Latin America is no stranger to the fintech phenomenon, which is rapidly growing in the region. As has already happened in other countries, this industry must face the new regulatory challenges that technology and innovation raise in the financial arena.
BRAZIL
What is the fintech state of play in the country?
The venture capital and fintech markets are quite active in Brazil. In the first quarter of 2018, three Brazilian startups achieved unicorn status (a valuation above US$1b), two of which hailed from the finance sector: Nubank and PagSeguro (via IPOs).
To boost the sector, the National Monetary Council (Conselho Monetário Nacional, CMN) recently regulated (Resolution No. 4,656, of April 26, 2018) what are known as Direct Credit Companies (Sociedades de Crédito Direto, SCD), financial institutions that provide loans and financing and acquire collection rights, always with own capital, and P2P Loan Companies (Sociedades de Empréstimo entre Pessoas, SEP), financial institutions that broker loans and financing between peers. Under the new legislation, SCDs and SEPs must act exclusively via electronic platforms, be incorporated as corporations, and have minimum paid-in capital and net worth of BRL 1 million at all times. SCDs and SEPs may also provide other services, such as credit analysis, loan collection and electronic money issue.
What’s ahead?
The new legislation creates a regulatory sandbox supporting the development of fintechs. Given the tightly concentrated nature of the Brazilian bank market and the resulting high interest rates charged, this would give Brazilian consumers better access to credit and on better terms. Accordingly, licensed direct credit and P2P lending fintechs can now act independently, without having to partner with and be backed by a bank (which was the market practice up to now). However, since the minimum capital and net worth requirement still poses a practical hurdle for some companies, traditional financial institutions and fintechs are still working together and complementing one another in some sectors.
CHILE
What is the fintech state of play in the country?
The fintech company ecosystem is seeing strong growth and diversification in Chile, as evidenced by sustained growth of 34% over the past 18 months. This fintech expansion has mainly taken place in the following service segments: payments and remittances (30%), business finance management (16%), crowdfunding (15%), loans (9%) and personal finance management (8%). Fintechs are also finding other emerging niches: asset management; scoring; identity and fraud; insurance; business technologies for financial institutions and trading & markets.
Although no general legislation currently regulates fintechs, financial regulators are paying close attention to the sector and tempering its impacts on oversight models though piecemeal measures. For example, the SBIF (Chilean banking oversight authority) issued instructions to banks on cybersecurity matters in response to the growing use of information technologies in financial markets. The provisions include various obligations for the boards of directors and top management of regulated financial institutions when managing this type of risk, as well as requirements to regularly evaluate the sufficiency and effectiveness of the associated internal controls.
What’s ahead?
The absence of a general regulatory framework for fintechs has limited the legal certainty with which some of these services operate in the country. Nor has Chile put in place any regulatory sandbox to allow companies to test new fintech products, models and operating standards under the supervision of the regulatory authorities. These regulatory gaps have been brought to the attention of the authorities by different Chilean fintech associations, which are lobbying for a specific regulatory framework that: (i) defines fintech services and business models in the areas of electronic payments, crowdfunding and virtual assets; (ii) expressly authorizes fintech experimentation, with temporary approval through a regulatory sandbox; (iii) promotes open banking, establishing guidelines for the relationship between banks and fintechs; and (iv) levels the playing field by guaranteeing access to the payment infrastructure and laying down risk-adjusted prudential requirements.
COLOMBIA
What is the fintech state of play in the country?
Colombia is one of the preferred destinations of fintech entrepreneurs in Latin America, surpassed only by Brazil and Mexico. In 2016, a total of 703 fintech companies operated in the region, approximately 150 of which had been set up in Colombia. While no comprehensive legislation is yet in place for these kinds of enterprises in the country, for several years now Colombia has been working on fostering a favorable regulatory environment. In this spirit, Law 1734 of 2014 was enacted, creating specialized electronic deposit and payment companies (SEDPEs) in order to promote a digital transaction environment. Likewise, by amending the Sole Decree on the Finance Sector (Decree 2555 of 2010), the Colombian government has encouraged the use of new technology-based tools, such as robo-advisers, for providing advice in the securities market.
