It is not rare that, once the creation of companies starts booming in some industry, a law to regulate and control its activities emerges. The case of fintech is no exception: These companies are taking the lead of the race towards the digital economy, mixing finances with technology, and bringing financial products to all people. So much, that the history of fintech has no match in the world: There is no market that has grown as fast as this in the technological industry records, reaching an investment of more than USD 110 billion globally only in 2018. That same year, the industry had 112.000 created fintech companies.
Although some ensure that regulation can be a booster for certain industries, others warn that care must be put when laws are very restrictive and do not allow growth. In regulation worldwide, the scope is broad, and there are approximately 12 nations that have legislation in these areas. Countries such as China and the United Kingdom have chosen to create new laws that regulate the use of these technologies in their financial systems. In the United States, instead, they have decided to act reactively, that is to say, modifying rules that already exist.
As in a school grade of teenagers, there are students of all heights in Latin America. Some, like Mexico and Brazil, are more advanced than others. In fact, these two countries are the ones that, almost competing, enacted fintech regulations at the same time. Nonetheless, experts point out that Mexico is the only country that has a comprehensive and non-biased regulation.
In March 2018, Brazilian fintech regulation introduced two new types of financial institutions through electronic platforms: direct credit companies and peer loan companies. In April 2019, regulation included the implementation of an open financial system, which is known as “open banking”. That regulated environment has proven to be a boost for investment: According to KPMG, Brazil registered a record investment in the industry of USD $555 million in 2018.
Mexico was also one of the most precocious ones: Since March 2018 they have a Fintech Comprehensive Law, although it only entered into force in September of that same year. This, although several fintech companies already existed in the country, which had until September 2019 to request their official authorization under the new law. With the pandemic, the National Banking and Securities Commission (CNBV) suspended authorization processes and left 80 fintechs on the waitlist. But, in August 2020, the process was resumed, this time in a 100% digital way. The law itself includes the regulation of four figures: Crowdfunding, cryptocurrencies, APIs and regulation sandbox.
Another of the most advanced, although not yet having comprehensive legislation, is Colombia. Its regulation is in charge of the Ministry of Finance, through the Financial Regulation Unit (URF) and also by the Financial Superintendence. Up to now, they have taken legislative steps to give entry to electronic deposits, to allow financial crowdfunding under certain rules, and to allow the arrival of the robo-advisor to the consumer. Also, the Financial Superintendence has created a regulatory sandbox. What does this mean? A sandbox is an experimental space, which allows certain companies to temporarily operate in a legal manner, with the idea that they test their solutions in an environment approved by the controllers.
In Ecuador, although a positive view from the Banking Superintendence towards fintechs has been noted, there is not yet a law that is precisely focused on these companies. In 2017, the Monetary and Financial Policy and Regulation Board issued the general rule that regulates the definition, qualification and actions of auxiliary services of the financial sectors. That gave some fintech companies an opportunity to regularize and obtain authorization in an official way. Since there is no specific regulation, fintechs must adhere to the laws applicable to all companies of a financial nature. There are two sectors: The private financial sector (banks, financial services and auxiliary services entities), and the popular and solidarity financial sector (savings and credit cooperatives, communal banks, savings and loans associations and centralized funds). Unlike their neighbors, they do not have a regulatory sandbox yet. It is this lack of specific laws which precisely slows fintech's processes, which have been forced to adhere to financial laws that often do not apply to them.
Both Chile and Peru have demonstrated their intention to advance in fintech legislations. That is why both countries have a high activity in the industry. In Chile, the last measurement of Finnovista's Fintech Radar of Chile, had 112 fintech companies in mid-2019. In Peru, the growth these types of companies have had, exceeds almost all of its neighbors, registering a progress rate of 256% between 2017 and 2018.
In May 2019, the Peruvian Government sent to the Congress a Crowdfunding bill to offer greater security to investors and consumer protection. The bill states that collective financing platforms can only be managed by companies based in Peru, and authorized by the SMV securities regulator. For now, it is that fintech side the one that has regulation in the Peruvian nation.
A little lower in the continent, Chile has been discussing the topic of regulating fintech companies. In April of this year, the Government announced that the Fintech Bill would be admitted to Congress in mid-2020, in a process that would be led by the Ministry of Finance. However, with the impact of the pandemic, little has happened in that regard, and the Government has pointed out that the matter is stalled. “They told us that the matter had been put on hold, since it is not part of the list of most urgent priorities,” says Ángel Sierra, executive director of the Fintech Companies Association of Chile (FinteChile).
For many, fintech legislation can be beneficial to governments. The truth is that, according to international experience, it has been shown that good regulation can be a win-win for all. A Fintech Law which is well-developed in each country: - Guarantees and promotes good functioning of the industry - Protects users of these services - Fosters investment, since for investors it is safer to risk funds in a country where there is a strong regulatory framework.
If something has been made clear by the pandemic, is an urgent need to move towards a digital economy. Companies such as dLocal, Rappi and Kushki are breaking those barriers, where regulation plays an important role: It can make them take off or brake them hard.
The case of Mexico is a positive example: Two years after the creation of its Fintech Law, the country has registered a record investment of almost USD 1.3 billion in 2020, that is, 16% of regional investment. In addition, it must not be forgotten that an industry that grows at this pace is a strong generator of qualified employment and labor dynamism, which something that, with the ravages of the pandemic, and more than 41 million unemployed people in the region, is more relevant than ever.
As Kushki, we want to push the evolution of the fintech industry. That is why we hope that regulation in Latin America will accompany the development of all companies, which, as we do, seek to break paradigms, bring financial services, and ease the lives of all people who live in one of the least banked regions up to this day.
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