International Finance
FintechMagazineNovember- December 2019 Issue

Mexican fintechs are daring to take risks which the banks didn’t

Experts predict fintech volume in Mexico to reach $68 billion by 2022

As of May 2019, there were 380 fintech startups in Mexico and more than 80 percent of them were less than five years old. In recent times, Mexico has evolved as one of the strongest fintech ecosystems not only in Latin America, but across the world. Mexico’s recent policy reforms and market potential heavily contributed to the establishment of a vibrant fintech ecosystem in the country. The sector is only expected to substantially grow in future. Experts predict fintech volumes to reach $68 billion by 2022.

Finnovista predicted that Mexican fintech startups have the potential of taking over 30 percent of Mexico’s banking market in the next 10 years and this is where fintech startups in Mexico can make a difference to the common man’s life considering the archaic laws under which the banking system in the country operates.  Yet another survey revealed that the business models of a majority of the fintech startups in Mexico’s are designed to tap into the need for financial services of those sections of the society that are not part of Mexico’s formal financial system.

In short, these Mexican fintechs seek to provide affordable financial services to the unbanked or underbanked Mexicans. 20 percent of the Mexican fintechs are focused on payments and remittances while 14 percent are focused on consumer lending.  A minority of the Mexican fintech startups are focused on providing services such as credit scoring and other payments solutions including cross-border trade.

In spite of the potential it possesses, the Mexican fintech system still remains relatively small. According to a report published by Ernst Young, 36 percent of Mexicans have adopted the services provided by fintechs.  The percentage is higher when compared to a global average of 33 percent.

In Mexico, the birth of fintech startups over the past few years. has prompted many traditional financial services providers to actively become interested in getting a foothold in fintech innovation through mergers and acquisitions. BBVA Mexico – Mexico’s largest financial institution with a financial services market share of 20 percent – acquired fintech startup OpenPay in 2016. Similarly, fintech startups also rely on traditional financial institutions or banks for funds or to boost their customer base. The Mexican government has brought about a number of regulatory changes to help fintechs flourish in the country. In fact, Mexico became one of the first countries to bring in a comprehensive fintech law in 2018 to regulate the sector.

Recently, the Comisión Nacional Bancaria y de Valores – the Mexican banking regulator, revealed that 85 new fintech startups have applied for licences under its new fintech law. While over the years, traditional banks have failed to accelerate financial inclusion in Mexico, fintech startups have the potential to help achieve the government’s aim to make Mexico a cashless economy while driving higher financial inclusion.

Mexican fintech startups are on investors’ radars

A research report published by Finnovista revealed that around 63 percent of the fintech startups in Mexico have received external funding. Out of those who have agreed to take part in the research, around 62 percent of them revealed that they were in the market in search of funding. These figures highlight the role of fundraising and venture capital firms when it comes to the Mexican fintech sector.

Also, 69 percent of these startups have received funding from a third party in the market. However, only 4 percent of the total startups surveyed have raised funds of more than $10 million.  While around 18 percent of them have raised around $100,000 to $500,000, interestingly, 44 percent of them have raised investment of less than $100,000. The total investment accumulated by the Mexican fintech startups is estimated to be around $800 million.

The CEO and co-founder of Smart Lending – a Mexico-based financial services company that provides mortgage loans digitally – Bernardo Silva told International Finance that, since Mexico is one of the strongest fintech ecosystems in Latin America, a lot of external investors have their eyes on Mexico. According to him, the fintech sector in Mexico provides tremendous opportunities to investors to participate in fintech projects of various dimensions.

“As for the funding environment in Mexico, it is very competitive, the private equity investors, mainly banks or investment funds, are those who participate in the financing of new or small projects in the financial sector. In our experience, we have recently been recognised by DILA Capital, Jaguar Ventures, and other international investor angels, including founders of similar companies in the United States, securing US $80 million in capital and debt to operate and grant mortgage loans,” said Silva.

