The upsurge of fintech in Latin America
Sebastián Ferreyra Romea and Ariel Garay consider Latin America’s fintech revolution and the impact of new regulations
The UK has emerged as one of the leading fintech hubs in the world, with a thriving ecosystem of around 2,500 fintech companies in Britain. London places as the third biggest fintech hub in the world. The role of the Bank of England, through its fintech hub and regtech agenda, has been central to achieving this goal.
Meanwhile, Latin America has been at the forefront of fintech services over the last few years, mainly driven by technologic developments boosted by the pandemic and high levels of unbanked population.
In fact, in Latin America and the Caribbean, the fintech ecosystem has grown exponentially in recent years. This growth reached 112 per cent between 2018-2021, of which 80 per cent originates in just five countries of the 46 that comprise the entire LATAM - CARIBBEAN conglomerate; namely, Brazil (31 per cent), Mexico (21 per cent), Colombia (11 per cent), Argentina (11 per cent) and Chile (seven per cent). This evident irregular growth of fintech in the region can also be seen in the progress of regulatory frameworks.
This article will discuss the most recent market and regulatory transformations in these five countries, which testify to the boom of fintech in Latin America.
Mexico was the first country to pass a law to regulate fintech and it is the second market in terms of regional growth (31 per cent in 2018-2021).
The ’Law to Regulate Financial Technology Institutions’ was published in March 2018, and subsequently amended in 2021. Other rules fill in the regulatory framework, issued by the Bank of Mexico and the National Banking Securities Commission (CNBV), which in turn play the role of enforcement agencies of the law within the scope of their relevant powers.
In summary, the law is based upon the principles of financial inclusion, innovation, competition, consumer protection, financial stability, prevention of ilicit transactions and technologic neutrality. Its purpose is to regulate the financial services provided by financial technology institutions (FTIs), as well as their organization, operation and functioning and financial services subject to special rules that are offered or performed by innovative means. The CNBV is the body in charge of authorizing FTIs, who must in turn comply with all applicable legal requirements.
Brazil has been the leading country in terms of regional market growth between 2018-2021 (31 per cent).
In 2013, the Brazilian Payment System (BPS) came into force as a result of the passing of Law 12,865. BPS coined the term ‘fintech’ in the Brazilian regulatory lanscape. The BPS law only regulates electronic payments and not financial operations. Hence, Brazil is yet to introduce a law that covers all operations fintech providers carry out.
Nonetheless, it is worth briefly outlining some additional provisions that regulate Brazilian fintech.
Resolution 4,656/18 issued by the Central Bank of Brazil (BC) provided for two new operating models, the Direct Credit Companies (SCD, Sociedades de Crédito Direto) and the Loan Companies Between People (SEP, Sociedades de empréstimo entre pessoas). Through their creation, greater independence was achieved for fintech service providers –They do not have to rely on a banking intermediary.
In turn, under Decree 9544/2018 it was expressed that: “it is of interest to the Brazilian Government the foreign participation of up to one hundred per cent in the capital stock of Direct Credit Companies and Peer-to-peer Loan Companies licensed by the Central Bank of Brazil” (art. 1).
Furthermore, Resolution BC 4,657/18 opened the scope for new fintech activities: to sell credit rights (securities of the fintech itself) and asset securitization. To be allowed to render these services, fintech companies must incorporate as or transform into limited companies.
Finally, Resolution 4,856 issued by the National Monetary Council (CMN) and Resolution BC 29, which came into force on 1 December 2020, regulate the operation of the test environment known as regulatory sandbox, as well as regulate the conditions for the provision of products and services in this environment and within the scope of the Brazilian national financial system.
Colombia, Argentina and Chile
Both Colombia and Argentina come in third in regional growth with 11 per cent, and Chile is fourth with seven per cent, in the period 2018-2021.
Argentina does not have a fintech law yet. Until now, the Central Bank of Argentina (BCRA), alongside the National Securities Commission (CNV), have been in charge of issuing the different provisions that regulate fintech.
In 2017, General Resolution CNV 717/2017 was introduced to regulate crowdfunding or collective financing platforms (PFC, Plataformas de Financiamiento Colectivo) within the orbit of securities regulation. Communiqué BCRA ‘A’ 6510 (May 2018) created the ‘Uniform Virtual Key’ (CVU), which allows the identification and tracing of transfers of funds between accounts, when one of them belongs to a Payment Service Provider company (PSP).
In January 2020, the BCRA issued two important Communiqués (Communiqué ‘A’ 6859 and ‘A’ 6885), which laid down the regulatory framework applicable to Payment Service Providers offering payment accounts PSPCP.
The BCRA made clear the distinctive nature between services rendered by banks (mainly, financial intermediation between savings and deposits of the public) and PSPCP (payment accounts). In that regard, PSPCP shall not be regarded as banking services and appropriate disclosure shall be made by PSPCP to avoid market confusion and compromise financial stability.
In the wake of the massive growth of QR payments (178 per cent increase between 2020 and 2022), in February 2022, the BCRA issued Communiqué ‘A’ 7462 targeted upon PSPs, that laid down specific regulations concerning interoperable QR code for payments.
Additional regulations followed this year (2022). Communiqué BCRA ‘A’ 7593 must be highlighted, which obliges PSPs offering services of digital wallet to fulfil the requirements applicable to banks regarding financial consumer protection and inclusion measured for customers with disabilities. This measure will clearly pose major costs for Argentine fintechs.
In the same vein, there is no fintech law in Colombia.
Fintechs must comply with ad hoc provisions in the domestic legal system, depending on the financing and other characteristics of the incumbent firms.
In particular, Law 527/1999 regulates electronic commerce and External Circular SFC 029/2014, 078/2016 and 052/2017 regulate crypto assets. External Circular SFC 006/2019 provides instruction related to safety and quality for carrying out operations using QR codes. In 2021, the External Circular SFC 016 was issued, which provides instruction related to the regulatory sandbox for financial innovation.
Unlike Argentina and Colombia, Chile has made substantial progress in the legislative sphere of the fintech activity. On 12 October 2022 the Chilean House of Representatives approved the fintech law, following Senate approval granted on 4 October 2022. The final passing of the law by President Boric is expected to follow shortly after.
The law will certainly facilitate the functioning of the payment system that will, in turn, interact with the Chilean Central Bank concerning platform interoperability. Market agents expect the new regulatory framework will boost innovation and competition within financial services providers.
Latin America is clearly marking the way for sustainable fintech activity in the coming years. Market growth, new incumbents and technological progress triggered the passing of stronger financial regulation to ensure financial stability and consumer protection, while fostering efficiencies, competition and incentives.
Our regulators are constantly following the progress of global financial hubs, such as London and in particular the scrutiny of the Bank of England, its research and academic roundtables.
Following the recent legislative debate and other regulatory progresses in some countries in the region, public and private agents in Latin America have now the responsibility to make fintech activity inclusive and sustainable for everyone, to ensure that its promising benefits reach unbanked population that will in turn accelerate economic development.
Sebastián Ferreyra Romea is an attorney and compliance specialist at FERREYRA ROMEA Legal & Compliance ferreyraromea.com Ariel Garay is an attorney specialized in banking and capital markets