OPINION: What new fintech laws mean for the future
March 23, 2018
Jorge Ruiz, the CEO of Above and Beyond Tech, the company behind FINCONECTA, a program with the IDB to integrate fintechs and financial institutions, discusses how regulations can make banking easier in Latin America
There is little doubt that Latin America is a burgeoning land of opportunity. From its rich culture to its present-day businesses, the region is well on its way to becoming a major world-influencer. Getting there, though, relies on the strength of the regional economy, and financial technology firms, or fintechs, are proving to be key players. However, most countries are still facing a regulatory limbo, and slow decision making has impeded progress. That said, 2018 is expected to be a historic year as Mexico’s Fintech Law may set a precedent for regulators across the region and beyond.
Let us consider the significance that technology companies have achieved in modern times and why it may have influenced Mexico’s swift action. In 2001, Microsoft was the only technology company among the top five publicly traded firms in the world. Nowadays, the top five — Apple, Alphabet, Microsoft, Amazon and Facebook — are all technology companies. BigTechs are now diving into the financial services industry, and will soon turn their attention to developing economies in Latin America. If banks hope to weather the disruption, they will need to strategically partner with able fintechs.
With the new Fintech law, Mexico aims to put an end to the “gray areas” that inhibit innovation. Taking this step was not easy, as regulators had to find ways of promoting growth while countering adverse effects like money laundering, tax evasion, monetary volatility and fraud. The law is based on 5 principles: financial inclusion, consumer protection, preserving financial stability, promoting competition, and preventing money laundering or the financing of terrorism. In order for the law to be successful, consultations were held with different players throughout the financial industry. The National Banking and Securities Commission, Treasury, Bank of Mexico, FinTechs Associations and international advisers all gave their say.
The new Mexican law encourages open API’s throughout the entire financial system. If embraced, this measure will allow for the rapid adoption of new technologies and will open up competition between the different players, benefiting the final customer with a better user experience. This policy is in line with other similar initiatives taken by regulators in South Korea and in the EU, targeting data sharing and Open Banking. South Korea was the first country to launch a common API infrastructure across financial institutions; in Europe, financial institutions are now required to share customer data with third parties if those customers give consent. It is part of the Second Payment Service Directive (PSD2) and it pushes forward an open-banking agenda, a crucial factor in order to create first-rate financial services.
The rest of the world is now inspired to build on the advances made by Mexico, South Korea, the EU and other global initiatives. It is expected that, in the short term, the remaining LATAM countries, will make a qualitative leap, and define their regulatory framework which will develop innovation throughout the region and allow the financial sector to evolve. Despite some resistance from traditional banking, the industry is moving towards a more efficient business model of interconnected systems leveraging Financial Institution-Fintech partnerships. In Latin America, as an emerging market, financial inclusion is possibly the greatest benefit to emerge from these changes.
To date, more than half of adults in Latin America do not have a bank account. That is more than 200 million people without the opportunity to access financial services. As banks embark on their digital transformation journey and integrate with fintechs, they are better able to bring financial services to the unbanked population, spurring overall economic growth, mobilizing domestic resources and thus improving living conditions.
In February 2017, my company, Above and Beyond Tech (a&b), partnered with the Inter-American Development Bank (IDB) to create FINCONECTA, a program that integrates solutions between financial technology companies from all around the world (FinTechs) and financial institutions (FIs) in the Latin American region, using a single streamlined platform, called 4wrd. With one single integration, FINCONECTA is able to incentivize rapid prototyping, collaboration and interoperability amongst the various players in our marketplace, fostering the exponential growth of the financial industry across the region.
It is only a matter of time before financial institutions everywhere find themselves welcoming technology as a game changer, weaving it in to their entire business model. Considering how digital transformation is advancing, a&b predicts that by 2020 — just two years from now — at least 20% of the world’s large and medium-sized banks will have an open-banking strategy, and by 2025 every financial institution will operate under some form of open banking protocol.
From the start, we knew choosing the right location was crucial to our mission, deciding on Miami for its strategic geographical location, enabling an easy access worldwide. In our journey, Latin America was only the beginning. We have since partnered with FMO, the Dutch development bank, introducing our comprehensive program in Africa. We now have already integrated 20 financial institutions in more than 50 countries, including 10 in Latin America, and have more than 800 Fintechs registered worldwide, comprising the largest financial ecosystem in the world.
On March 26, a&b is taking part in NewCo’s first-ever event in Miami, where innovative businesses will share how they are shaping global change. Regardless of your industry background, it is a great opportunity to learn more about digital transformation and the changing landscape. We look forward to sharing our story and our views of the next generation in financial services.
As a former executive in the corporate banking world, I am deeply encouraged by the technological initiatives taking place in Latin America and by what is still to come. With the economy growing again in Brazil, Argentina and Ecuador, GDP in Latin America will likely rise more than 2% by the end of next year. More cash in the market will mean more jobs and increased wealth for the underserved. FINCONECTA has been a&b’s contribution to Latin America, but it will take continued collaboration between government, fintechs, and financial institutions to realize its immense potential.