receive any regulatory guidance for their technology-driven innovations and services.

As a result, many big tech companies launching financial services and fintechs offering investment services were left without regulatory guidance or the security this particular law could provide.

The Fintech Law also required financial and credit information institutions to establish Application Programming Interfaces (APIs).

APIs would allow connectivity and access by third-party applications, enabling transactional data, financial data, and aggregated data to be shared openly. The problem, though, is there are no fully defined standards for sharing transactional data, which is holding open banking from genuinely taking off in Mexico.

Why Hasn’t Open Banking Worked for Mexico, Yet?

It's not as easy as picking one particular reason why open banking has remained so elusive in Mexico.

Most would stick the blame on the regulators. This is a pattern that is seen regularly among other regions that have also had major conflicts within their policymaking system.

The institutional boundaries that exist between different and opposing regulators have contributed to a lack of development throughout the country. Conversely, markets with clearer paths between regulators see progress come much quicker (Brazil is an example of this).

Open banking’s performance in Mexico is a group effort, though.

For open banking to succeed as it has in other markets with similar needs to Mexico, such as India and Colombia, collaboration among both public and private stakeholders is another absolute necessity.

Collaboration matters because a consensus is required on several vital issues, such as data protection, security and resolutions of disputes.

Changes in the fintech sector need to come sooner rather than later, as some people are starting to get frustrated.

For example, a Mexican citizen recently filed a civil lawsuit over the infringement of their constitutional rights to fair data access. Challenges like this make this matter even more pressing and further highlight Mexico’s need for secondary legislation to support open banking as well as cybersecurity legislation, which the country severely lacks.

The Future of the Industry

The reality is that while Mexico is waiting on its regulators to usher in the secondary regulations, we’re seeing the number of fintech companies in Mexico grow exponentially, even larger than some of the world’s leading fintech hubs.

With hundreds of fintechs established in Mexico (and more on the way), there is a sea of opportunity to supply customers with new and innovative benefits and opportunities.

For example, many forward-thinking banks have seen the opportunity in the market and have created “digital twins” (a virtual simulation of a financial institution’s systems to test them under different conditions and scenarios without having any effect on their real-world system) in response.

With the help of these digital twins, such as Open Bank by Santander or Hey Banco by Banregio, banks are preparing for the continued growth that’s to be expected in the coming years.

Even international neobanks are taking significant notice, with two of the largest neobanks in Latin America — Nubank and Uala — entering the Mexican market. HSBC has also made it clear that it plans on leveraging open banking to provide improved payment services and enhanced credit risk analysis to its members.

That being said, due to the lack of secondary legislation and the outline of a clear and concise path, few are willing to put all their eggs into the open banking basket.

Mexico’s Potential to be a New Fintech Pioneer

There’s no denying Mexico’s potential to become a fintech hub that pioneers innovations across North America. Its potential is especially noteworthy when you consider the North America Trade Agreement and the role Mexico can play in developing cross-border frameworks for open banking and instant payments.

These frameworks could also be applied in countries throughout Central and Latin America. Also, as the United States faces geopolitical issues, this leaves Mexico as a strategic location.

Before any of these dreams can become realities, though, progress must be made toward meeting the initial open banking policy objectives:

● A governance structure with the participation of all stakeholders must be developed

● A framework of trust for the secure exchange of data and reliable party recognition

● APIs and their technical specifications must be detailed and focused on quality, reliability, and performance

● For data sharing and innovation to be encouraged, a commercial model must be defined and outlined

When taking a look at the successful open banking ecosystems, there is always a clear and transparent partnership of collaboration between participants. They must all work together with the regulators to create regulatory APIs that take into heavy consideration the complex sets of laws in Mexico and the security risks they pose.

It is imperative for these conflicting agendas to form a strategic and forward-thinking alliance that can benefit them, the market, and their customers, which ultimately enables them to create new products together and even reach new markets.

The Mexican market must also face head-on the cybersecurity challenges that it’s currently grappling with.

As digitization increases, so do the security risks. However, there are methods to combat these threats, including the following:

● Verification of third parties

● Educating consumers

● Implementing modern methods for customer authentication

● Incorporating trust management platforms to help facilitate identification

A well-thought-out plan and careful implementation of these methods could act as a robust foundation for risk mitigation in open banking.

Final Thoughts on Open Banking in Mexico

After reviewing all the information shared above, one thing is certainly clear.

Regulators must create a new and relevant framework that provides clarity for the industry, with a centralized effort from all parties. This will greatly enhance Mexico’s potential to become an open banking powerhouse that leads innovation for an entire region.

The industry itself must also start recognizing the opportunities that open banking brings and working with one another to achieve them. Time is of the essence.

Mexico’s bustling fintech community and the institutions involved have a heavy task at hand, but the time to act is upon them. If not done in a swift and timely manner, Mexico’s future expectation of becoming a fintech pioneer might be an image of the past.

While they wait on legislation to catch up, the right open banking tools, like Exadel, can also play a significant role in helping Mexico’s fintech companies achieve their goals and provide superior service to customers. Learn more about Exadel and how it can help today.