Contxto – If you’re somehow involved in the Latin American startup ecosystem or financial industry, you might be aware that Mexico recently passed a historic fintech law.
While it does represent a consolidation benefit for those fintechs that may have started early, it also represents an enormous barrier of entry for newcomers. That is if they don’t fulfill certain operational requirements.
I recently spoke to Ernesto Cabral from ECcomplianceMX, a financial consulting company helping businesses legally establish themselves as fintechs. According to him, the industry will soon go through a major transformation.
“Those who act fast, have the capital and can eat the market will stand out and survive,” said Cabral in regards to the new regulations. “The industry will see many mergers and acquisitions. Maybe if there are 10 platforms doing the same, and there is no room for 10 more, many will end up merging or making a joint-venture.”
Who is CNBV going after?
Ever since Mexico pioneered the first regulatory fintech law in Latin America, the National Banking and Securities Commission (CNBV) has launched a series of events, support guidelines and conferences to assist aspiring fintechs in the legal process.
Although fintech is a wide industry, there are two particular verticals that the law intends to regulate. These include payment systems and collective funding (crowdfunding) companies.
Whether as credit, equity, royalty funding system or marketplace, crowdfunding will be thoroughly regulated. Other sub-industries including insurtech won’t be treated the same, though.
How long will it take?
The “Octavo Transitorio” is an article within the Fintech Law that clarifies two potential scenarios for fintech companies in Mexico. The first case involves startups that began operations prior to March 2018. These companies can continue operating while they file for permission (also known as formal revision).
Since the CNBV will confirm whether or not they qualify to continue, it’s assumed that during those 90 to 180 processing days that the fintech possesses the necessary capital and accounting requirements to function. Companies under this arrangement have until September 24, 2019 to submit their application.
The second case pertains to new companies that entered the market after March 2018. Technically, they shouldn’t be currently operating, meaning they can’t be billing or delivering services to clients.
Startups within this category don’t have a deadline, and they can present their paperwork whenever they’re ready. After applying, they can start operating, also 90 to 180 until the CNBV does it due diligence. Moreover, these companies should file 30 days before planning to start operations.
What are the implications?
“Authorities don’t see fintechs as startups anymore, but as financial institutions,” said Ernesto Cabral.
In this regard, that’s the main reason why requirements are so strict and capital intensive. Obviously, fintechs aren’t just invested in innovation, but the consumers and products themselves. However, the new status and legal expectations may benefit founders as a by-product.
Many founders who thought that establishing a fintech would be as easy as learning to code, cleaning up their garage or landing Uncle Jerry as their first client are now realizing it won’t be so simple.
“The authorities have set the bar high as an important barrier of entry,” said Cabral from ECcomplianceMX.
Many companies that thought it would be easier will not be able to do it. The regulators wants to make sure that those who enter can perform well and protect their client’s interests at its best.
This is especially true when it comes to capital requirements. Now, the Fintech Law requires capital minimums, including a reserve of 500,000 UDIS to 700,000 UDIS (UDI= investment units that replicate inflation’s volatility).
This equals approximately US$150,000 to US$225,000 in capital stock. They do not necessarily need to have it in cash or liquid securities, but at least they should have an equivalent in the assets column in their balance sheet.
Other essentials include a money-laundering prevention system, operation, compliance and technology manuals, constant reports to authorities, financial audits, corporate governance, as well as specific roles such as Chief Information Security Officer.
Once you do the math, you realize that fintechs will certainly have some barriers to cross to gain the necessary legal status.
Financial solvency and full-disclosure
CNBV also requires fintechs to be solvent for at least three years. So, if you’re raising capital, make sure to add a margin or financial cushion when you’re calculating your capital needs. This means you can raise capital and invest it in CapEx that could cover you for three years instead of destining everything to OpEx.
This law applies equally to native Mexican startups as well as foreign companies looking to start operations in the country. In fact, Paypal recently modified its course of action in Mexico due to the law. So yes, it affects everyone, not just startups.
Fintechs should also fully disclose where their capital is coming from. Along those lines, they will need to identify the shareholders. In fact, banks are already doing this by setting their eyes on fintechs, leveraging their speed and agility.
What should I do as a fintech founder?
Inform yourself. There’s nothing better than being knowledgeable instead of just paying to play. Also, recruiting a team with experience in these new requirements wouldn’t be a bad idea, either.
If you already have entered the game, you should also effectively plan out the next stages. Similarly, you should be cognizant of the capital requirements.
Again, scalability must be accounted for in the capital since growing organically is now going to be almost impossible, unless you have enough money from the beginning to bootstrap.
Asking for help and seeking support from companies such as ECcomplianceMX is certainly an option, too. The company began as a compliance team at another Mexican wealth management institution, Evidika.
ECcomplianceMX can emphasize with startups. It’s all too familiar with the fact that many fintechs can’t afford fees for consulting services. For instance, many firms charge up to four or five times more than a team such as ECcomplianceMX would.
If you’re interested in getting in touch with ECcomplianceMX team with a special 5 percent discount to Contxto’s audience for getting all your paperwork in place, fill out the form here!
Disclaimer: This post is not sponsored by ECcomplianceMX, but we’re partnering as affiliate marketing agents. We believe that the firm offers a great service, hence why we’re showcasing their services when it comes to these complex legal matters. Nothing is more relaxing than not having to worry about bureaucracy alone.
-VC
