As financial technology becomes an increasingly large, diverse and competitive industry across Latin America, regulators are introducing rules that encourage entrepreneurship, innovation and growth.
Regulatory asymmetry between incumbents and startups is an ongoing debate. But overall, experts say the authorities recognize the sector’s importance and are trying to find a balance between the two sides.
To take stock of the latest recent regulatory moves, we’ve put together a summary of the legal frameworks that are giving shape to the Latin American fintech sector.
To do so, we’ve turned to lawyers with expertise in new business models, looked at the most important rules seeking to develop the industry and explored the challenges currently facing the sector.
Read on below, or skip to the most relevant section.
Fintech Regulation in Ecuador: The Most Recent Big Leap
Just a few weeks ago, Assemblywoman Nathalie Viteri presented a draft of Ecuador’s first Fintech Law, which seeks to spur the market with a regulatory framework for three new technology-related business models: fintechs for securities, for shares and insurtech.
In addition, the proposal seeks to establish a fund with angel, seed and venture capital and also includes the possibility of designing a regulatory sandbox.
Background to Ecuador's Fintech Law:
Ecuador is taking its first steps toward regulating the sector, though in recent years it introduced reforms that created spaces for innovative business models.
In 2016, the Organic Code of the Social Economy of Knowledge (better known as the Code of Ingenios) began to regulate and promote issues related to competition and innovation.
This regulatory framework gave way to the Organic Law of Entrepreneurship and Innovation, in force since 2018. This, in turn, enabled the enactment of the Law to Modernize Company Law, which created the Simplified Joint Stock Company (SAS) model. This model has helped foster the entrepreneurship ecosystem and is now the preferred corporate structure for the development of new businesses as it allows them to digitalize administrative processes.
Similarly, the country’s Entrepreneurship regulation allows for new mechanisms to finance projects and businesses as well as the registration and control of collaborative investment funds, such as crowdfunding.
What the experts say:
“The presentation of the Fintech Law is not an isolated phenomenon but the effect and conclusion of a process that Ecuador has carried out over the last two years around the communication of certain cutting-edge regulation,” says Diego Álvarez, country manager of Niubox Legal Ecuador.
However, Alvarez says there is still a long way to go — and many discussions to be had — before the country can enact a definitive fintech law. He estimates it will take at least a year for the bill to take shape.
There are also some controversial aspects to the bill, starting with the way it was drawn up.
“The bill did not have a prior socialization process: It was worked on behind closed doors,” he says. “There is a lot of room for improvement.”
The bill’s most noteworthy aspect is that it seeks to build a framework for fintechs in general and fintechs in verticals such as securities and insurance. It also tries to ensure channels of financing for innovative models through the creation of a capital fund.
Nevertheless, according to the lawyer, the proposal falls short in terms of the business models it seeks to regulate since it is focused on startups. Also it does not cover the products and services offered by traditional financial institutions, such as bank wallets, or companies from other industries that are part of the financial technology trend, such as delivery firms with credit cards.
“This is an opportunity to regulate or establish the initial rules to bolster the fintech phenomenon but it’s only focused on enabling the provision of technology-based financial services and by companies that were not traditionally part of Ecuador’s financial ecosystem.”
Looking ahead to the coming months, Álvarez expects those interested in contributing to the draft legislation will raise objections and propose improvements.
Fintech Regulation in Argentina: Opting for colaboration
In November of this year, the Central Bank of Argentina (BCRA) will launch the Transfers 3.0 plan, with the aim of popularizing digital payments and promoting the interoperability of wallets belonging to banks and fintechs.
The changes stem from regulation inspired by the principles of open banking and establish an interoperability regime between bank and non-bank accounts, QR payments, contactless and other types of technology.
Although it does not have an overarching law for the fintech sector, Argentina has experimented with more specific regulation, such as rules for non-financial credit providers. These are firms that lend but do not take deposits so in other words, they do not do banking intermediation. It also introduced rules for Payment Service Providers.
In 2017, the country enacted the Entrepreneurial Capital Support Law No. 27,349, a framework that bolsters new businesses in several ways. Like Ecuador, it established the Simplified Joint Stock Company (SAS) model, which allows accounting books, corporate books and other processes to be handled electronically.
