Fintech in Chile

As of today, it is estimated that there are around 160 Fintech companies in Chile, of which around 100 are affiliated with the Association of Fintech Companies of Chile (FinteChile).

Subcategories in the Fintech industry

The main subcategories of the Fintech industry in Chile are the Banking, Payments & Transactions and Crowdfunding & Lending sectors:

• Banking & payments

This has been the fastest growing industry in global Fintech for years, and Chile is no exception.

At the local level, the predominant business model has been B2B.

This sector is expected to continue to grow following the boost of e-commerce.

• Crowdfunding & Lending

In Latin America, Chile is the country with the second highest volume in this type of operations after Brazil (first) and before Mexico (third).

The first crowdfunding platform was created in 2013 (Broota) and there are now around 18 Latin American platforms (12 Chilean).

In 2018 alone, USD 290 million were raised in Chile, which represents a growth of 128% compared to what was generated the previous year. As a result, Chile displaced Mexico as the country in Latin America with the second highest volume of alternative financing (Brazil continues to be the first). This is worth highlighting that Chile is smaller in comparison to other jurisdictions in Latin America.

At a local level, crowdfunding is probably the most established industry within Fintech.

Some interesting facts and figures of the Chilean market

1. As of 2018, the total amount raised by Fintech Companies was USD 107 million.
2. The founders were 28 years old on average when they started their companies.
3. A study published in 2019 indicates that the principal countries of interest to Chilean Fintech companies are Mexico, Colombia and Peru.
4. Most Fintech companies were founded no more than 7- 8 years ago.

Fintech Law & Sandbox

As of March 2021, there is no Fintech Law in Chile. The government (Ministry of Finance) has been working in recent months on what should be the bill that will regulate the Fintech sector, including the development of Open Banking. The first stage of this work includes collecting quantitative evidence of the evolution of Fintech companies that participate in the Chilean market, identifying the entry barriers and the risk involved, and having a better assessment of the potential benefits of these new business models. At this time, the government is working on this first stage in order to propose a new regulatory framework, which will result in a bill, the second stage of the Ministry of Finance’s task in this matter. Authorities have said the goal is to have the legal proposal ready by the first quarter of 2021.

What about Regulatory Sandbox? At an international level, regulatory sandboxes have been used as a framework to promote the development of Fintech companies (UK in Europe and Mexico in Latin America, for example). This framework offers advantages in environments where (i) financial services can only be carried out as permitted by current legal regulations and (ii) the regulations applicable to a new service have NOT been technology neutral. In Chile, with the exception of certain financial services specially regulated by law (securities brokerage, bank transfer, fund management, etc.), as a general rule, there are no limitations to innovation or the emergence of new financial services. Consequently, it would seem that in Chile a regulatory Sandbox would not present the same advantages as it does for other jurisdictions, since currently innovation can arise without the need for a law or the supervision of the authority. However, this alternative has not been expressly dismissed by the Chilean authorities.

Open Banking

As mentioned before, the Fintech bill may include guidelines on Open Banking, but it is unclear what the approach will be.

In Chile there is a slight delay in comparison to more advanced countries, particularly with regard to data protection regulation. There is a bill in Congress that will raise the standards to what exists in Europe today (GDPR), which is expected to be enacted in 2021.

In March 2020, the Association of Fintech Companies of Chile (FinteChile) prepared and delivered to the government, banks and regulators an open banking protocol indicating the principles required for its correct implementation:

1. User-centred design;
2. Promotion of innovation;
3. Incentivization of competition; and
4. Efficiency and proportionality (guaranteeing data privacy without excessive costs or complexity).

The protocol indicated that, to reach an agreement on the use of APIs that allow the development of new, better and more efficient financial products, it is necessary to achieve the following:

1. User confidence in the open banking environment. This translates into the confidence that users have in the control they have over their data (consent to share the data, authentication when processing data to avoid security breaches (two-factor authentication - Strong Customer Authentication (SCA), remedies in case of possible breaches in the security or protection of the data);
2. Confidence on the part of the current players (Minimum security standards and technology neutrality)

Crowdfunding

In February 2019, the Chilean Financial Market Commission (CMF) issued a white paper containing general guidelines for the regulation of Crowdfunding and its related services (such as the custody of financial instruments and financial instrument transaction services).

As indicated in the white paper, the following would be regulated accordingly:

1. Crowdfunding platforms,
2. Robo-advisors and scoring, and
3. Alternative trading systems.

Said document established the general criteria that all regulations on this matter must consider (proportionality, neutrality, comprehensiveness, flexibility and modularity) and indicated the following components that a regulatory proposal must contain:

1. Expansion of the regulated perimeter (and consequently, the companies that provide this type of services are subject to the control of the Financial Market Commission);
2. Innovation hubs: implementation of formal regulatory support; and
3. Implementation of proportionality through secondary regulation (through regulation, the CMF may dismiss certain requirements or replace them with less difficult ones).

