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Fintech Regulation in LATAM is Evolving. What Does This Mean for Finance Apps?

Magdalena Tanev

Latin America might have been late to the fintech game compared to regions like Europe and North America, but now it’s catching up. In the first half of 2020, LATAM fintechs raised $525 million, and the region’s biggest fintech, Nubank, was valued at $25 billion in January 2021. The Brazilian neobank is now the largest of its kind in the world with 33 million customers. Much of this growth has been fueled by a large unbanked and underbanked population in the region (over 50% of people in Mexico are unbanked), who were previously locked out or underserved by traditional financial structures. The onset of COVID-19 and the necessity of online financial services during isolation measures only accelerated this growth. 

But with a surge in fintech activity came the need to address regulatory matters. The development of fintech is dependent on regulatory paths that allow the sector to flourish while keeping users safe. In LATAM, tangible steps have been taken towards regulating certain types of fintech companies, but by no means is legislation extensive or cohesive across the region.

Let’s dive into existing regulations in LatAm and what any budding fintechs should keep in mind when it comes to setting up shop in the region.

Mexico leads the way

In 2018, Mexico passed the Fintech Law (Ley Fintech), the first of its kind in Latin America. The law created a framework for fintech companies to legally offer new services within the Mexican regulatory system, with the goal of creating more competition in the sector, providing security to users, encouraging financial inclusion, and contributing to a stable financial sector. 

Under Ley Fintech, lending-based, equity-based, and royalty-based crowdfunding companies can provide an easy and accessible experience for investors, enabling them to raise the funds they need to reach their goals. E-wallets were also incorporated into the financial sector as a result of the law, regulating fintechs that offer their users online accounts that facilitate digital payments. Both crowdfunding platforms and e-wallets are authorized to operate with virtual assets such as cryptocurrencies. On top of this, the law regulates virtual assets including cryptocurrencies, which are now considered a legitimate payment method.

The Fintech Law also includes sandbox programs for companies seeking to provide financial technology products or services that lie outside of existing regulated modalities. The sandboxes allow these services to test out their functionality under regulators’ supervision, with the aim to promote technological innovation.

While certainly a big step on the path to fintech regulation in LATAM, the Mexican Fintech Law is by no means exhaustive, only officially covering two types of fintech companies (crowdfunding and e-wallets). Compared to many countries in the rest of the region, however, Mexico is still leading the way.

Others follow suit

Brazil, home to the region’s biggest fintech Nubank, is now also taking measures to implement fintech regulation. The first phase of the country’s Open Banking regulation project went live earlier this year, aiming to boost market competition and drive innovation through API-enabled data sharing (with consumer consent). The country also boasts three regulatory sandboxes, which cover financial and payment systems, capital markets, and private insurance markets. These sandboxes allow products from their respective industries in Brazil to test innovative products and provide consumer protection. 

While Mexico is the only state in the region which has created a new law specific to fintech, other countries, including Argentina, Brazil, and Colombia are adapting existing regulation to cover new financial activities.

Colombia, which has the third-largest fintech industry in Latin America, announced a new regulatory sandbox in 2020, where fintechs can test and develop their products with regulatory assistance. The country continues to recognize the need for more comprehensive regulation, with several decrees in development that would regulate the digital market and open Colombia’s acquiring market to unmonitored agents. 

Other countries, including Chile and Peru, are also planning to implement more comprehensive regulations in the future. Chile has a regulatory framework in the works, which would introduce parameters around open banking, robo-advisors, crowdfunding, and payment agents. Meanwhile, many in the traditional banking structure in Peru seek more regulation to attract investor and consumer confidence when partnering with fintechs, but feel like they don’t yet have the legislative frameworks necessary to capitalize on fintech potential.

Capital requirements are potential blockers

Despite the perceived groundbreaking nature of Mexico’s Fintech Law, operating within the country’s newly-instated regulation is no walk in the park for many of its fintechs. For example, firms must have a minimum capital of between $140,000–$200,000 to start operating. Such stringent requirements risk pushing smaller players out and leaving the fintech arena to those who have been around for much longer. Only 85 out of a possible 200 applied for a license under the new law, and as of July 2020, only one institution had been issued a financial technology institution license. Those that didn’t apply for a license were forced to stop their existing operations or face a penalty.

Capital requirements also apply to fintechs operating in other countries. In Argentina, crowdfunding companies must raise at least $3,000 in their initial round. Regulators in Brazil and Colombia ask deposits and lending services to have between $260,000 and $2.5 million in initial capital. In Chile, prepaid card issuers require almost $1 million in initial capital.

A fine balance for fintech regulation in LatAm

Regulators must tread a careful line — too many restrictions, and they risk blocking entry for many smaller fintechs and stifling innovation. Not enough regulation and they put at risk consumer confidence in fintech products and could create roadblocks to securing finance.

While many countries are looking to Mexico as the region’s leader on the regulation front, those regulators should also realize that a single “fintech law” may not be the most efficient way to provide legislative certainty to a diverse range of companies with distinct offerings. Instead, countries can provide a regulatory framework that evolves to support this rapidly advancing sector.

Fintechs launching in LATAM should choose their markets carefully and do their due diligence on existing and upcoming regulations. Legislative bodies must ensure to contribute toward an environment that promotes competition and growth, rather than create roadblocks for up-and-coming players while keeping consumer protection at the forefront. Only by crafting this fine balance will regulators allow fintechs to grow to their maximum potential and reap the many benefits of doing business in Latin America.