At the same time, it also introduced CNV General Resolution No. 717-E/2017, which establishes the standard for crowdfunding platforms, whose regulatory authority is the National Securities Commission (CNV).
Another law that encourages technological entrepreneurship, although not necessarily fintech, is the Law for the Promotion of the Knowledge Economy, which grants tax benefits to companies in the technology field.
What the experts say:
The Argentine Central Bank has been monitoring the development of the financial industry and introducing regulation that fosters competition but without limiting activity, experts agree.
“Little by little we are seeing growth in regulation but in a way that does not stifle the industry," says María Shakespear, a partner at Beccar Varela law firm in Buenos Aires.
“[Transfers 3.0] marks a milestone in the rivalry between fintechs and banks where, although there is a lot of friction, there is also a lot of interconnection,” she adds.
The BCRA's plan for the new platform will have important consequences, especially for the digitalization of payments through QR, a system that is quite widespread and accepted by the public, says Daniel Levi, who is also a partner at the Argentine firm. In addition, it could curtail the use of debit cards, which will compete with a contactless payment that is processed in 15 seconds.
However, the lawyer foresees that, at least in the early stages of implementation, the changes could generate friction, depending on how well prepared banks and fintechs are for adopting the solution and processing the technical aspects of the platform.
“Although the system’s implementation is being discussed by all parties — banks, fintech and the regulator — and therefore one would expect an outcome that pleases everyone, Transfers 3.0 could create some market friction to begin with,” Levi said.
Join the global financial technology leaders who read iupana
Fintech Regulation in Chile: From the general to the specific
In early September, a proposal from the Financial Markets Commission (CMF) was sent to Congress accompanied by a report with guidelines for the development of an open finance framework.
In November 2020, the Financial Markets Commission (CMF) submitted the proposed Fintech Law for the securities market to the Ministry of Finance with the aim of establishing a legal framework for crowdfunding and crowdlending platforms, as well as creating alternative transaction systems, such as cryptoassets and other financial products.
This represents Chile’s first regulatory exercise with implications for fintech. While the Treasury granted authorization to non-banking entities to issue and operate methods of payment a few years ago (Law 20950), it didn’t have a big impact on the market.
But the latest bill has sparked enthusiasm.
In addition to regulating crowdfunding platforms, it also includes a section on open finance that could give rise to a more competitive market.
It is worth noting that the most important aspect of the bill is that it doesn’t seek to regulate each business model since rules would be subsequently drawn up based on the characteristics of each vertical.
What the experts say:
“The bill aims to create sufficient regulatory proportionality. It won’t ask the same of everyone simply because they perform a particular financial activity. It will depend on the impact and the way it is done,” says Ignacio Pera, Fintech and Venture Capital leader at Dentons, a global firm.
According to Pera, the regulator has taken an observatory role with the ability to adapt and make rules more or less demanding depending on the activity of the companies involved.
With respect to open finance, the lawyer argues that the Ministry of Finance’s bill makes ample references to the issue so this particular section has raised expectations across the entire financial ecosystem.
“Crowdfunding and crowdlending is something that already works in Chile but if there is strong open finance regulation, it will be interesting because it is expected to be pro-competition".
From the outset, it was proposed the regulation would be in place within two years at the most so the discussions about its enactment shouldn’t last much longer, the lawyer said.
Fintech Regulation in Mexico: New regulatory schemes
Latin America’s first set of rules to regulate the fintech industry was introduced in Mexico with the enactment of the Fintech Law in March 2018.
Although the law gives the sector legal certainty, it imposes a regulatory burden that could be slowing the entry of new players. As a result, firms are resorting to alliances, acquisitions and even embedded finance schemes to enter the market.
Background to Mexico's Fintech Law:
The Law regulates Electronic Payment Fund Institutions (digital wallets), crowdfunding and virtual asset operations.
Since the law took effect, the authorities have introduced changes in an effort to promote financial digitalization in verticals such as credit and investment management. They include new rules relating to the remote identification of users (digital onboarding) and the prevention of money laundering, which establishes how entities have to perform KYC (Know your Client) in the digital world.
