The great equalizer in the race to be Mexico’s top neobank

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Today we had our Morning Coffee with Sam Garcia, Senior Associate at Amplo—a venture fund

Contxto – It is estimated that 42 million Mexicans are unbanked and that millions more are “underbanked”, meaning that they have a bank but it does not offer mobile services, or are just generally unhappy with their current banking situation.

This has created a huge market opportunity for fintechs all over the world to try and capture.

Related article: Mexico’s challenger and neo-banks. Do you know the difference?

On March 9, 2018, the Mexican Fintech Law was published and soon after the publication of that law came an explosion of fintechs all vying for the Mexican market.

Currently, there is a long list of challenger banks and neobanks all attempting to capture this market: Fondeadora, Albo, Klar, Nelo, Oyster Financial, Flink, Cuenca, Hey Banco, Broxel, Stori, Evvo, Mibo, Vexi, and many others.

Outside of the Mexican fintechs that are quickly forming up, international players like Nubank, Revolut, N26, and Ualá are quickly coming up with ways to make their entry into the Mexican market.

However, as all these fintechs are jockeying for the top spot in Mexico, they are all facing one huge common hurdle—the Mexican government.

The same law that has created the space they are in, the Mexican Fintech Law, is also one of their biggest impediments to rapid growth.

Most of the fintechs listed would be classified as an e-money institution for the wallet services that they provide and they cannot operate without being a licensed entity (minus the exception for institutions that were grandfathered in).

This means that they are now subject to AML (Anti-Money Laundering) rules and they are required to receive authorization from the National Banking and Securities Commission to offer their services.

One of the biggest limitations on e-money institutions in Mexico is that they cannot pay interest on the money that is deposited into their accounts. This is a really important limitation because offering attractive interest rates is ideally how financial institutions would bring in consumers.

The inability to pay interest on their deposits also puts fintechs at a slight disadvantage to the traditional banks who they are competing against.

Another big roadbump is that fintech firms cannot accept traditional deposits, which means they have to rely on banks that are already in operation.

No matter the size of the institution involved (from Nubank to the most recent digital wallet startup) these rules must be followed or regulators will not be far behind you.

Silver lining to a string of dark clouds

Interestingly, although these regulations are limiting, they are allowing fintechs a slightly more level playing field against one another. For example, Nubank and Revolut have an incredible amount of money on hand and if they had a clear avenue to both pay interest on deposits made with them and run normal marketing campaigns, they could do so at a loss for quite some time just to gain market share.

This would effectively quash all new competition.

Since they cannot provide interest on their deposits, they are forced to use the same marketing avenues that are available to other fintechs in the space.

Since the Mexican Fintech Law is relatively new, a lot of details around enforcement and how the law will be shaped is still up in the air. One of the big factors that may play into the Mexican government being more lenient with fintech players is the current coronavirus crisis.

The current fintechs are allowing for banking to take place without the need for contact with a central banking location, which may be incredibly necessary given the contagiousness of the virus.

Further, President Andrés Manuel López Obrador has adamantly stated that Mexico’s companies should not expect bailouts or tax amnesties in the wake of the epidemic. Without the possibility of a bailout, some of Mexico’s traditional financial institutions may face distress, which may allow more room for fintechs to come in and sweep up the market.

Although the Mexican government’s involvement in the fintech space is adding a good amount of uncertainty to it, its hands-on approach is understandable given its want to protect Mexican consumers from what they have had to deal with in the past.

For all of the fintechs currently competing within Mexico, it seems like racing to comply with the Mexican government should be a top priority since it has made it absolutely clear that they do not care how much money your company has or how much marketshare you have acquired, if you do not quickly comply with them, operating in the country will become impossible.

Related articles: Tech and startups from Mexico!

Sam García is a Senior Associate at Amplo and a graduate of Harvard Law School. He has also written for Forbes, Slate, and is currently a Legal Tech Contributor for Law.com. He is hugely passionate about growing Hispanics in entrepreneurship and the VC world.