A spokesperson for Albo,  a leading Mexican challenger bank, corroborated the view that Mexican fintechs were attractive targets for investors. “A lot of funds are eager to invest in the country and fintech firms. That’s why we have seen a lot of huge investment rounds. Albo, for example, managed to raise 7.4 million dollars in a Series A investment round in January this year, the spokesperson told International Finance.

Challenges with old regulations in Mexico

Prior to the introduction of Mexico’s fintech law in 2018, the sector in Mexico was highly unregulated. Some of the conventional financial activities carried out by fintechs now such as crowdfunding, financial consultation, loans to SMEs and individuals, payments and remittances and foreign currency exchange services were unregulated.

Another problem for the Mexican fintech sector was the lack of supervision from the National Banking and Securities Commission. Neither the consumers nor the investors were provided with any kind of security despite the existence of two consumer protection bodies in the Commission for the Protection and Defence of Users of Financial Services (CONDUSEF) and the Federal Consumer Protection Office (PROFECTO).

To put things into perspective, the legislations were highly inadequate to monitor the activities carried out in the fintech sector. Even though regulators amended various laws to bring in stability and bring the fintech sector under its blanket, such attempts proved futile. These very challenges faced by the Mexican fintech sector led to the creation of the new fintech law.

What is the impact of the Fintech Law 2018?

The financial technology Institutions law (Fintech Law) was enacted on March 9, 2018 to promote financial inclusiveness in Mexico and to build a regulatory framework aimed at the fintech sector. It also aims to promote the development of financial services, regulate competition, accelerate Mexico’s financial inclusion and also position Mexico as the strongest fintech ecosystem not only in Latin America, but globally. The law also aims to promote innovation and provide testing grounds for new technology; facilitate innovation experimentation; and encourage the sharing of data between different players in the financial sector.

The CNBV, Mexico’s central bank, published certain general provisions in the Federal Official Gazette on September 10, 2018. The provisions made it mandatory for the Mexican fintech startups to follow proper documentation and licencing processes before carrying out any activities related to fintech. The provisions also gave the Mexican central bank and other authorities the ability to supervise and monitor the activities being carried out in the fintech sector.

The fintech law also created the anti-money laundering provision to prevent or detect transactions that could lead to fraud or money laundering. Despite the central bank publishing the general provisions of the fintech law, it is expected to amend or further develop the provisions of the law in the near future.

While speaking about the new fintech regulations in Mexico, co-founder and CEO of Smart Lending, Bernardo Silva told International Finance,“As far as Smart Lending is concerned, the open banking regulation being pushed through by the Mexican government could provide a huge benefit. This regulation will allow us to have equal conditions in terms of obtaining information from potential clients. This will allow us to perform a better risk analysis, to better understand their finances and, therefore, will give us the opportunity to lend to more clients and at lower rates, it will be for the benefit of the entire market.” However, according to him, the legal process of recovering a property in case of defaulting customer is arduous and requires a more balanced approach.

Albo, on the other hand, believes the new regulations are necessary but calls for improvement by better understanding the new technologies and the regulator being faster in adapting to innovation and the new initiatives and services offered by the fintech companies.

Mexican fintechs drive efficiency in financial system

Fintech startups are definitely driving efficiency when it comes to the financial system of Mexico. A Mexican can today send money to another part of the globe just by logging into his mobile phone. Smart Lending, for example, has redesigned the experience of acquiring a mortgage loan focusing on the needs of the consumer, the digitalisation of operations, and the attention to customer service by leveraging a high degree of technological and financial knowledge. “We improve and update mortgage processes and procedures that are currently frustrating, bureaucratic and slow; and that without a doubt should remain in the past,” says Smart Lending’s Silva.

“We are the only automated platform in Mexico that provides a completely online experience and we have the power to adapt the credit products based on customer needs. To mention some technological solutions, we have automatic integrations for the validation of income and credit history and we make appraisals with big databases,” added Silva.

