Mexico Passed A "Fintech Law," But Regulatory Headaches Remain
Dave's Rough Debut, Credit Bureau Complaints, Bitcoin's 0.01%, Credit Card Balances Surge
Hey all, Jason here.
While 2022 so far feels, unfortunately in some regards, like an extension of 2021, there are signs some aspects of the fintech climate may be in for a different year. With interest rates set to rise as early as March, tech stock valuations have come under pressure — and newly public fintechs are no exception. What this means for fundraising and private market valuations in 2022, we’ll have to wait and see.
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Mexico Passed Its “Fintech Law” in 2018. So Why Are Some Companies Getting Blocked From Opening New Accounts?
If you’re a follower of fintech news, you no doubt noticed this trend: the LatAm fintech scene is on fire. The number and value of deals has risen considerably in recent years, reaching a high of ~$6 billion across 76 deals in Q2 2021.
The improving access to funding has given rise to a robust fintech ecosystem. The two countries anchoring the fintech revolution in LatAm?
Brazil, with a population of over 200 million and GDP of USD $1.4 trillion — but where 30% of the population over 15 lacks access to a bank account, and a credit-to-GDP ratio of 70%.
And Mexico, with a population of about 130 million and GDP of USD $1 trillion — but where an astounding ~63% of the population over 15 lacks access to a bank account (2017), and access to credit is limited, reflected in a credit-to-GDP ratio of just ~39% (I’ve written about some of the underlying reasons why previously here.)
For frame of reference, ~95% of US households have access to a bank account, and the credit-to-GDP ratio in the US is 216%.
With VC funding plentiful and private market valuations in the US reaching stratospheric heights in recent years, investors have increasingly been willing to venture beyond the confines of their Sand Hill Road offices and invest in emerging markets in LatAm.
The result? Mexico boasts about 450 fintech startups today, making it the largest fintech hub in Latin America:
Mexico’s Law to Regulate Financial Technology
The Mexican government and regulatory regime has been fairly forward looking in its approach to regulating the burgeoning fintech sector.
On March 9, 2018, the Law to Regulate Financial Technology Institutions, popular known as the “Fintech Law,” was published in the Federal Official Gazette, coming into effect the following day, though collaboration and dialog between the fintech sector and Mexican banking regulators dated to at least 2014.
The Fintech Law sought to address regulatory gaps and provide greater clarity to firms operating in grey areas of existing law.
The law was more a beginning than an end point for Mexican banking regulators’ focus on fintech. The government has continued to be forward-looking in designing policy initiatives to promote innovation and with it, hopefully, improved access and inclusion in the country.
For example, in just the past few weeks, the central bank, Banxico, has announced plans to launch a central bank digital currency (CBDC) by 2024 and a CreditKarma-like API-driven credit marketplace.
What is the “Fintech Law,” Why Was It Passed?
Fintech activity in Mexico pre-dates the Fintech Law. In addition to addressing activities and business models that fit poorly in the existing regulatory framework, goals of the Fintech Law include to:
promote financial inclusion
provide legal security to technological financial services users
trigger greater competition in the financial services market
increase the number of participants in the financial sector
prevent money laundering activities through electronic means
regulate the transactions with digital assets in Mexico
Despite its all-encompassing sounding name, the law as passed in 2018 addresses a relatively narrow slice of “fintech.”
Financial Technology Institutions: Crowdfunding & e-Money
The Fintech Law defines licenses for just two types of Financial Technology Institutions (FTIs): crowdfunding institutions (IFCs) and electronic payment funds institutions aka “e-money institutions” (IFPEs).
Under the Fintech Law, crowdfunding business are permitted to:
Facilitate collective debt financing (eg, peer-to-peer lending model, comparable to Prosper in the US)
Facilitate collective equity financing (eg, crowdfunded equity model, comparable to WeFunder in the US)
Facilitate collective financing of co-ownership or royalties (eg, fractional real-estate investing, comparable to Fundrise in the US)
And e-money institutions are permitted to issue, administer, redeem, and transmit electronic payment funds via computer applications, webpage, and other digital platforms (eg, digital wallet and neobank platforms, comparable to Venmo, Cash App, and Chime in the US).
Although IFCs (crowdfunding) and IFPEs (e-money) are the only two licensing categories the Fintech Law defines, the legislation does speak to other areas of fintech in Mexico, including open banking and digital assets, and creates a “regulatory sandbox” to help promote innovation.
Implementing the Fintech Law has been an ongoing process, with relevant agencies in the country continuing to develop regulations that implement that law.
What Is the “8th Transitory Provision,” and Why Is It Important?
When the Fintech Law went into effect in March 2018, numerous businesses were already engaged in activities that would fall under the new crowdfunding and e-money institution categories of the law.
Recognizing this, the Fintech Law included a provision — the “8th transitory provision” — to permit those companies to continue operating while seeking licensure under the new law. In March 2021, there were approximately 70 fintechs operating under the transitory provision while seeking full authorization — including some fintechs providing Banking-as-a-Service infrastructure used to enable other companies’ products and services.
