What is the Fintech Law? And how is it Transforming Mexico?

Author: Carlos Valderrama (more information here)

The Dawn of a New Financial Era

As Mexico's financial horizon began to be tinged with the hues of digital innovation in the FinTech Sector, it became clear that a transformation of the financial institution was underway. With the invention and adoption of emerging technologies, the need for a new regulatory narrative emerged. Here is born the ethos of the Fintech Law, an ambitious legislative response to the rapidly evolving landscape in financial services, marking the beginning of an era of unprecedented financial services regulation modernization and accessibility in Mexico.

The irruption of the FinTech Company in the Mexican market was not a mere whim of fate; it was the inevitable consequence of a financial industry striving for fresh dynamics and accelerated diversifications. This law can be seen as the catalyst that has allowed Fintech Companies to be more than just a set of innovative startups offering novel services. They have become democratizing change agents, capable of providing financial services to those previously marginalized from the traditional regulated banks.

With this legislation, Mexico was not only ahead of its contemporaries but also set a standard for the region, enabling Fintech Firms to experiment and grow under financial regulation and the watchful eye of regulators. In essence, the disruptive impact of the Fintech Law transcends the regulatory and permeates the very structure of the financial market. This normative body is, therefore, more than a set of rules; it is a manifesto that declares Mexico's willingness to reinvent its financial infrastructure, placing the country on the global map as a precursor of inclusive and responsible financial innovation.

The Heart of the Law: What is the Purpose of the Fintech Law?

¿What is the Fintech Law? The Law to Regulate Financial Technology Institutions, often simplified as the Fintech Law, is a cutting-edge regulatory body in Mexico, specifically conceived to address the burgeoning space of financial technology companies. It not only recognizes and aligns Mexico with the global trend towards financial digitalization but also stands out as a legal framework that harmonizes consumer protection with the promotion of innovation.

The Fintech Law is structured around several fundamental pillars that collaborate with each other to offer a regulated and fertile ecosystem for FinTech Companies:

1. Instituciones de Tecnología Financiera (“ITF”) | Financial Technology Institutions (“FTIs”): These are companies that require authorization from Mexican financial authorities to offer financial services and financial inclusion through digital platforms, from a computer or your cellphone, without having to go to a physical branch. They are divided into two:  a. Instituciones de Fondos de Pago Electrónico (“IFPEs”) | Electronic Payment Funds Institutions (“EPFIs”): A Financial Entity that manages operations in electronic media to make financial transactions or electronic payments. Visualize them as digital or virtual wallets where you can store your money electronically instead of physically in cash or in a bank account. Imagine it's like having a wallet on your cellphone or computer, which you can use to pay for things online or send money to other people without needing to use bills or physical cards (more information here). b. Instituciones de Financiamiento Colectivo (“IFC”) | Crowdfunding Institutions (“CFIs”): These are platforms that connect those who need financing or crowdfunding with those who wish to invest or lend their money. Think of it as a place where many small investors can provide public credit support to large entrepreneurs or applicants and interesting projects, all from a computer or cellphone. For example, if someone has an idea to open a restaurant but doesn’t have enough money, they can publish their project on one of these platforms, and many people can contribute small amounts of money to help finance it. In return, depending on the type of financing, they may receive interest back on the money lent, shares of the project, or a portion of the company's profits in the future (more information here).
   

2. Modelos Novedosos | Regulatory Sandbox: These are companies with new and original methods or systems to offer financial products and services, thanks to the application of advanced technology thus revolutionizing the financial sector. Imagine them as freshly invented recipes in the financial cooking world, where technological ingredients like apps, algorithms, and online platforms are mixed, to create faster, safer, and more accessible ways of handling money, making payments, investing, or financing projects. These models have to be sufficiently different from what already exists and must follow special compliance rules to ensure they are safe, low-risk, and work well before offering them to everyone (more information here).
   

3. Activos Virtuales | Virtual Assets or Digital Assets: These are an electronic version of money or digital asset, but they are not issued by the government like pesos or dollars. They are assets that exist only in digital form and can be used on the internet to buy things. The special thing is that these assets can be moved from one person to another through the network, without the need for banks or cash (more information here).
   

4. Finanzas Abiertas | Open Finance: This is about giving each person power over their own financial data. Imagine that all your data about what you earn, spend, save, and owe is stored in a little box. With Open Finance, you have the key to that box and can decide if and with whom to share it. For example, you could allow different apps or websites to access those data to offer you better financial services. This could help you find better credit offers, insurance, or personalized recommendations on how to use your money most wisely. Think of it as a way to securely connect different financial companies with your permission, so you can manage your money more easily (more information here).

The scope of the Fintech Law encompasses not only the regulatory aspect but also stimulates competition and collaboration. Financial institutions and non-financial companies have the opportunity to integrate and develop products that meet the needs and expectations of a population increasingly inclined towards the adoption of digital solutions in their financial services.

The heart of the Fintech Law beats to the rhythm of Mexico's digital transformation, being a bulwark that supports both consumers and innovators by providing legal certainty. Its presence signals the country's commitment to progress that is not only technological but also inclusive, projecting a financially more accessible future for all Mexicans.

FinTech in Mexico, a Regional Leadership

In the heart of Latin America, Mexico stands out as a leader in Fintech regulation, a position forged through its Law to Regulate Financial Technology Institutions and its FinTech sector. Recognized for its sophisticated legal framework, Mexico has not only established a conducive environment for financial innovation but has also acted as a catalyst for the adoption of similar regulatory policies throughout the region.

