Financial Innovation Group:

A multidisciplinary approach to advance FinTech in Mexico

 

1. The Financial Innovation Group: Context

Mexican FinTech Law, enacted in March 2018, includes a section mostly forgotten until recently. Articles 93 to 95 create the Financial Innovation Group, a consulting, advisory and coordination instance integrated by up to 12 proprietary members from the public and private sectors. The public sector members include representatives from the Ministry of Finance, the Central Bank and all supervisory financial agencies -(i) the Banking and Security Commission, (ii) the Insurance and Bonds Commission, (iii) the Pension Saving System Commission and (iv) the Financial Consumers’ Protection Agency-. The rest of the members should represent FinTech and other financial entities invited by the Ministry of Finance. Third parties may be invited without voting rights when the nature of the session requires it.

According to the Law, the Group is intended to encourage the exchange of opinions, ideas and knowledge between government and industry and, most importantly, for the authority to learn about and understand new developments around financial technology and plan in an orderly manner its development and regulation.

We can personally attest why the writers of the law wanted this body to exist. They fully understood that what was being regulated was in constant change and that regulators will never match the speed and progress of technology. By periodically meeting with the people on the ground, they would understand, try to adapt and, most importantly, not hinder innovation and the growth of the sector.

By legal mandate the Group has to convene at least once a year. Sadly, this has not happened.

Up to December 2023, the only public evidence that the Group gathered was on August 2018, complying with one of the commands in the Law stating that the first meeting had to be held at the latest in September 2018. What is interesting is that the private members being invited to this first meeting were “innovation specialists for banking, securities, insurance, e-payments, cryptocurrencies and crowdfunding sectors”. As to the agenda, a special guest was invited, the Head of the Global Macro-Financial Monitoring and Lead Financial Sector Economist in the World Bank, to talk about the FinTech landscape and vision worldwide, as well as his view on the development through technology of the Mexican financial system in Mexico.

No other evidence of further meetings were found, in spite of the legal mandate mentioned above, until a big event shifted the attention back: the First FinTech Week organised by the Ministry of Finance along with the other financial authorities, held in August 2023.

2. The First FinTech Week: Kick-off to pending agenda

The Ministry of Finance inaugurated the three-day event, recognising that the FinTech sector has had a non-stop escalation with 20% of annual growth and increase in the user base 7 times higher than traditional banks. The number of granted authorisation reached 65.

So their intent is to consolidate the ecosystem to become a benchmark in innovation, sustainability and collective well-being. For this, they recognised that a proper regulatory environment prone to protect the consumers and integrity of the financial system, without hindering innovation, competition and growth, is what had to be promoted and safeguarded.

The Underminister of Finance called upon authorities, regulators, and representatives from the sector to collaborate in creating an enabling and proportional environment for the sector allowing it to realise its potential and, therefore, benefiting the entire Mexican population, while ensuring a level playing field.

We consider this recognition a huge milestone achieved by the current administration in Mexico.

Further, a working agenda was shaped which, no doubt, fell short of all pending matters in the ecosystem but definitely served as a kick-off for all work to be done. The items mentioned by the Underminister were:

1. Urgent definition and implementation of the pending open finance regulation, which would help to offer new, better and personalised services, helping clients in better money management and informed decision-making.
2. Issuance of clear rules for the card payment system to foster competition and the establishment of new payment networks.
3. Produce specific regulation for “digital” brokers to provide legal certainty and create an ad-hoc framework.
4. Update and increase the investment limits in crowdfunding products to offer higher returns and more benefits for consumers.

Finally, they called to activate the Financial Innovation Group to work hand in hand, fostering innovation, sustainability, inclusion, and education within digital financial services. “Maintaining constant dialogue, we aim to turn Mexico into one of the leading financial hubs in the region.”

3. 2023 Meeting of the Group

The Financial Innovation Group finally gathered in December 2023. The FinTech regulatory agenda for the next year, in general terms, was discussed. The topics outlined were: incorporation of innovative models (regulatory sandbox), use of cryptocurrencies, digital financial education, open finance, cybersecurity and strengthening of existing models, including payment systems. The specific working agenda will be landed in weekly meetings to be held up until the end of February 2024, with the purpose of issuing policy recommendations in March.

a.Payment systems

A zoom in to discussions around payment systems is interesting. Context is that in October 2018, Mexican competition authority (“COFECE”) initiated an investigation into potential barriers to competition in the payment systems market involving a clearinghouse for card payments. In December 2020, the Investigation Department issued a preliminary report concluding that there were no conditions for effective competition due to the likely existence of four barriers hindering competition and free entry. These barriers not only impede market entry and raise costs for new participants but also inhibit innovation and new investment to address operational and security issues, and increase overall costs. The barriers are the following:

(i) The existence of a single card payment network.

(ii) Anticompetitive requirements limiting entry for new clearinghouses.

(iii) Co-ownership of Prosa and E-Global (incumbent clearinghouses).