In line with the efforts to promote financial inclusion in Colombia, the government recently issued Decree 1357 of 2018, allowing certain entities under the supervision of the Colombian Finance Authority to carry out equity crowdfunding activities. Crowdfunding seeks to put a large number of contributors into contact with parties needing financing for a project.
The Colombian Finance Authority has tried to mitigate the risks derived from these new developments by issuing instructions on cybersecurity and data protection to the financial institutions it oversees. In 2018, the Finance Authority set up the innova sfc program to support, advise, guide and receive feedback from institutions (regulated and unregulated) on issues related to financial and technological innovation.
What’s ahead?
The Colombian finance sector is highly regulated and, at times, new developments by regulated institutions run up against areas where the rules have to be adjusted. Unregulated entities, however, have greater flexibility, which gives rise to regulatory arbitrage in the payment activities they can pursue.
Garrigues has played a key role in advising the Colombian government in its analysis of potential regulatory adjustments. According to the legislative schedule published by the Ministry of Finance, the government is expected to issue regulations on digital payments in the second half of 2018.
Now that the regulation authorizing the creation of crowdfunding platforms is in place, we are waiting to see exactly how the Colombian Finance Authority will regulate the specific conditions that must be evidenced by those companies wishing to operate in this new segment.
MEXICO
What is the fintech state of play in the country?
March saw an important step forward with the publication of the new law governing financial technology institutions (the Fintech Law), which establishes the first-ever rules for crowdfunding, electronic payment platforms, technology-based financial services and virtual assets (Bitcoin). Under the new law, only Mexican companies licensed by the National Banking and Securities Commission as crowdfunding institutions or electronic payment fund institutions can pursue those activities.
Licensed crowdfunding platforms can engage in debt, equity and joint venture crowdfunding. Licensed electronic payment fund institutions can provide services such as issuing, managing, rendering and transferring electronic payment funds via IT applications, interfaces, websites or any other electronic or digital means of communication.
What’s ahead?
Secondary regulations are expected to be drawn up, given that, under the law, financial institutions (such as credit institutions, brokerage firms, regulated multi-purpose finance companies, financial cooperatives, savings and loan cooperatives, credit unions and insurance and surety institutions) may invest, directly or indirectly, in the share capital of financial technology institutions, if authorized by the Regulatory Commission or the Ministry of Finance and Public Credit. These secondary regulations would need to further define the requirements for this authorization.
PERU
What is the fintech state of play in the country?
The Peruvian Congress is currently considering a bill that would establish the legal system governing crowdfunding platforms. The bill seeks to regulate platforms used for financial crowdfunding (which includes equity crowdfunding and crowdlending).
The bill would place the activity under the supervision of the Securities Market Authority (Superintendencia del Mercado de Valores, SMV), which protects investors, supervises markets and publishes market information.
The bill sets out the requirements that platforms must meet to operate in Peru, including a registration and authorization process before the SMV and reporting requirements that must be satisfied when operating the platform. If the bill is approved, certain rules governing the Peruvian securities market will need to be adapted to include investments via electronic platforms as a new type of investment.
Prior to publication of the bill, the Peruvian Banking Regulator (Superintendencia de Banca, Seguros y AFPs, SBS) announced that its regulatory proposal (in the context of specific powers relating to money laundering and the protection of depositors’ interests) can summed up as follows: a strategy consisting of selective and focused development, as well as regular supervision of the companies to be set up in this sector.
What’s ahead?
Current players in the Peruvian fintech market are hopeful that the new regulatory framework will eliminate some of the uncertainties they face. They also hope that regulators understand how quickly this emergent industry changes and how innovation is its only constant.
Nevertheless, no one can be sure how the market will react to the regulatory framework ultimately implemented in Peru. Appropriate regulation that provides incentives for this growing sector could spur a faster proliferation of technology platforms offering financial services. If so, the market could react in one of two ways: competition between fintech companies and the traditional financial sector over those individuals that have yet to participate in the formal banking system could spike, or we could see strategic partnerships between fintech companies and financial institutions, unlocking synergies that ultimately benefit unbanked consumers.