Mexico Charts a Revolutionary Course for Fintech
Gavin O’Toole, the author of Politics Latin America and other five books about Latin America, gives his opinion on the fintech landscape in the region.
Mexico knows a thing or two about revolutions.
The tumultuous insurgency of 1910–17 shaped and defined Mexican society for the next century – but also unleashed a technological revolution in a country hungry for modernity.
That yearning is captured well by one of Diego Rivera’s most celebrated murals, Man, Controller of the Universe, finished in 1934.
At the heart of this epic image, a worker operates a vast, complex machine to establish order between the competing ideologies then dominating the period.
So it should come as no surprise that Mexico is at the beating heart of the fintech revolution now sweeping across Latin America.
A year ago this month, Mexico’s congress passed Latin America’s first law to regulate financial technology.
This aims to provide greater legal certainty to the fintech sector by regulating platforms and establishing a framework to ensure fair competition between start-ups and existing financial institutions.
It demonstrates how governments are catching up with a rapidly developing sector mindful – like Rivera – that technology can promise huge social benefits.
There is no doubt that a fintech revolution is sweeping across Latin America.
In their latest report on the sector, the Inter-American Development Bank (IDB) and Finnovista – an organization that works to strengthen fintech ecosystems – identify a 66% increase in the number of fintech startups in Latin America between 2017–18.
There are now 1,166 financial technology enterprises in the region and activity has expanded to 18 countries led by Brazil (380 startups), Mexico (273), Colombia (148), Argentina (116) and Chile (84) – a third of which now operate beyond the borders of their home country.
Nearly a quarter of those startups are providing payments and remittances which, when combined with lending and enterprise financial management firms, together comprise 67% of all fintech providers in the region.
It’s a far cry from just a few years ago, when fintech was largely absent from policy debates.
The absence of an accepted measure to gauge financial innovation in Latin America galvanised the IDB to act – resulting in the first ever report on this sector in 2017.
Why is fintech on the march?
The IDB points to three drivers of fintech growth: the massive penetration of mobile devices in the region – 67% by 2017 – the limited services offered by traditional banks, and the millions of people excluded from the financial system, mainly because of poverty.
According to the World Bank, 45% of Latin American adults are still excluded from formal financial services because they cannot open a bank account, a gap in the market that fintech startups are rushing to fill.
It would seem, then, that just as happened after Mexico’s 1910 Revolution, the effort to right a social wrong is marching hand in hand with technological change.
Evidence from across the world suggests that public saving and economic welfare are closely related to fintech activities.
Moreover, Latin America’s youthful population is eager to launch small and medium enterprises (SMEs) but is being ignored by old-fashioned banks.
These digital savvy young people see fintech as the obvious solution – hence the significant popularity of crowdfunding in the region.
The IDB also notes that venture capital sees an opportunity: in the second half of 2017 Latin American fintech firms raised a record US$430 million in risk capital.
Investment is flooding in from angel investors, accelerators and investment funds, both from Latin America itself but also the United States and Europe – more than 60% of fintech startups now benefit from external finance.
The role of public policy
But the real key to long-term growth will be public policies and regulations that promote financial inclusion and boost the trust of consumers in digital services.
Fintech entrepreneurs know it: according to the IDB, 35% of companies surveyed in this sector say specific regulations are needed for it to flourish.
In response, rapid progress is being made as regulators and the industry engage in intensive dialogue to boost growth and confidence.
That is why, just as in 1910, Mexico is blazing a revolutionary trail.
Its fintech law focuses on four main areas – crowdfunding and electronic payments, cryptocurrencies, the software protocols that enable startups to prosper (APIs), and regulatory “sandboxes” for nurturing innovation.
This legislation is being seen as a regional model for its emphasis on “proportionality” – an unassuming but critically important regulatory principle to promote a form of market supervision that is “proportional” to the characteristics of the entities being regulated.
This means Mexico’s regulation aims to take into account the radically different business models, sizes and risk profiles of fintech startups so as not to stifle them at birth.
Where Mexico dares to lead, others are following.
Governments in Brazil, Colombia, Argentina, Chile, Paraguay, and Peru have all begun to introduce or debate regulations in areas such as crowdfunding.
In Brazil, crowdfunding rules have been in place since 2017, peer-to-peer (P2P) lenders can act independently through electronic platforms, and regulatory sandbox rules have been agreed.
Colombian authorities authorise entities to conduct crowdfunding, have established a new category of electronic payment companies, and encourage the use of technology in the retail securities market.
Last year the Colombian regulator established a fintech space called Innovasfc to promote innovation in the financial services industry.
This flurry of regulation across Latin America is in large part the result of tireless efforts by trade associations such as Colombia Fintech that have sprouted up in almost every country.
In Chile, for example, fintech associations lobbied hard for a specific regulatory framework – prompting authorities to follow Mexico’s lead.
But the pressure for change is also being driven by the clear social benefits promised by the fintech revolution.
Policymakers across Latin America have realised that alternative financial platforms can help to resolve age-old barriers to financial access and boost economic development.
It’s a revolution that would have inspired Diego Rivera to paint a mural.
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