(iv) The obligation of brand holders (Visa and Mastercard) to ensure daily liquidity for transactions processed by clearinghouses without timely and necessary information, hindering technological innovation in security and the entry of new brand holders.

The COFECE resolution confirmed the majority of the conclusions outlined in the preliminary report and was ultimately published in late September 2023. While this represents a significant step forward in recognising factors that limit the competitiveness of the system, two issues stand out: the lack of a stance on the vertical integration problem in clearinghouses and the risk associated with setting maximum prices for interchange fees.

In the case of market verticalisation in card payments, a few entities control multiple roles in the value chain, restricting market competition and overall efficiency. Initiating a process of de-verticalisation through regulatory changes enhances competition and allows both payment recipients and cardholders greater choice. In a similar case in Colombia, for instance, authorities’ intervention to eliminate vertical integration allowed new entrants into different market segments, ultimately resulting in an increase in the supply of services with products more tailored to consumers’ needs. In Mexico, allowing such modifications would genuinely enable the participation of other stakeholders.

On the other hand, setting maximum prices for interchange fees between participants would lead to market inefficiency and consistently high costs. In this case, it is more advisable to change the methodology for establishing these fees to encourage card payment networks to have more elements to differentiate themselves independently, thereby improving the innovation proposal that allows, among other things, ongoing efforts to reduce rejection rates.

In summary, the necessary modifications to the current regulation should include (i) rules to ensure interoperability when a transaction requires the involvement of two or more networks, (ii) making it the responsibility of the authorities to set the maximum limits for interchange fees for each business sector, rather than leaving it to the banks that own the current clearinghouses, allowing players to freely establish the fees they should apply, (iii) enforcing the establishment of interchange fees with objective criteria, (iv) regulating and authorising the connection to processing systems by the authority, not by those managing the systems, and (v) incorporating controls to mitigate collusion among players.

b.Open Finance

Open finance is still a pending matter. Last year’s article mentioned that we were expecting rules to be issued in 2023. This has not happened yet. We urgently need APIs’ standards to share transactional data to trigger more and better products and services for Mexican consumers and, no minor fact, to comply with the legal mandate established in the FinTech law to issue this secondary regulation.

4. Way forward

Topics mentioned in this article and many others require a deep dive and a longer discussion. However, it is crucial that, beyond technology, the role of regulators in ensuring a level playing field for all participants is acknowledged. For example, in the payment systems case, COFECE has taken positive steps, but the actual and effective implementation of its recommendations relies on closer collaboration between the government, regulators, and the financial industry.

Despite the obvious fact that any political change in politics demands consensus, all the projected financial reforms in Mexico will need a carefully crafted strategy and broad consensus between the public sector, including executive and legislative branches, and the private sector, including incumbents and new entrants. This will be particularly crucial in 2024, as Mexico is set to engage in a presidential election.

In June 2024, Mexico is set for a landmark general election. While the formal announcement of official candidates is not expected until February, the fact of the unprecedented scenario where two women are the leading presidential candidates is a notable development. Claudia Sheinbaum, a former Mexico City mayor and representative of the governing party, will contend against Xóchitl Gálvez, an opposition candidate. Although neither candidate has a background in finance or has held leadership roles in the industry, their financial strategies are expected to play a crucial role in the electoral process. While other candidates may emerge in the coming months, the real contest is likely to only involve Sheinbaum and Gálvez.

Regardless of the election outcome, the next administration is set to take office in October 2024 and will face the challenge of addressing unresolved issues from previous years. The role of Congress, in this context, is anticipated to gain greater significance, especially given the unlikelihood that the new president will achieve the consistently high approval ratings above 60% that current President López Obrador has comfortably enjoyed.

Despite President López Obrador’s frequent declarations about retiring from politics, his influence is likely to continue shaping the political landscape. This, combined with the pressing need to address regulatory issues, calls for a Congress and private sector that is both proactive and decisive, potentially accompanying significant shifts in policy and governance strategies.

As technological advancements continue to transform the financial sector, the possibility of expanding inclusion and offering a wider range of financial services becomes more feasible. In this context, the role of entities like the Financial Innovation Group becomes crucial. Their collaboration with authorities, regulators, and industry representatives is key to achieving a healthy financial ecosystem.

The expectations set during the First FinTech Week, along with the collective efforts from the sector, emphasise the need to stimulate the industry and enhance competitiveness. Continuity in the authorisations of FinTechs and achieving regulatory certainty for all participants are essential in this regard. These steps will position Mexico as a leading figure in the region, especially in areas like Open Finance and Cryptocurrencies that have the potential to flourish.

Moving forward, the continuation of collaborative efforts will be crucial. It will be vital to encourage the financial sector to actively engage with the newly elected leaders of public administration and Congress, sharing best practices and insights. Such cooperation will be instrumental in achieving the policy reforms necessary to support the growth and innovation of the sector, thereby enhancing financial services in Mexico.