In October 2021, a number of already-operating fintechs had their authorizations denied — causing headaches for those companies, but also impacting operations for 3rd party fintechs that had built products on top of their services.
There were some additional regulatory actions, not directly related to the Fintech Law, that have caused disruption in the sector.
A quick overview of some of these developments and their impact:
Accendo Bank was a small, fully licensed bank — it was not operating under the Fintech law. The tiny bank had a portfolio worth just MXN $2.154 billion, or about USD $105 million, comprising 0.08% of assets and 0.09% of deposits in the Mexican banking sector.
However, not unlike smaller American banks that provide banking services to non-bank fintechs, Accendo positioned itself as “the fintech bank” and pursued a Banking-as-a-Service driven business model.
Accendo had relationships with a number of well-known fintechs, including Rappi, Cuenca, Billpocket, Kushki, Sr. Pago, Claro, Okcredito, among others.
In September 2021, Accendo Bank had its licensed revoked by the CNBV, after its capitalization index, a measure of its ability to withstand financial stress, fell to 9.88% vs. the required minimum of 10.5%. Although Accendo had a brief window to secure an outside capital injection, it failed to do so, leading to its license revocation and, ultimately, liquidation.
Rappi, the largest company leveraging Accendo’s BaaS functionality, said disruption from the bank’s failure would be minimal, with just 1.2% of its cardholders in Mexico unable to use their cards “for a short period.” Visa, the payment network for cards issued by Accendo on behalf of fintechs, said it would work with the impacted parties to take the steps necessary to resolve any disruptions from Accendo’s failure.
Cacao PayCard, founded in 2017, is a payment processing company that provides infrastructure for other fintechs to issue and operate debit cards (roughly analogous to Marqeta or Galileo in the US). Cacao boasted a number of well-known Mexican fintechs as clients, including BNEXT, Clip, Jefa, Kapital, Lana, Meta, Oyster, Tauros, and Warp.
Cacao, whose business pre-dated passage of the Fintech Law, had continued operating under the eight transitory provision as it sought full authorization under the new law.
However, Cacao’s application for authorization was denied in October 2021 — requiring fintechs dependent on its infrastructure to halt new user registrations:
In early December, Brazilian payment processor Dock announced it would acquire Cacao PayCard for an undisclosed sum. Cacao PayCard is Dock’s third acquisition outside of Brazil; it has previously acquired fintech infrastructure companies Muxi and BPP Instituicao de Pagamento SA.
Presumably the intention is for Visa-backed Dock to secure the authorization Cacao was denied and leverage Cacao’s clients it is able to retain as it stitches together a pan-LatAm payment processing platform.
Cacao PayCard was hardly the only Mexican fintech that had been operating under the temporary provisions of the eight transitory article and was subsequently denied full authorization.
Flink offers a mobile banking app targeted at millennials and Gen Z, with budgeting, savings goal-setting, and debit card. In 2020, it added stock trading services — and, in August 2021, announced it had raised a $57 million Series B from marquee investors like Lightspeed Venture Partners and Accel.
But come October 2021, Flink’s application for full authorization under the Fintech Law was denied. The denial has forced Flink to no longer offer core features of its app to new customers, with its website stating (via Google Translate):
“In compliance with the regulation and due to the refusal by the financial authorities to request authorization for Flink, SAPI de CV (“Flink”) to operate as an Electronic Payment Fund Institution, it has stopped providing its services of ‘wallet’ for the celebration of new operations related to those attributed to said institutions.”
UnDosTres, founded by a veteran of Indian fintech Paytm, is somewhat of a super app, centered around a digital a wallet and enabling users to pay utility bills, top up mobile phones, shop at popular merchants, and even buy movie tickets.
UnDosTres also provided the underlying infrastructure for the Argentine neobank Ualá to launch in Mexico in September 2020. The move was a calculated risk for Ualá: it could have sought its own license under Mexico’s Fintech Law, but UnDosTres was already operating under the eight transitory article while it sought full authorization.
Partnering with UnDosTres provided a faster route to launch in the Mexican market. Ualá founder Pierpaolo Barbieri said at the time (via Google Translate):
“All the IFTs that existed before the passage of the law are in a normalization process, but no new ones have been registered. So we use a supplier such as UnDosTres to be able to reach the market and it will not be the only regulatory development that we are betting on to make a product in Mexico.”
Having multiple regulatory strategies was good hedging on Ualá’s part. In October 2021, UnDosTres had its license application denied — blocking Ualá from onboarding new users through the partnership.
Less than a month later, news broke that Ualá reached an agreement to buy Mexican bank ABC Capital SA for an undisclosed sum. The transaction is subject to approval from Mexican banking regulators, though Ualá appears to already be opening new accounts through ABC Capital.
Fondeadora, which began as a crowdfunding platform similar to Kickstarter, has since pivoted to the mission of building a full stack neobank. The startup has raised $28 million, including from Gradient Ventures, Google’s AI-focused venture fund, and Y Combinator.
But the startup has also faced regulatory woes. Fondeadora’s issues stem not from the Fintech Law, but from partnerships with SOFIPOs (licensed microcredit institutions) it leveraged to open accounts on behalf of its users.
