Fintech, or financial technology, has emerged as a disruptive force in the financial industry, revolutionizing how financial services are delivered to individuals and businesses. In Mexico, where financial inclusion remains a challenge, fintech has the potential to bridge the gap and provide innovative solutions to the unbanked population. Here, we explore three fintech business models that can operate successfully in Mexico without requiring the establishment of an Institución de Tecnología Financiera (ITF).
1. Peer-to-peer lending platforms: This business model connects individuals or businesses seeking loans with potential lenders. By leveraging digital platforms, fintech companies can match borrowers’ creditworthiness with investors looking for higher returns on their investments. With robust regulatory oversight already in place in Mexico, such platforms can operate within legal boundaries, enabling more inclusive financial access.
2. Mobile payment solutions: With over 100 million mobile phone users in Mexico, mobile payment platforms offer a convenient and secure way for individuals to access financial services. These platforms enable transactions, peer-to-peer transfers, bill payments, and even savings through mobile applications. By partnering with existing financial institutions, fintech companies can leverage their infrastructure to provide seamless mobile banking experiences, even without direct regulation.
3. Automated financial advisory services: This model uses algorithms and machine learning to provide individuals with personalized financial advice and investment recommendations. By tailoring recommendations based on a person’s financial goals, risk tolerance, and income level, these platforms provide low-cost and easily accessible financial advice, without the need for in-person consultations. Given the potential to improve financial literacy and democratize investment services, Mexico’s regulatory framework can support the operation of such fintech businesses.
In conclusion, Mexico presents a ripe environment for fintech innovation, and these three business models can operate successfully without relying on an Institución de Tecnología Financiera (ITF). By leveraging existing regulations and strategic partnerships, fintech companies can help enhance financial inclusion and accessibility for the unbanked population in Mexico.
Mexico has been laying the groundwork to support open banking initiatives through various regulatory measures. In 2018, the country enacted its Fintech Law, which aimed to foster innovation and competition within the financial industry. This legislation recognized the importance of open banking and set a framework for its implementation.
Under the Fintech Law, financial institutions are obligated to share customer data with authorized third parties, with the express consent of the customer. However, this sharing of data is subject to strict data protection and cybersecurity regulations to ensure the privacy and security of customers’ financial information. The legislation also requires the implementation of robust Customer Due Diligence (CDD) processes to safeguard against money laundering and fraud.
For foreign investors, the legal outlook of open banking in Mexico presents significant opportunities. With the country’s vibrant fintech ecosystem and the increasing demand for digital financial services, investing in open banking ventures can offer access to a growing market and potential partnerships with local financial institutions.
Despite the favorable legal framework, foreign investors must carefully navigate the regulatory landscape and ensure compliance with Mexican laws. Engaging legal counsel well-versed in the intricacies of open banking in Mexico is paramount to mitigate any legal risks and fully harness the potential of this innovative and transformative financial landscape.
Operating as a SOFIPO (Sociedad Financiera Popular) in Mexico provides foreign investors with the advantage of lower minimum capital requirements compared to instituciones de tecnología financiera (ITFs) regulated by the fintech law or traditional banks.
1) Lower Minimum Capital Requirements: SOFIPOs have lower minimum capital requirements set by the National Banking and Securities Commission (CNBV) compared to ITFs and traditional banks. The minimum capital requirement for a SOFIPO is significantly lower, making it more accessible for foreign investors to establish and operate a financial institution in Mexico. This can be an attractive option for investors with limited resources, as they can enter the financial market with a lower upfront capital investment.
2) Less Stringent Regulatory Framework: SOFIPOs are subject to a less stringent regulatory framework compared to ITFs regulated by the fintech law or traditional banks. While ITFs and banks are under the supervision of multiple regulators, including the CNBV and the Bank of Mexico, SOFIPOs have a simpler regulatory structure with more relaxed requirements. This can reduce the compliance burden and associated costs for foreign investors.
3) Greater Flexibility and Agility: SOFIPOs enjoy greater flexibility in their operations compared to ITFs and traditional banks. They have the freedom to design their own financial products and services, allowing them to cater to specific target markets or niche segments. This flexibility can be attractive for foreign investors who want to implement innovative business models or target underserved markets with tailored financial solutions.
