Fintech in Mexico

1. Fintech in Latin America: overview of local markets 

30% of the Mexican banking market could belong to Fintech companies within the next ten years; but what is the reason for this trend? The current success of the Fintech sector is based on its innovative business models, its versatility and its potential to be the problem solver for markets that have been neglected by the traditional financial system. Fintech initiatives have come to increase competition in the financial sector, intended to result in better offers for users of financial services with the use of the advantages offered by artificial intelligence, data analysis and technology, to create more personalized and accessible services that respond to people’s specific needs without requiring the physical presence of any of the parties, which has also had a positive impact on reducing costs and time.

Mexico is the country with the most Fintech start-ups in Latin America. This statement implies a challenge for the authorities responsible for regulating the financial sector, since the Fintech sector seeks the development of specialized regulation that does not stop innovation, but at the same time provides legal certainty and confidence.

As a consequence of this accelerated growth, Mexico has strived to be at the forefront of legislation and aimed at promoting financial inclusion, innovation, customer protection, market integrity and competition to traditional financial institutions, issuing: the Law to Regulate Financial Technology Institutions (the “Fintech Law”) and secondary regulation including: the General Provisions applicable to Financial Technology Institutions (the “Provisions”), the General Provisions referred to in Article 58 of the Law to Regulate Financial Technology Institutions, Circulars 12/2018, 4/2019, 5/2019 and 6/2019 issued by the Central Bank of Mexico (“Banxico”), and the General Provisions applicable to Electronic Payment Fund Institutions.

The Fintech Law regulates two types of FTI that could be authorized by the National Banking and Securities Commission (“CNBV”):  

  1. crowdfunding platforms (“Crowdfunding”), and
  2. electronic money institutions (“Wallets”).
Crowdfunding

They allow people from the general public to connect with each other, and grant funding in a regular and professional manner, in terms of any of the operations provided for in article 16 of the Fintech Law, through the electronic and digital media platform established as Crowdfunding.

Wallets         

They provide services to the general public in a regular and professional manner, consisting of the issuance, administration, redemption and transmission of electronic money, in accordance with article 22 of the Fintech Law, and through an electronic or digital media platform enabled as Wallets.

The procedure to incorporate an FTI is as follows:

  • Step 1.  Application for authorization before the CNBV.

The application to request authorization to incorporate an FTI must include, among other things, the following: (i) the powers of attorney of the individuals submitting the application; (ii) the draft or amendment to the by-laws; (iii) the business plan for the operation of the FTI; (iv) the account policies to separate customer bank accounts; (v) the applicable procedures for customer’s identification; (vi) the applicable policies for the resolution of conflicts of interest; (vii) the policies to prevent fraud, laundering and financing of terrorism, and (viii) agreements or contracts entered into with another FTI or technology service providers that are required for the execution of key business procedures, database administration and technological infrastructure for the fulfilment of its activities, among others.

Likewise, the Provisions require additional information to be submitted with the application, such as: (i) proof of having sufficient financial resources for the first three years of operation; (ii) the intended corporate name and trademark; (iii) drafts of the operations, internal control and risk management manuals, and (iv) the organization and internal control plan for the FTI.

  • Step 2. Approval of the Interinstitutional Committee.

To obtain authorization from the CNBV, the prior approval of the Interinstitutional Committee will be required. The Interinstitutional Committee is made up of six proprietary members, as follows: two representatives of the Ministry of Finance and Public Credit (“SHCP”); two representatives from Banxico and two representatives from the CNBV. The favourable vote of at least one representative of each of these financial authorities is required to obtain authorization.

  • Step 3. Resolution of the CNBV.

The CNBV has a period of 180 calendar days to decide on the authorization that starts the business day after the application. Such period may be extended by request to the authority, but in no case will it exceed half the period originally contemplated.

The authorization granted by the authority must specify the type of FTI that is authorized and the operations that it may perform. A new authorization must be requested in the event that the FTI subsequently intends to perform additional or other operations.

The authorization of the CNBV will be published in the Official Federal Gazette. Given that the Fintech Law does not contemplate the  absence of an answer as an affirmative answer, if the period granted to the authority to issue the resolution expires, the applicant will understand that the authorization was not granted.

  • Step 4. Start of operations.

To start operations, applicants must demonstrate to the authority compliance with the following matters at least 30 business days from the date scheduled for the start of operations: (i) the due incorporation of the FTI and its registration with the Public Registry of Commerce; (ii) that the minimum share capital is subscribed and paid; (iii) that the directors and executives comply with the legal requirements established in the Fintech Law, and those issued by the CNBV; (iv) that the technological infrastructure to operate the FTI has been put in place; (v) the internal controls necessary to perform its activities and provide the intended services, and (vi) the policies, procedures, manuals and all the documentation required by the Fintech Law and its regulations. The authorization to start operations may not be granted if the applicants do not meet the aforementioned requirements.

3. Effects of COVID-19

Mexico has a comprehensive fintech framework for continual market growth in the fintech sector. With the pandemic, we believe this framework is even more important because it will encourage people to turn to fintech for sustainable solutions. People are discovering that fintechs offer them new technologies and solutions to make payment processes faster, easier, and more secure.

Mexico’s economy will struggle with the long-term effects of the pandemic; however, as a general conclusion, we believe that Mexico has the advantage of being very familiar and very well prepared to face the effects of Covid-19, and most importantly to drive the growth of the fintech sector. We also believe that Mexico will continue with its commitment to help and promote fintech and take advantage of the fintech industry for its economic recovery.

4. Opportunities and challenges of applicable regulations

The opportunities and challenges with respect to the Fintech Law will be to create secondary regulation to enable operations with regulatory sandbox and cryptocurrencies. The Regulatory Sandbox is defined by the Fintech Law as a model to provide financial services using technology different from that existing in the market at the time the authorization is granted. The authorization may be requested by any company incorporated under Mexican commercial law, but different from an FTI, financial entity or any other entity supervised by Banxico or any other regulatory authority in Mexico. As an exception, financial entities that are subject to the supervision of the Mexican regulatory authorities may request authorization to perform operations or activities through Regulatory Sandboxes under certain restrictions.

The Fintech Law regulates which financial entities may operate with virtual assets and considers virtual assets as units of account, electronically recorded and used among the public as a payment method for legal transactions, and whose transfer may only be implemented through electronic means. Considering that Banxico has the monopoly of issuing currency, placing coins in circulation and stopping them, it has maintained an important “distance” between virtual assets and the Mexican financial system, by restricting the use of virtual assets for the internal operation of FTIs. Virtual assets are not issued by Banxico, but rather arise from innovation and algorithms designed under the FTI platforms. Operation with sandbox and cryptocurrencies will be the opportunities and challenges of the current Mexican regulation.

5. What's next?

Fintech companies have come to increase competition in the financial sector and people are discovering that fintech offers new technologies and solutions to make payment processes faster, easier and more secure. Fintech also creates more personalized and accessible services that respond to people’s specific needs without requiring the physical presence of any of the parties, which has also had a positive impact on reducing costs and time.

The Fintech sector seeks the development of specialized regulation that does not stop innovation, but at the same time provides legal certainty and confidence. Several authorized companies will come into operation in the coming years and it will be very interesting to see the interaction in the market of these companies with traditional banks. We believe this is an opportunity for financial inclusion and to create market competition for consumers of financial services.

Portrait ofRaúl Zepeda
Raúl Zepeda
Senior Partner
Mexico City