Introduction

Mexico’s fintech sector continues to unfold, with transformations driven by the constant evolution of technology. It is crucial to recognise the shift occurring in how financial services are conceived, delivered, and embraced globally. The continuous synergy between technology and finance promotes an environment where traditional barriers are brought down, paving the way for inclusivity and accessibility when it comes to financial alternatives.

The overall expectation is that 2024 will be particularly important for the fintech sector in Latin America, especially Mexico – given the increase of its economic activity with the USA and that a huge sector of the population still has no access to traditional financial services. According to Bloomberg, Mexico is now the USA’s top trading partner, surpassing both Canada and China. This, together with the fact that most experts forecast interest rates starting to decrease in 2024, suggests that an increase in venture capital investments coming into the region is likely – mainly via the USA, but also from elsewhere in the world.

Likewise, debt financing of fintech companies is expected to continue its upward trend, as it remains an attractive avenue for both domestic and international lenders. One example is BBVA’s unit focused on tech companies, BBVA Spark, which launched in Mexico and Spain in 2022 and began operations in Colombia and Argentina in 2023.

Other banks are following BBVA’s lead, with Banorte’s Bineo, Santander’s Openbank, and Banregio’s Hey Banco set to commence operations during the course of 2024. Several other international and local funds are also highly active in the debt side of fintech company financing, structuring “warehouse” facilities ear-marked to fund Mexican fintech’s loan origination.

Separately, at the forefront of fintech’s influence in Mexico is the increasing adoption of mobile financial solutions. In 2024, smartphones are now powerful gateways to an array of financial services. According to El Economista, more than 75% of Mexico’s population has access to the internet through a smartphone. From digital wallets to mobile banking applications, Mexicans are experiencing a fundamental shift in how they manage their finances.

This transformation is not only streamlining day-to-day transactions but also extending financial services to previously under-served populations, thereby fostering economic empowerment across diverse communities.

Regulatory Framework

In 2018, the Mexican Congress passed the Law to Regulate Financial Technology Institutions (Ley para Regular las Instituciones de Tecnología Financiera), colloquially known as the “Fintech Law”. This legislation comprises the oversight of various activities, including crowdfunding, electronic wallets (e-wallets), cryptocurrencies, open banking, and regulatory sandbox initiatives.

Subsequent regulations to complement the Fintech Law were gradually introduced, with the majority being officially published in 2018 and 2019. Notably, the first regulations specific to “open banking” were issued by the Mexican Central Bank (Banxico) in 2020 and primarily apply to credit information entities (sociedades de información crediticia) and other regulated institutions.

Fintech Companies vs Financial Technology Institutions

Broadly, companies in the fintech sector align with their name, delivering financial services or products via technology or tech-based platforms. However, it is important to note that the Fintech Law explicitly outlines that only specific authorised entities – referred to as “Financial Technology Institutions” (Instituciones de Tecnología Financiera, or ITFs) – are permitted to offer the services and products regulated by the law. The Fintech Law takes a stringent stance, specifying that entities using terms such as “financial technology institution” or equivalents in any language could face monetary fines.

Authorisation Process for Financial Technology Institutions

The Fintech Law considers two types of ITFs: Collective Financing Institutions (Instituciones de Financiamiento Colectivo, or IFCs) and Electronic Payment Funds Institutions (Instituciones de Fondos de Pago Electrónico, or IFPEs).

A licence granted under the Fintech Law is required for ITFs to operate as such. Licences are granted by the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV), with the prior favourable opinion of an inter-institutional committee formed by members of the CNBV, the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) and the Mexican Central Bank (Banxico).

In summary, companies seeking to function within the framework of the Fintech Law must formally apply to the CNBV. This application entails detailing crucial aspects such as the company’s operational and business model, business plan, financial feasibility, shareholder structure and prospective board of directors’ composition, as well as the formulation of policies and manuals addressing AML. Subsequently, companies authorised as ITFs are obligated to adhere to minimum capitalisation requirements, contingent upon the particular activities they engage in.

Collective Financing Institutions

IFCs are authorised to conduct “crowdfunding”, which is defined by the Fintech Law as activities with the purpose of facilitating contact between the general public – as investing and requesting parties – in order for such individuals to grant financing to each other through information applications or other digital interfaces.