Mexico's stance on Fintech regulation is considered by many to be pioneering. The integration of Financial Technology Institutions, Virtual Assets, Regulatory Sandbox, and Open Finance under a single regulatory framework is testament to regulation that encompasses various facets of the Fintech universe.

At the Latin American level, other jurisdictions have taken note. Inspired by Mexico's Fintech Law, nations such as Chile and Colombia have developed their own regulatory frameworks aimed at stimulating innovation, protecting consumers, and ensuring financial stability.

The impact of this legislation is measured not only in terms of regulation but also by its positive influence on the business and commercial development of Mexico. Companies like Bitso with Nvio, the first Financial Technology Institution authorized in Mexico, are examples of how Fintechs can reach unicorn status under the watch of effective legislation. These success stories not only increase confidence in the Mexican market but also attract the attention of investors who see Mexico as fertile ground for investment in technological innovation.

Testimonials from entrepreneurs highlight the efficiency, receptiveness, and speed with which the population adopts Fintech products and services. Leading digital service platforms have reported a consistent increase in performance, revenue, and user base, which is indicative of the healthy environment that the Fintech Law has helped foster (more information here).

Despite global challenges, the Mexican Fintech ecosystem stands strong, maintaining expectations of significant growth. This optimism is grounded in the generation of strategic alliances (more information here), continuous innovation in sales strategies, and constant improvement in the product offering, demonstrating that Mexico not only adopts digital transformation but also leads with its implementation and legal framework.

Mexico positions itself as a benchmark for Fintech regulation in Latin America. The Fintech Law, with its progressive approach, has been crucial in establishing a conducive environment that encourages emerging technological titans, while continuing to inspire regulatory developments across the region.

The Future of FinTech in Mexico

Exploring the horizon that stretches beyond the current Fintech Law, we find ourselves in a future filled with bold opportunities and vibrant challenges for investors and entrepreneurs alike. This promising scenario is much more than a mere consequence of regulation; it is the fruit of a business ecosystem that has matured and is ready to capitalize on the promises of digitalization and FinTech innovation.

For investors, Mexico represents a canvas of unlimited possibilities. With the support of robust legislation and significant advancement of users in the Mexican Fintech market, the potential for return on investment is notable (more information here).

Entrepreneurs, on their part, face FinTech clients and a FinTech ecosystem where collaboration and competition will coexist more closely than ever before. FinTech Business, the era of Fintech 2.0 with new financial technologies and embedded finance is upon us, and startups will have the opportunity to integrate with established financial and non-financial entities, creating a richer business fabric and a broader range of services.

Now is the time to act. Advances in the regulatory framework have set the stage where innovation is not only welcome but essential. It is time for stakeholders in the technological and financial ecosystem to step up their efforts and seize the opportunities presented to improve the lives of millions through more inclusive and innovative financial services.

Investors, seize the initiative and actively seek out disruptive projects with the potential to change the face of finance (more information here). Entrepreneurs, continue breaking barriers with original solutions that not only bring profitability but also tangible social benefits (more information here). To regulators, we urge you to keep the dialogue open with market players, adapting and refining the legal framework to anticipate and encourage the next wave of innovation.

Mexico's Fintech ecosystem and its Fintech companies are at a decisive point. With a landscape full of promises and a rich confluence of talent, technology, and capital, the future is seasoned with the potential to consolidate Mexico's leadership position on the global financial scene. The call is clear: maintain momentum, embrace change, invest in innovation. Let's make the promises of today the realities of tomorrow.

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Q&A 1. What is the FinTech Law in Mexico?

Officially known as the Law to Regulate Financial Technology Institutions, it was published in the Official Gazette of the Federation on March 9, 2018, with the purpose of regulating financial activities carried out through innovative technologies.

2. How does the FinTech Law impact financial inclusion in Mexico?

The FinTech Law is based on the principle of financial inclusion, which can be defined as the access to and use of formal financial services with the goal of providing opportunities for everyone to fully participate in the economic system.

Therefore, the Law has a significant impact on financial inclusion in Mexico by providing a regulatory framework that has the potential to foster the development of innovative financial services, thereby increasing financial inclusion and reducing inequality.

3. What are the key components of the FinTech law?

The key components of the FinTech Law focus on regulating various figures within the technological financial ecosystem, with the aim of fostering innovation, protecting users, and maintaining a legal competitive environment, and they are:

(i) establishing the regulation of Financial Technology Institutions, incorporating the figures of Electronic Fund Transfer Institutions, known as IFPEs or Wallets, as well as Collective Financing Institutions, known as IFCs or Crowdfunding;

(ii) establishing the possibility of creating novel models or regulatory sandboxes;

(iii) generating regulation for the use of virtual assets in financial entities; and,

(iv) establishing the basis for Open Finance.

4. How does the FinTech Law foster innovation in the financial sector?

By providing clear rules and a suitable environment for the development of innovative FinTech products and services, mainly with the potential development of regulatory sandboxes, which are safe spaces to test technological innovations and different business models in a controlled environment.

5. What are the challenges and opportunities presented by the FinTech Law?

The FinTech Law presents opportunities such as increased financial inclusion, support for innovation, and the potential for Mexico to become the FinTech hub of Latin America. However, challenges include ensuring a balance between innovation and regulatory compliance with adequate consumer protection, as well as the appropriate evolution of the regulatory framework in the context of continuous technological advancement.

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