In addition to the above, in November 2020 the CMF issued an enquiry regarding certain public offerings exempt from registration. The purpose of the enquiry is to facilitate access to financing for smaller companies by issuing and offering securities, which would be applicable to crowdfunding activity (subject to limits that must be established by the definitive rule).

Payments

In Chile there is only one major merchant acquirer (Transbank). This means that there is a 3-party model since the issuer (the bank) is connected to the acquirer (Transbank, in which almost all banks were partners).

In 2021, a new 4-party model will be implemented with new acquirers, which will not necessarily be linked to issuers. The transition to this new model has been complex since the authorities called to regulate the issue have had different positions on this matter (mainly the central bank, the competition authorities and the Ministry of Finance).

As in the rest of the world, one of the main effects of COVID has been the acceleration of digitization processes. In particular, we have seen a push in digitization in the financial industry, including digital onboarding such as the electronic identification of people.

In 2020 PSP companies grew 400% on average. Just to give an idea, what PSP companies were forecast to grow in a total of three years was accomplished in a total of three months in 2020. Interestingly, the growth came from companies that managed to make the change and switched to e-commerce (those that did not go bankrupt). The companies that switched to online channels required the services of PSPs that facilitated online sales.

In alternative financing, the lending companies have increased the volume of credit available to individuals and small and medium-sized companies. Crowdfunding companies have also increased financing.

There are several pro-fintech legal initiatives that have represented opportunities for new Fintech or new products for existing Fintech.

Opportunities

There are several opportunities in Chile in the Fintech sector. As a general comment, it is worth noting that Chile has been determined to be the best country for doing business in Latin America, according to Forbes. Some key aspects that confirm the above:

1. Chile is an excellent place to experiment: our market size is ideal for prototyping and validating businesses.
2. It is the leader in Latin America in digital connectivity (the bidding process for 5G technology has already started).
3. Our public policies strongly support entrepreneurship (CORFO, for example - a Chilean government organization - which has multiple funding options).
4. Significant international free trade agreements (Mercosur in the region, free trade with the US, China and the European Union).
5. Soft Landing in Latin America: open to receive foreigners.

Generally, there are no limitations to innovation or the emergence of new financial services in Chile. Therefore, companies can do everything except certain activities that require special authorization. Therefore, approximately 87% of Fintech companies in Chile are not registered as financial institutions and only 17% are regulated or supervised by the CMF or the Financial Analysis Unit.

At the institutional level, despite the changes that will come as a result of a new constitution, Chile has solid institutions (including strong financial institutions such as the Central Bank and the CMF), with a clear market-oriented economy.

Fintech companies are characterized by financial inclusion and from that point of view there is an opportunity to reach sectors that traditional banking has not yet reached.

We see important opportunities in the alternative financing sector, both crowdfunding and lending. As a reference, in Chile there are approximately 1 million companies and 1 million microentrepreneurs and traditional banking only provides approximately 30,000 - 50,000 of them with financial services. In that order of things, in the US more than 50% of credits are financed with banking institutions, while in Latin America 95% of the credits are delivered by banks: this suggests that private debt will increase and cover an important sector which is currently neglected.

Challenges

The lack of regulation acts as an inhibitor, generating uncertainty about the future. As long as there is no Fintech law, companies must attract investors who do not fully trust this type of service. In this sense, there is consensus in the industry regarding the need for regulation, which must be proportional. A new comprehensive regulatory framework would instil greater confidence in the sector, reduce entry barriers, and promote the modernisation of the industry.

Another important challenge is to incentivize the traditional industry to work with Fintech companies to improve their products and services (for example, the electronic signature).

There is also a lack of confidence towards many of the Fintech companies and their business models (which affects the possibility of alliances with financial industries, financing and attracting the right talent). This lack of confidence, unfortunately, is compounded by the lack of legislation.

Traditionally it has been said that we underdevelop the industry at the level of venture capital. Fortunately, this has changed in recent years and a lot of progress has been made with many internationally successful companies such as Fintual, Xepelin, Cumplo and Fintoc, just to give a couple of examples in the fintech sector.

In the payments sector, the main challenge is that we have a highly concentrated industry with only one major merchant acquirer, as noted above. However, this will change with the transition to a 4-party model and the arrival of international acquirers as already announced.

Finally, an interesting challenge will be creating better tax incentives for companies to invest in Fintech through corporate venture capital models (for example, tax benefits for angel investors in early investment stages).

From a legal perspective in 2021 we should see a new legal framework with the enactment of the announced Fintech Law and a new Data Protection Law (an important element to advance open banking), which will positively impact the industry for the reasons already mentioned.

From a transactional point of view, we will see more Chilean Fintech companies go international hand in hand with international acceleration programs such as Y Combinator. Along with that, we see increasingly larger M&A deals in which big players (from commercial banks to private equity funds) will acquire local Fintech companies.