The transactions that may be carried out by the general public through IFCs are:

• collective debt financing – where the investing parties grant loans to the requesting parties;
• collective equity financing – where the investing parties acquire stock of the entities acting as requesting parties; and
• co-title or royalty collective financing – where the investing and requesting parties enter into participation arrangements in which the investing party will acquire part of the assets, income, profits or royalties of a project or activity carried out by the requesting party.

IFCs can only connect the demand and supply of debt or equity as per the above activities. They are expressly precluded from acting as counterparties (ie, a requesting or investing party).

Among other things, IFCs must:

• disclose the selection criteria of the requesting parties, the projects to be financed, and the information and documentation analysed for such purpose;
• analyse and inform the potential investing parties of the overall risk of the requesting parties and the related projects, including general performance and payment indicators; and
• report to credit information companies.

The Fintech Law imposes limits on the transactions that may be carried out by IFCs, including the maximum amount of resources that may be requested by the receiving parties and the amounts that may be invested by a single investing party.

Agreements entered into by IFCs with their users, both investing and receiving parties, must comply with financial consumer protection laws aimed at providing transparency and certainty to all parties involved.

Electronic Payment Funds Institutions

IFPEs may issue, manage, redeem and transmit electronic payment funds through information applications or digital interfaces. Specifically, IFPEs may:

• open and maintain electronic payment fund accounts (e-wallets) for their clients whereby deposits in electronic payment funds may be made in exchange for a corresponding amount in money or other virtual assets;
• carry out transfers of electronic payment funds between clients; and
• facilitate the withdrawal of amounts in cash or other virtual assets by debiting electronic payment funds.

The Fintech Law defines “electronic payment funds” as funds that are accounted for in an electronic registry maintained by an IFPE and which:

• refer to an amount in money (either in Mexican or foreign currency) or in virtual assets;
• correspond to a payment obligation by their issuer;
• are issued upon receipt of the corresponding amounts in money or virtual assets; and
• are accepted by a third party as due receipt of such amounts in money or virtual assets.

Also, IFPEs are authorised to handle virtual assets (eg, cryptocurrencies) and to facilitate their transfer between members of the general public.

Use of Cryptocurrencies

The Fintech Law defines “virtual assets” as electronically registered representations of value used exclusively as a payment method, transferable solely through electronic means. Banxico is responsible for formulating supplementary regulations concerning virtual assets. The mandatory rules on virtual assets, issued by Banxico in September 2020, are notably stringent. They aim to restrict the utilisation of virtual assets by regulated financial institutions, allowing their use only for internal operations to insulate clients from associated risks.

In non-binding opinions, Banxico has asserted that “the regulations do not impede commercial companies from offering services related to virtual assets”, despite the restrictions outlined in the rules. Additional rules to augment the existing framework are anticipated in the next few years. It is pertinent to note that the current regulation has a restricted scope, as assets such as stablecoins, tokenisations, coin offerings, and non-fungible tokens (NFTs) are not explicitly encompassed. Banxico has informally addressed these aspects in unofficial communications.

Regulatory Sandbox

The Fintech Law provides for an authorisation process under a “sandbox model” for companies seeking to engage in new and innovative technological activities or otherwise rendering services that differ from the ones that are already regulated. Specifically, the Fintech Law defines an “innovative model” as a model that uses tools or technological means to provide financial services and which has different modalities to those of others in the existing market.

In this context, unlike ITFs or other financial or regulated entities, Mexican companies may request temporary authorisation to carry out – through an innovative model – an activity otherwise requiring fully fledged authorisation under the Fintech Law. This works as an exemption that allows companies to test out new models and alternative ways of providing financial services in a controlled environment.

Conclusion

Ultimately, the fintech landscape in Mexico for 2024 is a testament to the dynamic convergence of technology and finance in reshaping the nation’s financial ecosystem. As Mexico navigates this era of unprecedented innovation, mobile banking and digital payments have emerged as pivotal forces, fostering financial inclusion and transforming everyday transactions.

The regulatory landscape, underscored by the Fintech Law, reflects a careful balance between encouraging innovation and safeguarding consumer interests. Cryptocurrencies and blockchain technologies continue to evolve, challenging traditional norms and opening new frontiers. Notably, the nascent but promising realm of open banking could propel Mexico into a future where financial services are seamlessly interconnected. As the sector progresses, it is evident that Mexico’s fintech evolution is not merely a trend but a paradigm shift, ushering in an era in which accessibility, innovation, and regulatory resilience coalesce to shape the financial experiences of millions.