For several years, Mexico and Brazil have disputed the supremacy of fintech in the region. Both countries have a dynamic ecosystem with more than 400 startups, seeking to create alternatives to the financial institutions that currently exist. Crowdfunding, Crowdlending, or online brokers are some of the current options. However, Mexico’s Fintech ecosystem has a substantial difference: it already has a regulatory framework.
For some, the Fintech law in Mexico is a positive signal for the sector. It indicates that the ecosystem is mature, with both proven and regulated business models. For others, it is a stumbling block that hinders innovation.
Like it or not, entrepreneurs in Fintech must abide by the new legislation. For Collective Financing Institutions (IFC) that exist since before the enactment of the Law, this period will expire on September 25, 2019.
IFCs have time in Mexico, although with the common crowdfunding name. On these platforms, users can support other people’s projects and receive some benefit in return: the prototype of a product, interests, or participation of a company.
The founder and CEO of Prestadero, Gerardo Obregón Salorio, commented to Entrepreneur some of the most notable changes in the Crowdlending platforms.
Don’t put all your eggs in one basket
Currently, the platforms allow users to determine how to manage their funds. However, at present, they can only invest 7.5% of the money they already have invested in a project.
While this seems to be a limitation, the objective is for the investor to reduce the risk of losing his money with the diversification of projects.
IFCs will have to know more about you
To prevent money laundering, financial institutions will have to ask for more information. Among the required data will be name, address, RFC, CURP, telephone, email, beneficiaries (also with full address), source of resources, transactional profile, if you are a politically exposed person, if you are the final beneficiary, identity document (such as INE or passport), proof of address, among other information.
Obregón points out that these changes will mainly affect investors, as this detailed information is already requested from credit applicants.
No cash allowed
Platforms may not receive cash for payment of credits. Although some fintech have never allowed investors to use some money, now neither can credit applicants pay with cash. To accept, they will have to request an exception to receive the money, and they will only be able to collect 3,000 UDIs monthly, equivalent to approximately 900 dollars.
You can only transfer funds from bank accounts to your name.
If you used to deposit funds in cash or make electronic transfers from an account that is not in your name to invest in a crowdfunding platform, now you will not be able to do so. You should always pay funds to the platform from a bank account in your name.
You must approve new contracts.
The Law establishes that contracts signed online between the platforms and their users have specific requirements (generally designed to protect their users). So the platforms must modify these contracts and request the approval of the users so that they can continue operating on the platforms.
A “Certificate of Risk” will also have to be approved for each investor, where they explicitly have to accept the risks of investing in crowdfunding platforms such as loss of money, lack of liquidity, among others. In case of not agreeing with the dangers, users will not be able to operate on said platform.
Modification to log-in processes, funding, among others
The platforms will have to meet some requirements to improve the security of account access. Some basic ones are: requesting a username and password in 2 steps or more, blocking accounts in case of failed access attempts, avoiding having more than one session at a time, among others. Obregón believes that these changes will impact users slightly, as the burden to control and modify these processes will fall on the platforms.
Withdrawals only to own accounts.
You can only withdraw funds from the platform to bank accounts that are in your name.
Project tracking
Platforms are required to follow up on investor projects. The vast majority of platforms already reported this monitoring and performance.
Incentive Alignment
The platforms must present an Incentive Alignment Scheme with investors so that they share the risk or have “skin in the game.” This scheme may vary by each platform, but some examples may be charging the commission according to the successful performance of the projects, or actively participating as funding of them in a particular proportion.
Maximum credit amounts
The platforms will have limits of amounts per project. These limits will depend on the type of platform (for example debt, capital, real estate), but the maximum for liability will be 50,000 UDIs (approx. 15,000 dollars).
Transparency
Once authorized, the platforms must publish on their website clear information about:
- How they rate their applicants
- Details of commissions charged
- Contact information for clarifications (UNE)
- Consolidated financial statements (and audited annually)
- Status of the loan portfolio (including performance and judicial process statistics)
We must also submit our Accession Contracts to the National Commission for the Protection and Defense of Financial Service Users (Condusef) (therefore, comply with the contractual transparency criteria that the agency issues), and publish information to users so that they are aware of their credits and their investments (in addition to the transparency that we already published on our website, we must generate and give access to Account Statements, for example).
What happens if the platform is not authorized?
If the platforms in operation do not request authorization on time, or once your authorization request has been entered, it is denied, then the platforms must stop operating. In other words, they will not be able to authorize new credits or receive new investments, and should thus notify their clients. They may only carry out operations aimed at concluding the transactions already carried out.
However, the bulk of the changes will occur internally in each platform, where the Financial Technology Institutions (ITF) must, among other things, have: risk control manual, conflict of interest policy, manual of money laundering prevention, automated operation detection system, risk disclosure policy, and account separation policy.
In addition to an internal control manual, business continuity plan, information security manual, operation manual, business model, check sufficient and safe technological infrastructure and have a compliance officer, among other requirements.
The authorization of the platforms would not be immediate since the Law establishes 90 days or up to 180 days in case of requiring feedback from other governmental institutions (such as Banxico or SHCP). And if there is any prevention, the term restarts.
For several months now, the platforms have been preparing to meet the requirements of the Law. This process involves many changes, especially within the organization.