Regulating fintechs

Do financial technology companies in Latin America require special regulation or supervision?

The number of fintech companies in Latin America and the Caribbean has significantly increased over the last three years, reaching 2,482 platforms at the end of 2021: a 112% increase from 2018, according to the Inter-American Development Bank (“IADB”). Brazil leads the country ranking for fintechs in the region, hosting 31% of the region’s platforms. Mexico is second with 21%; followed by Colombia with 11%.

In a region in which more than one of two persons is considered to have sub-optimal access to financial services, fintech platforms are a key tool to furthering the financial system’s integration. Nevertheless, regulatory frameworks are slow in adapting to the new financial practices derived from Latin America’s digital banking boom.

Mexico was the first country in the region to pass a fintech regulation law, in 2018. The government promoted the bill to encourage innovative financial platforms, integrating them with existing financial services. The current regulatory framework in Mexico, praised by the business community, allows the National Banking and Securities Commission (“CBNV”) and the Bank of Mexico to monitor third-party financial service providers. E-money institutions are also given a risk level classification and have limitation on transaction amounts.

A legal strategy and development executive at a global bank in Mexico commented, “There is a problem with financial inclusion in Mexico and fintechs are one way to tackle it, but they are not the only way. Fintech is gaining more traction, especially transactional APIs, it will be very important for the development of the financial system. It has created a bit of a regulatory challenge for incumbent banks though, because fintechs are given much more room to offer services than we are.”

“There is a problem with financial inclusion in Mexico and fintechs are one way to tackle it, but they are not the only way.”

Legal strategy and development executive, Mexico

The central bank of Brazil recently imposed new regulations, which will enter into force in January 2023, and sets stricter regulations based on the size and complexity of the institution, taking into consideration capital calculations and assets. Payment fintechs in Brazil will also need licences from specific regulators depending on the financial volumes they deal with and the payment scheme they operate in.

According to latest figures, there are more than 322 fintech companies in Colombia. Some well-known firms stand-out, including ADDI, Avista, Sempli, Mercado Pago, Panacash, Creditop, AM Capital, and others. The Financial Superintendence of Colombia is the highest inspection, surveillance, and control authority in the country. The legislation in Colombia seeks to integrate new financial players while guaranteeing their compliance with safety and risk management standards.

The number of Colombian fintechs is widely expected to continue growing, a local venture capital investor explained, “Accelerated by the COVID-19 pandemic, financial technology companies have been growing rapidly in Colombia, offering high returns with low-moderate risks. There is a great variety of investment opportunities including payments and remittances, loans, business finance management, credit checks, identity and fraud, crowdfunding and insurance. All market niches that traditional banking has historically not covered.”

“Accelerated by the COVID-19 pandemic, financial technology companies have been growing rapidly in Colombia, offering high returns with low-moderate risks.”

Venture capital investor, Colombia

Specific regulations can pose challenges for users which struggle to navigate through the requirements of each platform. This can lead to unmet user expectations, or, in the case of disputes, regulators may struggle to resolve issues between users in their platforms which, ultimately, can result in long and complex litigation processes.

In response, a fintech executive in Peru was quick to point our the various regulations that his firm was subject to, “Fintechs are already regulated: their contracts are subject to Peruvian law, a judge can resolve disputes about them, Indecopi can resolve customer complaints and impose fines, the Personal Data Authority supervises that they respect their customers’ personal data, they pay taxes to Sunat, some fintech business models are obliged to have a compliance officer and report to the UIF. The question is whether fintechs require special regulation (and supervision). I think the answer is case by case and I am inclined to think that only in very specific cases will the answer be yes.”

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