Craig Dempsey is the CEO and Co-Founder of Biz Latin Hub, a firm that helps both local and foreign companies establish and operate their businesses successfully in Latin America through a full suite of back office services. Before becoming a business owner and entrepreneur, Craig served as an Australian military officer. He is a professional mechanical engineer and holds a Master’s Degree in Project Management from the University of New South Wales.
In 2018, regulators in Mexico began addressing financial inclusion more aggressively with the introduction of new legislation for the financial technology space. The ‘fintech law’ offered a framework for regulating digital financial products, such as crowdfunding and electronic payment software, as well as a formal process for registering and operating a fintech firm. The goal of the fintech law was to help bring more people into the formal economy. Additionally, it would help to reduce the amount of cash in circulation, which would cut down on money laundering and corruption as well.
The economy in Mexico remains largely informal and cash dependent. An estimated 44% of the adult population in Mexico owns no financial products. This largely unbanked population, coupled with the new fintech legislation, has created immense opportunities for Mexico’s fintech sector to grow. In fact, roughly 100 new Mexican fintechs were established in 2018 alone, representing 52% growth for the industry. Mexico has become a regional leader with more than 273 fintech ventures operating in the country. When combined with Brazil’s 380 fintech ventures, the two countries make up 56% of the region’s total fintech activity.
Over the past year, many of Mexico’s fintechs have also attracted significant investment. In May 2019, Japan’s Softbank Group invested approximately $20 million in Mexican payments startup Clip, one of the first deals in its $5 billion Latin American technology fund. Softbank is also in advanced talks to invest in Mexico’s Konfio, which helps small businesses secure loans. In September 2019, Goldman Sachs provided Konfio with $100 million in fresh credit, which would allow the startup to provide up to $250 million in loans to 25,000 companies over the next year.
Just one month prior, Goldman Sachs also co-invested with Point72 Ventures in Mexico’s fintech startup Credijusto, providing the startup with $42 million to help underserved SMEs secure credit. In September 2019, Klar, or the ‘Chime of Mexico,’ secured an impressive $57.5 million in debt and equity seed funding – the largest amount ever raised in a seed round in Mexico.
There’s no doubt Mexico’s new fintech law encouraged interest and investment in the sector over the past year. As we head into 2020, here’s a look at why this dramatic growth in Mexico’s fintech sector is likely to continue, and why Mexico is one of the world’s most interesting fintech hubs to watch.
Ready for Open Banking to take off
What started as an innovative regulatory disposition in the UK has quickly become a global movement. Open Banking allows any third-party financial service provider access to consumer banking data through the use of application programming interfaces (APIs) upon receiving the consumer’s permission. The system promises to spark a new wave of innovation and transparency in the financial sector. Over 22 jurisdictions around the world have implemented or are working towards implementing Open Banking, and Mexico is among them.
Many people anticipate that Open Banking in Mexico will be broader than PSD2 and the UK’s Open Banking regulations. Not only will all financial institutions be subject to its regulations, but the regulations will cover more APIs as well, which will help with the move toward a more open, competitive, and customer-driven financial ecosystem.
More progressive banks, such as Citibank, have already launched open API portals in Mexico in an effort to stay ahead of the competition. Still, implementation is not expected until the secondary dispositions of the fintech law are due in March 2020. Implementation will likely take place in phases, with the first phase requiring a regulatory sandbox to test Open APIs. Regardless, Mexico’s embrace of Open Banking pushes its fintech sector further ahead of most other countries in Latin America. Mexico appears to be heading on the same track as other leading financial hubs in the world, including the UK, Singapore, and Hong Kong.
Big opportunities for mobile banking
In October 2019, Mexico's central bank, Banco de México (Banxico), rolled out CoDi — a smartphone and QR-based payments system. The platform aims to facilitate electronic payments in an effort to move consumers away from cash and allow both banks and fintechs to reach new customers.
The CoDi system is not unlike a state-owned version of WeChat Pay. In a pre-launch report, the central bank indicated that 33 out of Mexico’s 51 regulated private sector banks were ready for the CoDi rollout. Users of CoDi must have a bank account (at any financial institution), a mobile device, and an Internet connection. Once a merchant enters the amount on the CoDi application, CoDi generates a QR code for the customer to scan and pay.
The CoDi system is up against a number of challenges on its pathway to adoption, including security concerns and a general distrust in banks among Mexican consumers. To access the free mobile payments system, unbanked Mexicans still need to set up a bank account. Nevertheless, both Mexico’s public and private sectors are betting big on mobile-first financial services. Many neobanks are finding success targeting Mexican consumers through their branchless business models. One of the first neobanks to arrive on the scene in 2016 was Albo. Albo partnered with retailers such as Oxxo, Mexico’s largest convenience store brand, to roll out its services which also include digital bill pay and P2P transfers.
In January 2019, Albo raised $7.4 million, sparking a surge in investor interest in Mexican neobanks. In March 2019, Mexican neobank, Fondeadora, announced a $1.5 million round of investment, and in May 2019, Nubank, Brazil’s largest neobank with over 15 million users, announced its plans to expand into Mexico. Thiago Paiva, the co-founder of Liquia Digital Assets, recently wrote about the battle to become Mexico’s leading neobank, and noted that traditional banks are also putting a lot of effort into improving their digital services in Mexico. Banco Sabadell, for example, offers fully-digital services. Hey Banco is another mobile banking service launched by the local mid-sized bank, Banregio.
Becoming Latin America’s fintech leader
In 2019, Mexico’s financial industry took a significant step toward its goal of a more transparent and inclusive future. As a greater percentage of Mexico’s population comes online, demands for digital financial services are rising, and fintechs are meeting them without hesitation. Mexico stands out as one of the countries most well-prepared for both continuous technological disruption and financial regulation changes. What’s more, it serves as a glimpse of what the future of finance in Latin America may look like should the rest of the region follow its lead.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