4) Market Opportunities: The financial industry in Mexico still includes a significant portion of the population that remains unbanked or underserved by traditional banking institutions. As an alternative financial institution, SOFIPOs can tap into these market opportunities and reach a wider customer base. This can be especially beneficial for foreign investors looking to enter emerging markets and provide financial services to previously underserved populations.
5) Potential for Higher Returns: Lower minimum capital requirements and reduced regulatory constraints can potentially lead to higher returns for foreign investors operating as SOFIPOs. By minimizing the upfront capital investment and operating costs, investors can allocate resources to generate higher returns on investment.
It’s important to note that while operating as a SOFIPO provides these advantages, foreign investors must still comply with all relevant regulations and ensure proper due diligence in establishing and running their financial institution in Mexico.
As a foreign investor, it is important to define the best vehicle when investing in the Mexican lending market in order to make the legal structure of the project more efficient and maximize its profitability.
The most comprehensive entity for this type of venture is the SOFOM ENR, which allows the investor to participate in the credit granting market, leasing, credit card issuance, and even factoring, with the added benefit of being considered an integral part of the Mexican financial system, which provides important tax benefits and simplification of the collection process.
However, it should be considered that the incorporation and implementation process of the entity in practice usually takes 8 to 12 months (fully operational), which can be a significant limitation for projects sensitive to “time to market”.
An alternative for these projects is the SAPI, which only takes a maximum of 2 months to be fully operational and with which projects based solely on payday loans can be executed, for which it even has its own tax benefits.
In summary, the suggestion is not to decide between SAPI and SOFOM, but to start operations with the former while simultaneously starting the incorporation of the SOFOM to make the most of market timing.
Mexico, as a flourishing economy, has attracted numerous foreign investors seeking lucrative investment opportunities. To ensure fair competition and safeguard its tax revenues, Mexico has established comprehensive legislation to regulate thin capitalization, specifically for corporations receiving loans from their overseas holdings
The Mexican government recognizes the importance of preventing excessive interest deductions that may diminish tax revenues. To address this concern, the Mexican Income Tax Law (MITL) clearly outlines regulations related to thin capitalization and interest expense deductions. These regulations are primarily governed by Article 28 of the MITL, supported by various corresponding resolutions and guidelines set forth by the tax authorities.
According to Mexican law, thin capitalization occurs when the debt-to-equity ratio of a Mexican corporation exceeds certain predetermined limits. In Mexico, both interest payments and the loan amount are subject to thin capitalization rules. However, it is crucial to note that these rules only apply to loans received from related parties or entities.
The specific thresholds set by Mexican law are as follows:
- General rule: For corporations, the debt-to-equity ratio must not exceed three to one (3:1).
- Financing entities: Financial institutions and certain non-financial entities engaged in lending activities must maintain a debt-to-equity ratio not exceeding ten to one (10:1).
If a Mexican corporation exceeds the prescribed debt-to-equity ratio, expenses arising from interest payments may not be fully deductible for tax purposes. In this scenario, Mexican tax law stipulates two courses of action that authorities can undertake:
- Debt recharacterization: Mexican tax authorities have the power to recharacterize an excessive loan as equity, resulting in a denial of interest deductions. The principal purpose behind this provision is to ensure that excessive debt does not exploit tax advantages.
- Back-to-back loans: Mexican thin capitalization regulations also tackle back-to-back loans, which refer to loans received by a Mexican corporation from a related party, where the corresponding lender has received funding from a third party. In such cases, the tax authorities have the authority to evaluate both sides of the transaction and potentially disallow any interest deductions.
The Mexican government, with its robust regulatory framework, ensures fair tax practices and prevents the erosion of tax bases by closely regulating thin capitalization. By establishing clear thresholds and consequences for violations, Mexico encourages responsible borrowing practices while ensuring that tax revenues are safeguarded. Foreign investors looking to invest in Mexico should be well aware of and adhere to these regulations to avoid any potential penalties and maintain a sound and compliant business environment.