As originallly published on 1st March 2021 by René Arce Lozano and Dinorah Cantu
from Hogan Lovells, Mexico and seen on Mondaq.com
Introduction
Over the last few years, the fintech ecosystem in Mexico has evolved to become one of the most developed in Latin America. According to information published in January 2021 by the Comisión Nacional Bancaria y de Valores (“National Banking and Securities Commission” or “CNBV”), there are 93 fintech companies currently in the process of obtaining a Financial Technology Institution (“FTI”) license, 59 of which are electronic payment funds institutions and 34 are crowdfunding institutions1. Likewise, out of the 93 companies in the licensing process, 69 are currently operating under the eighth transitory provision of the Fintech Law2. Nevertheless, as of February 2021, only one electronic payment funds institution has been authorized to full extent by the CNBV3.
Therefore, major regulatory developments are expected during 2021, as the first authorizations will be issued by the CNBV in accordance with the Ley para Regular Instituciones de Tecnología Financiera (the “Fintech Law”) and its secondary provisions.
This document will briefly describe the fintech ecosystem and opportunities in Mexico as well as the fintech legal framework for fintech companies considering operating in Mexico.
A. The Mexican fintech ecosystem and opportunities in Mexico
Mexico is the largest fintech hub in Latin America with more than 441 startups, slightly ahead of Brazil, the second largest ecosystem in the region. During 2020, the number of fintech startups in Mexico increased more than 14%, with a significant growth on the insurtech and the digital banking segments. Likewise the fintech ecosystem has become more mature and active in Mexico, with a fintech mortality rate of only 4.5% during 2020, compared to 11.3% in 20194.
Mexico´s fintech sector is comprised of companies and startups from all segments, being the most developed the payments and remittances segment with 90 startups, consumer lending with 52 startups, enterprise financial management with 52 startups, and enterprise technologies for financial institutions with 51 startups, according to data published by Finnovista and the Inter-American Development Bank in 2020.
Likewise, foreign participants may consider Mexico as a unique place for fintech development due to the existence of a young and tech-savvy consumer base, high access to internet services and the low penetration of financial services.
According to data from the Instituto Nacional de Estadística y Geografía (“National Institute of Statistics and Geography” or “INEGI”) 30 million people in Mexico range between 15 and 29 years old, therefore approximately 24% of the total population is considered young5. Regarding internet access, the INEGI estimates that at least 80 million people in Mexico has an internet connection and more than 75% of the population has a cellphone. Likewise, 9 out of 10 users of cellphones have a smartphone with an internet connection.
On the other hand, the World Bank estimates that there are only 13.7 bank branches for every 100,000 people in Mexico6 and according to data from the INEGI in 2018, only 68% of people around 18 to 70 years old have access to financial products7.
Furthermore, there are many advantages of doing business in Mexico8. In the last few years, Mexico has consolidated as the second-largest economy in Latin America and has established a strong track record of prudent macroeconomic policies and a welcoming business environment. Likewise, the Secretaría de Hacienda y Crédito Público (the “Ministry of Finance” or “SHCP”) and the Banco de México (the “Central Bank of Mexico”) have delivered stable and sustainable monetary and fiscal policies, and garnered high credibility in international markets.
B. The Mexican fintech legal framework
The joint participation of the public and private sector has been fundamental in the evolution of the fintech ecosystem. In particular, the private sector made important efforts to have a legislation that promotes and drives fintech development in Mexico.
On March 8th, 2018, Mexico became the first jurisdiction in Latin America to include a specific fintech legal framework through the enactment of the Fintech Law and its secondary regulation issued on September 10th, 2018.
The Fintech Law regulates specifically two types of FTIs: (i) crowdfunding institutions and (ii) electronic money and payment institutions. Nevertheless, the Fintech Law also covers subjects such as cryptocurrency regulation, open banking standards and the process to operate in the Modelo Novedoso (“Regulatory Sandbox”).
