Why the Crowdfunding Sector in Mexico Faces Challenges in 2024

The collective funding sector in Mexico, also known as crowdfunding, faced challenges during the first half of the year. Like other Financial Technology Institutions (FTIs) regulated by the Fintech Law, they went through a complex economic context, according to the Bank of Mexico (Banxico).

According to the latest Financial Stability Report published by the central bank, some of the Collective Funding Institutions (CFIs) that specialize in debt financing reported levels of non-performing portfolios that rose to 30% during the first quarter of 2024. However, it is worth noting that of the regulated institutions in the crowdfunding sector, only 6.3% reported information.

“It is important to closely monitor the evolution and viability of their business models, since defaulted financing continues to be a relevant issue for some institutions,” the report reads.

Crowdfunding sector in Mexico analyzed by Banxico

On the other hand, Banxico indicated that there is an upward trend in financing granted through debt IFCs, with a nominal increase of 17.6% compared to the last quarter of 2023, although this developed in an environment that put pressure on the operation of firms in the regulated fintech sector. Currently, 25 IFCs are authorized, which are divided into debt, equity and co-ownership or royalty segments.

“The ITFs have faced a challenge with the tightening of financial conditions, which has put pressure on the sector and, in particular, questioning the viability of some companies dedicated to crowdfunding. However, given the size and limited interrelation of the sector with other sectors of the financial system, it does not represent a threat to the stability of the financial system,” the report indicated.

It should be noted that the Fintech Law establishes that IFCs cannot ensure or guarantee the return on an investment, but rather this is the result of the performance of the project and its environment.

What about the fintech sector in Mexico

The sector of the 78 authorized ITFs is still small compared to the commercial banking sector, because technology companies barely represent 2.6% of the bank’s social capital. However, the size has grown compared to that of other regulated non-banking sectors, for example, the capital of the ITFs is equivalent to 78.1% of the capital of the Cooperative Savings and Loan Societies and 34.2% of the Popular Financial Societies (Sofipos).

Although the incorporation of fintech companies into the regulatory framework continues, authorizations have been given at a slower pace than the previous year. During 2023, 30 ITFs were authorized, while during the first half of this year the licenses of four firms have been published.

There are fintech companies that are also interested in other licenses, 9.9% would be in the process of operating under another license such as a bank, brokerage house, insurance company, Multiple Purpose Financial Company or Sofipo, according to the latest Finnovista Fintech Radar México.

In an annual report, Banxico reported that from September 2019 to October 2023, the authorities have received 170 applications to establish an ITF. This total is made up of 111 applications that were to establish Electronic Payment Fund Institutions, 51 for IFCs and eight for Innovative Models.

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(Featured image by Towfiqu barbhuiya via Unsplash)

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First published in EL ECONOMISTA. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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