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Fintechs booming in Mexico as regulations arrive

Bnamericas Published: Saturday, August 11, 2018
Fintechs booming in Mexico as regulations arrive

On the cusp of finalizing key secondary legislation to the country's groundbreaking law to regulate the fintech industry, Mexico is strengthening its position as one of the main fintech ecosystems in Latin America, with 125 new fintech startups born over the last 12 months.

The growth, reported in Finnovista's latest Fintech Radar México, stems from expansion in key segments: enterprise technologies for financial institutions, trading and capital markets, wealth management and alternative scoring, identity and fraud.

"The financial sector currently finds itself in a deep process of transformation and innovation, a process mainly characterized by the use of new technologies," said the fintech industry research firm in the report. "This wave of disruption, which began in solid and established markets like London or Singapore, has expanded to nearly all the world in the last years and in Latin America it is rapidly growing and transforming the world of finance as we know it."

Finnovista noted that in the past months, Mexico has taken major steps to drive the fintech innovation ecosystem and position itself as one of the potential global fintech hubs.

Only one year ago, in the first version of this analysis, the country became the largest fintech ecosystem in the region with 238 startups. The latest edition shows that the Mexican fintech ecosystem now contains 334 fintech startups, leaving the country just behind Brazil with 377, according to the Fintech Radar Brasil published in June.

The Mexican ecosystem is 2.5 times larger than Colombia, the third fintech ecosystem in the region with 124 startups, more than three times larger than Argentina, and over four times larger than Chile.

The current number of fintechs in Mexico represents an annual growth rate of 40%, while Brazil saw an expansion rate of 48%. The growth in Colombia was 52% and 56% in the case of Argentina, while Chile saw a much slower rate of expansion with 22%.

In comparison with the Brazilian market, Mexico has a better mortality rate, with 12% of startups folding last year compared to 14% in Brazil. Of the 125 new startups in Mexico last year, 96 are still operating.

Finnovista identified the following six main segments in the case of Mexico:

• Payments and remittances, accounting for 23% of the total with 75 startups

• Lending, representing 22% through 74 startups

• Enterprise financial management, 13% of the total with 45 startups

• Personal financial management, accounting for 11% through 36 startups

Crowdfunding, representing 9% with 30 startups

• Enterprise technologies for financial institutions, 7% of the total through 23 startups.

The remaining five emerging segments are all at or below 6% of the total number of identified startups:

• Insurance: 6%

• Wealth management: 3%

• Alternative scoring, identity and fraud: 3%

• Trading & capital markets: 2%

• Digital banking: 1%

Impact of fintech law

The study weighed in Mexico's new legal framework, the Ley Fintech, as a much-needed effort to ensure stable growth, development and acceptance of the sector.

"In 2018, Mexico has become a pioneer after the adoption in March of [Ley Fintech] becoming the first law in the region and a global reference," said Finnovista. Secondary legislation to the law is nearly ready for expected introduction in Mexico's congress in September.

The objective of this new law focuses on offering greater legal certainty through a legislative framework to regulate all the platforms, known as financial technology institutions (ITFs), as well as creating a legal framework that ensures a fair competition landscape between fintech startups and traditional financial and banking institutions.

"The existence of an appropriate and tailored regulation to the Fintech sector is a necessity accepted by the majority of the main players in the country's industry because, as seen in other consolidated ecosystems such as London or Singapore, it adds clarity to the sector and hence drives further growth and consolidation of innovative solutions," said the firm.

Too much regulation?

The new legislation does, however, present certain risks that need to be addressed by the industry.

"We are faced with the risk of having these new regulations, like the fintech law in Mexico, resulting in over-regulated markets that slow down or even hinder greater financial innovation," warned Finnovista, adding that in the case of Mexico, the new law specifies that electronic payment institutions will have to evaluate through independent third-party players the compliance with "security measures regarding information, use of electronic means and the continuous operation that these institutions must observe according to the mentioned provisions."

"This process has a high dependence on blockchain technology, and hence there is a high dependence on foreign companies that offer these technical requirements which still have not been widely adopted in Mexico and the rest of the region," Finnovista added.

"Finally, because we find ourselves at a point in which technological finance has a global presence, it is necessary that new regulations do not limit to a national scenario," said Finnovista, stating that countries in Latin America must take into account the international field, learning from best practices observed in other countries, as well as from the main barriers that ended up being an impediment to further innovation and new business models.

"In this way, the region will be able to achieve a greater integration in international markets, which at the same time will position Latin American countries as destination ecosystems for foreign companies and will open the doors of expansion to startups in the region."

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