The CNBV, Mexico’s primary banking regulator, fined the company MXN $844,900 for remotely opening accounts through SOFIPOs without the CNBV’s authorization. In May 2021 El Economista reported (via Google Translate):
“According to the CNBV portal, this sanction was for violating the Popular Savings and Credit Law, since Fondeadora collected data and information, and also made the identification of clients of a popular financial company (sofipo), for the remote opening of deposit accounts, without having an authorization from the authority.
Sources aware of the sanctions process, commented that in the alliance that this platform has with some sofipos, this act was detected that violated article 124 of the Popular Savings and Credit Law.
“Fondeadora, through its proprietary platform or application, collected data and information and made the identification of clients or potential clients, for the non-face-to-face opening of deposit accounts, without the latter having obtained prior approval from the Commission”, It can be read on the sanctions portal of the regulatory body.”
According to the company, the sanction was for a limited set of activities, and the company had already begun a new partnership with Apoyo Múltiple in order to continue operating.
Fondeadora co-founder René Serrano stated (via Google Translate):
“Mexico comes from very difficult issues in terms of bank protection, after the great crises, where your savings were lost, suddenly the banks went bankrupt and you had no one to complain to ... That the CNBV is strict with new fintech players has to do with that legacy. Obviously there are things to improve, but the main concern must be the protection of the user.”
Despite a Dedicated “Fintech Law,” It Hasn’t Been Smooth Sailing for Mexican Startups
Mexican fintechs operating neobank- and BaaS-like models aren’t the only companies that have run into regulatory trouble. Companies operating under the crowdfunding provision like Propeler, Cumplo, and Inverspot have also had their applications for full authorization declined by the CNBV.
That isn’t to say Mexican banking regulators are refusing all applications. Numerous companies have had authorization to operate under the crowdfunding provisions approved, including: Fundary, Likideo MX, BXL Fintech, Doopla, Prestadero, M2Crowd, Cien Ladrillos, Play Business, and Crowd Up Mex.
As have a number of e-money institutions, including: NVIO Pagos, Trafalgar Digital, BRX Payments, Inguz Digital, BKBN, Tu Dinero Digital, STP Transfer and Payment System, ColtoMoney, Cuenca and Mexpago.
Still, I suspect the uncertainty of approval under Mexico’s Fintech Law — and the disruption to fintechs relying on services operating under the eight transitory provision that were subsequently denied full authorization — has had something to do with a number of fintechs acquiring legacy financial firms in Mexico.
In addition to Ualá’s purchase of ABC Capital, Credijusto, a small business lender, acquired Banco Finterra in June 2021; Brazilian neobank Nubank acquired Akala, a small non-bank lender, in October 2021.
Top 0.01% of Bitcoin Owners Hold 27% of the Cryptocurrency
This story came out in late December, and seems to have been swallowed by the holiday news cycle (or perhaps I just missed it.)
According to research by the National Bureau of Economic Research, the top 10,000 holders of bitcoin hold approximately 5 million bitcoins, or the equivalent of about $232 billion (well, $208 billion as of this morning — bitcoin’s price as slid substantially in recent days.)
Based on ~114 million holders of bitcoin worldwide, the top 0.01% of bitcoin holders control about 27% of bitcoins currently in circulation. By comparison, globally, the richest 0.01% control 11% of global wealth, according to the 2022 World Inequality Report.
The NBER research paper draws two key conclusions from its analysis: that such concentration makes the bitcoin network more susceptible to systemic risk, and that the majority of price appreciation goes to a small group of investors.
The analysis also suggests a majority of observed transaction volume is “spurious,” with 90% of transaction occurring on the bitcoin block chain not tied to meaningful economic activity.
Revolving Credit Increased at 23.4% Annualized Rate in November
Credit cards are back, baby!
According to the Federal Reserve’s consumer credit data series, revolving credit grew at a 23.4% annualized rate in November — 3x the rate of increase in October:
Totally consumer revolving credit in November exceed $1 trillion for the first time since 2019, with overall consumer credit hitting $4.4 trillion (not seasonally adjusted).
Multiple factors are driving the resurgence of consumer credit card borrowing.
November is traditionally a big shopping month, leading in to the holiday season. And that was even more true in 2021, as consumers did holiday shopping earlier than normal, owing to ongoing supply chain disruptions, shortages, and shipping delays.
But, perhaps more important in driving the increase, is that the cash cushion many households built during the earlier months of the pandemic has steadily faded — even with most families receiving monthly child tax credit payments, which Congress has so far failed to renew for 2022:
Research from the Bureau of Economic Analysis finds that excess savings accrued during the pandemic were mostly exhausted by the end of 2021. The personal savings rate, which spiked as high as 1/3 of disposable income at the beginning of the pandemic, has dropped to just 6.9% — lower than it was before the pandemic.
Other Good Reads
The Truth About NFTs (LaptopMag)
In El Salvador, Bitcoin’s Libertarian Streak Meets an Autocratic Regime (Wired)
TPG: A Tale in Five Trades (Net Interest)
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