The rise of FinTech in banking

December 2019

Innovation has transformed many industries during the last twenty years; this is no truer than in the financial services industry. Traditional banks have been able to maintain their dominant position in everyday financial life, both commercial and domestic, largely due to high levels of regulation acting as a barrier to entry. However, technology has changed everything, and the banks are witnessing the arrival of high-tech new competitors that threaten their dominance.

Perhaps surprisingly for the traditional banks, many of the new financial competitors are innovating and growing in emerging countries where the growth potential for banking services is huge. In Asia, Africa, and Latin America, 60% of the population still has no bank account, yet they do own mobile technology such as smartphones. Of the new entrants, financial businesses founded on technology, collectively known as FinTechs, are the most specialised. In this article we will look at FinTech businesses and how Mexico is dealing with their arrival.

The FinTech business model

FinTechs operate as intermediaries in money transfers, loans, crowdfunding, purchases and sales of financial securities, as well as providing financial advice services. They have three key characteristics.

1. They focus on a single product or service and do it well. Without the overheads of traditional banks, they can concentrate on the user experience by providing their service more cheaply, more efficiently, and more resourcefully. An example is TransferWise, an application that enables international money transfers.

2. They have a clear customer focus. Without the cumbersome legacy systems with which the traditional banks grapple, FinTechs can focus on solving their customers’ problems. The application Fintonic, for example, allows users to efficiently manage their bank accounts and savings.

3. They all use modern technology that gives them a competitive advantage. Kabbage, an American lender to small businesses, can collect large amounts of data, using artificial intelligence, to grant loans in just ten minutes.

These characteristics enable FinTechs to supply their products more efficiently and at lower cost than the traditional banks.

Regulating FinTechs in Mexico

According to a US Treasury report, more than three thousand new FinTech businesses were formed between 2010 and 2017, generating investment exceeding $22 billion. This rapid growth has made the issue of regulation a pressing one, particularly as traditional banks have been tightly regulated for decades.

Mexico’s National Banking and Securities Commis-sion (CNBV) governs FinTechs under a new Financial Technology Institutions Law. This law allows Fin-Techs to operate using one of two business models:

1. Electronic payments institutions permitted to issue and manage monetary balances electronically, perform domestic currency operations, and act as money transmitters.

2. Crowdfunding institutions permitted to conduct financing operations involving debt, equity, or profit sharing.

FinTechs must meet the following stringent licensing requirements:

• A minimum share capital of UDI 700,000 equivalent to around $217,000

• At least two shareholders, Mexican or foreign, individuals or other entities

• A management body comprising a single manager or a board of directors

• An overseeing body that supervises the management body

• Sufficient representatives to ensure the business can fulfil its corporate purpose.

Where next for FinTechs?

Until now FinTechs have focused their attention on payments, automation and open data. However, 2020 will see a shift in focus as the market seeks to control the full range of FinTech services through regulation.

What tends to follow regulation is a surge of new entrants into the mass market. This will happen quickly, especially in areas where the take up of traditional banking services is less common. This is likely to represent the beginning of a new era in financial services.

About the author

José Antonio Gutiérrez
Mexico City, Mexico

José Antonio is a partner at Russell Bedford’s Mexico City firm. He is responsible for the financial sector and Anti-Money Laundering (AML) within the firm and has acquired more than 20 years of professional consulting experience within international consulting firms supporting entities in the banking and non-banking financial sector.

José Antonio leads review and due diligence assignments for banks, private sector companies and governmental programmes. He is certified by the Mexican authorities as a compliance officer and external auditor for AML.

Author: José Antonio Gutiérrez, Russell Bedford Mexico

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