During 2020, secondary regulation such as the open banking rules and the Regulatory Sandbox secondary provisions were published which has led to an increasingly stronger legal framework for fintech operation in Mexico. Likewise, on January 2021, secondary provisions regarding information security, technology infrastructure, third party providers, use of biometrics and operational for electronic money and payment institutions were published by the CNBV.
C. Process for obtaining a fintech license in Mexico
Crowdfunding institutions and electronic money and payment institutions are required to file for an authorization before the CNBV to provide their services in Mexico. Afterwards, the CNBV and the Interinstitutional Committee9 will have a term of six months to grant or deny the authorization filing. Such period can be extended for another three months depending on the information requirements from the financial authority.
The process for obtaining authorization requires such entities to submit before the CNBV the operation model, the business plan, the share-holders information, the capital and corporate structure, the board of director’s integration, the financial viability report, the internal policies regarding compliance with AML/KYC regulation, risk management procedures, client protection policies, among others. The required level of detail in all these documents is high.
Likewise, FTIs are required to be incorporated in Mexico, to fulfill the minimum capital requirements that range between 165,000 USD and 230,000 USD depending on the operations performed and to include in their bylaws the obligation to comply with the fintech legal framework.
Conclusions
The next few months will be fundamental to the development of the fintech ecosystem in Mexico as the first entities that submitted an authorization filing in September 2019 will be granted or denied their authorization to operate as an FTI. We are looking forward for the implementation of the Fintech Law and the secondary provisions to full extent as we are certain that regulation will promote fintech investment, financial inclusion, competition and transparency to the financial system.
Companies interested in starting a fintech in Mexico should seek legal and technical advice from the beginning in order to know the complete list of application requirements to the CNBV, the implications of being a regulated entity and the form, method and deadlines to obtain the authorization in terms of the Fintech Law and its secondary regulation.
Footnotes
1 CNBV (2021). Comunicado No. 05. Consideraciones respecto al proceso de autorización de Instituciones de Tecnología Financiera. https://www.gob.mx/cnbv/prensa/comunicado-no-05-consideraciones-respecto-al-proceso-de-autorizacion-de-instituciones-de-tecnologia-financiera?idiom=es
2 Pursuant to the eighth transitory provision of the Fintech Law and, persons carrying out activities regulated by the Fintech Law upon its entry into force are authorized to continue carrying out their activities until the CNBV resolves their application; however, they must disclose through their website that their authorization is under review and therefore, their activities are not regulated by Mexican authorities.
3 CNBV (2021). Actualización de consideraciones respecto al proceso de autorización de Instituciones de Tecnología Financiera https://www.gob.mx/cnbv/prensa/comunicado-no-05-consideraciones-respecto-al-proceso-de-autorizacion-de-instituciones-de-tecnologia-financiera?idiom=es
4 Finnovista and Inter-American Development Bank (2021). Fintech Radar. Retrieved from https://www.finnovista.com/en/radar/the-number-of-fintech-startups-in-mexico-grows-14-in-one-year-to-441/
5 INEGI (2020). Estadísticas a propósito del día internacional de la juventud. Retrieved from
https://www.inegi.org.mx/contenidos/saladeprensa/aproposito/2020/Juventud2020_Nal.pdf
6 World Bank (2019). Bank branches for every 100,000 adults. Retrieved from https://datos.bancomundial.org/indicador/FB.CBK.BRCH.P5?view=chart
7INEGI (2018). Encuesta Nacional de Inclusión Financiera. Retrieved from https://www.inegi.org.mx/contenidos/programas/enif/2018/doc/enif_2018_resultados.pdf
8 World Bank (2019). Overview of the Mexican Economy.
https://www.worldbank.org/en/country/mexico/publication/mexico-diagnostico-sistematico-de-pais
9 The Interinstitutional Committee is comprised of members from the CNBV, the Central Bank of Mexico and the Ministry of Finance. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.