The Difficult Journey of Mexican Fintech Startups in Establishing Operations

The regulation for fintech startups in Mexico was pioneering not only in Latin America but in the world. The Fintech Law in the country was enacted in 2018 and in 2020 the National Banking and Securities Commission (CNBV) delivered its first authorization to operate.

The rule was made to regulate those companies that were operating in Mexico, but that did not yet have a framework that established what they could do and what they could not do . This legislation contemplates two types of companies: Electronic Payment Fund Institutions (IFPE) – which would be digital wallets, for example -, and Collective Fund Institutions (IFC), such as investment funds.

“The reason why these institutions were only regulated is because they indirectly, or in some way, collected resources from the general public ,” commented Ernesto Calero, financial analyst and former director of Fintech Mexico.

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Since its creation to date, the CNBV has authorized nearly 72 fintech startups

However, more than 30 licenses have been rejected, according to the latest data reported in local media.

Of course, in the industry they do not rule out that this amount could be even higher, because there is no exact registry of rejections and, in addition, there are many companies that give up during their own regularization process.

“Knowing how many companies withdrew from the process is going to be impossible because the companies will not want to admit that they gave up,” explained Sebastián De Lara, general director of the local union.

The motives

According to analysts, Mexican law is quite rigorous and, in that sense, similar to that of traditional banking.

“That change from being a startup to a financial institution is what has cost companies the most. If you want to play in the major leagues you have to meet the requirements of the major leagues ,” Calero said.

De Lara added that “the authority seeks to guarantee the greatest certainty for users , and when it finds that this is not there and that there are no conditions, then it invites the company to desist from obtaining a license.”

The Mexican media Dia Fintech had access to two rejection letters, specifically from Ethos Pay (which sought to be IPFE) and Accepted Digital (IFC), which submitted their applications in November and October 2022, respectively.

Some of the observations made by the CNBV were: failure to describe the financial model, lack of information on some items, failures in the financial viability study, errors in financing amounts, among others.

In this regard, Calero recognized that they are complex and expensive requirements, but necessary so that the authorities can truly carry out an analysis of the risks and other factors .

Despite this rigor from the regulator, both experts agreed that “ the National Banking Commission has made its maximum effort to ensure that the licenses are authorized.” This has led -Calero said- to the processes of some being very long, in order to avoid rejections.

De Lara pointed out that one of the missions that the commission currently has is to do everything possible to approve these licenses , despite the fact that the commission and other regulators have gone through austerity processes in which the staff has been reduced: “they have increased the number of requests and the number of officials to process them has decreased,” he added.

Deadlines

According to De Lara, initially the processing processes took approximately a year and a half; Currently they do not exceed a year and some even achieve it in seven or eight months.

Calero also believes that these processes have been reduced as the years go by: “There were companies that initially took more than three years,” he noted about those fintech companies that were already operating in Mexico and had to regularize themselves. Currently, the analyst pointed out that these processes can last approximately a year.

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(Featured image by Tingey Injury Law Firm via Unsplash)

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First published in DF SUD. A third-party contributor translated and adapted the articles from the originals. In case of discrepancy, the originals will prevail.

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