The law also allowed the implementation of a regulatory sandbox and laid the groundwork for open banking.
What the experts say:
“What the Fintech Law did was to generate such a high barrier to entry that there have been no new electronic wallets in Mexico since 2018,” said Victoria Albanessi, a legal advisor to digital economy companies.
As a result, companies hungry to enter the Mexican market are resorting to other strategies, such as alliances and acquisitions. For example, the Chilean wealthtech Fintual bought Invermérica to speed up its entry into Mexico.
These obstacles could also potentially accelerate the search for opportunities in embedded finance, a model that is growing throughout Latin America.
Embedded finance allows any non-financial company to add banking services to bolster its offering. In practice, banks and fintechs with permits can provide a financial leasing service to companies that need to expedite their entry into the country.
Changes to the merchant banking framework are being drawn up to steer this new model, Albanessi said.
“The embedded finance sector is currently in the middle of a whirlwind but thanks to regulatory reform, it is moving toward where it should be.”
For the time being, the authority may be treating it like a banking commission agent or digital commission agent but “they are still trying to understand how to do it,” he added.
Delays to issuing operating permits is another recurring issue affecting fintechs in Mexico. According to Albanessi, although the National Banking and Securities Commission (CNBV) has been slow to grant permits, fintechs operating before the law came into force have been able to remain open.
“The Banking Commission has had enormous flexibility with fintechs, even giving conditional approvals so they can comply with all the requirements. It shouldn’t be “demonized,” he said.
Join the global financial technology leaders who read iupana
Fintech Regulation in Brazil: Seeking regulatory balance
The Central Bank held a public consultation on a set of regulatory proposals that seek to “harmonize” the prudential treatment given to payment services, regardless of whether they are provided by payment or financial institutions. If they materialize, new standards would be introduced so that these proposals can operate in the market.
The consultation period ended in January so the results are pending.
Brazil has been making advances with a series of regulations affecting the fintech sector over the last eight years, specifically in the sub-segments of payments, lending (P2P and direct) and crowdfunding.
The first rules for the sector were introduced in 2013 with the aim of stimulating competition: legislation regulating the payment system through cell phones and tablets (Law 12.865/13).
This led payment institutions to start offering mobile payment services but not other financial services, which remain the exclusive domain of banks and other regulated financial institutions.
In 2017, the Securities and Exchange Commission established CVM Instruction 588/17, which regulates public offerings by small companies via electronic platforms for collaborative investment, better known as crowdfunding.
The following year, the Central Bank issued Resolution No. 4,656, which authorizes digital lenders to act either as direct lenders - Sociedad de Crédito Directo (SCD) - or Peer to Peer lenders - Sociedad entre Personas, (SEP).
What the experts say:
Brazil’s Central Bank has added new rules, such as the Pix Regulation, as the market has evolved. It has found a route for regulating new business models and could continue along this path.
However, some segments have complained that competition is intensifying as fintechs have expanded and that warrants clearer rules. The monetary authority may be trying to address this regulatory “asymmetry” between the traditional businesses and the new players.
“One of the main things that this regulation intends to do is to change the [regulatory] burden for some of the institutions that operate in the payment system, bringing in rules that make them more onerous,” said Marcela Matiuzzo, partner at VMCA Advogados.
This is an issue that is very present in the debate about finance in Brazil and should be reflected in regulation soon, according to Matiuzzo. However, there is currently no rule that alters the balance between the two sides.
“I don't know if it [a Fintech Law for Brazil] would be that useful. I think we have found other ways to potentially achieve the benefits that a fintech law could bring us, due to the very active participation of the Central Bank in making specific regulation for the system.”
Nevertheless, the lawyer said the context in Brazil is becoming increasingly complex due to the proliferation of important players and they will have to wait for the authorities next moves to see how the regulatory balance stabilizes.
“What will the Central Bank do? Will it stand its ground? The Bank has tried to inject competition into the market and has responded to some extent to this need for technological innovation. We have a lot of examples of that, such as open banking, so I think they are really worried about us and are trying to do something about it,” Matiuzzo said.