Meanwhile to access Albo’s services, a consumer does not need to walk into the nearest branch, but all he needs to do is download Albo’s app and his bank account will be ready within the next five minutes and free of cost. Such is Albo’s business model that it does not need to charge any additional cost from its clients. While the traditional way of opening a bank account by walking up to the branch and filling up paperwork would require a minimum of 24 hours, the same can be done within five to ten minutes on Albo’s app. Same goes with applying for loans, deposits, withdrawals and transfer of funds.

Where Mexican fintechs outdo banks

Fintech startups in Mexico have been so successful because they tap into those sections of the market which are often overlooked by traditional banks. In Latin America, Mexican fintech startups have caused disruption throughout the lending, payments, trading and crowdfunding sector.

While traditional banks in Mexico have been operating in the country for a very long time, they are still not easily accessible by the unbanked or underbanked Mexicans. The very problem of access is being solved by the fintech startups. The digital products and services offered by fintech startups are easily accessible compared to products of traditional banks.

Traditional banks offer their products with high commission and long operating processes. Fintech startups such as Albo are taking on the traditional banks by providing affordable services that are accessible through a digital device.

Many fintech startups have taken advantage of the low-quality service provided at a high cost when it comes to cross-border transfer of funds. Similarly, fintech startups have also targeted the 69 percent of Mexicans who still do not have access to credit. Many startups are now offering fast and easy international money transfer services and also offering credit products at a lower and competitive rate.

Collaborate or compete with banks?

But are traditional banks willing to willing to collaborate with fintech startups? When International Finance asked the same questions to Smart Lending’s Bernardo Silva, he said that there is a huge possibility of collaboration between with traditional banks in Mexico because fintech startups could gain from these banks’ size and the scale they operate in, the way they raise capital and the cheap capital cost they handle. He revealed that Smart Lending seeks such kinds of collaboration as it would improve its product offerings.

Albo, too believes there is potential for such collaborations as its ultimate goal is to improve client experience. However, Albo did also point out that many traditional banks in Mexico currently do not have the technological infrastructure to form alliances with fintech startups. Similarly, PayU the fintech and electronic payments division of Prosus, also revealed its priority is growth and to improve Mexico’s financial ecosystem. Therefore, it is open to and actively seeking partnership opportunities. PayU is also working closely with banks in Mexico to improve its product offerings

Are digitalising banks a threat to Mexican fintechs?

While the transition of many Mexican traditional banks into the fintech sector provides an opportunity to collaborate and form alliances, it also brings along a degree of threat to the fintech startups. The size and structure of the traditional banks that are operating in the market for years might overshadow the newly formed startups. But according to SmartLending’s Bernardo Silva, the fintech startups have an edge over the traditional banks because of characteristics such as speed, convenience, and transparency.

In this regard, he told International Finance, “It is true that every day more traditional Mexican banks add similar products and services to fintech companies, they don’t want to be left behind in this technological revolution, but it’s also true that fintech’s DNA is made up of innovation, extensive use of technology and a 100 percent customer-oriented approach, which makes it difficult for banks to compete against fintech.”

While PayU, on the other hand, sees the traditional banks’ entry into the fintech sector as a possible sign. PayU believes it represents an understanding across the industry that there is a need to innovate especially in the way the players in the fintech sector deliver banking services, particularly within densely underbanked populations.  However, PayU highlights that the investment from fintech in technology is superior to that of the legacy banks as it underlines its core business approach. PayU even states that the real threat is faced by the traditional banks and not the fintech startups as technological investment is key to survive in the Mexican financial ecosystem.

Regulatory flexibility and dynamism is key for Mexican fintechs

Authorities in Mexico are not oblivious to this fact and the fintech law proves that. Even though it is at its initial stage and various amendments are anticipated, the law aims to provide a regulatory framework and protect the players in the sector. It is highly important that regulators understand the rapid changes taking place and keep themselves up to date with regards to innovation in fintech. The growth of fintech will also depend on the rules and regulations that the regulators will set and the enabling ecosystem they create.

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