This country-specific Q&A provides an overview to Fintech law in Mexico.
It will cover open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech.
This Q&A is part of the global guide to Fintech. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/fintech/
What are the sources of payments law in your jurisdiction?
As a civil law country, legislation is the primary source of payments law in Mexico. Following the bill discussion and approval by both Chambers of Congress, legislation is enacted by the Executive Branch and published in the Federal Official Gazette.
Payments systems and services are regulated in Mexico as follows:
(i) The Bank of Mexico Law (Ley del Banco de México) establishes that such institution should be in charge of:
(a) regulating payment systems; and
(b) fostering the optimal functioning of such payment systems.
(ii) The Payment Systems Law (Ley del Sistema de Pagos) provides the characteristics, conditions and operation of payments systems in Mexico under the supervision of the Bank of Mexico.
(i) The Transparency and Ordering for Financial Services Law (Ley para la Transparencia y Ordenamiento de los Servicios Financieros) authorises the Bank of Mexico to regulate the means of payment and the payment services banks provide to their customers including, among others: (a) commissions and exchange fees; (b) services enabling cash to be placed on a payment accounts; (c) cash withdrawals; (d) transfers of funds on a payment account; and (e) the execution of payment transactions through digital or IT devices.
(ii) The Monetary Law (Ley Monetaria) establishes the provisions for the regulation of banknotes and metallic coins as means of payment and acknowledges the Mexican peso (MXN) as the currency of legal tender in Mexico.
(iii) The Fintech Law (Ley para Regular las Instituciones de Tecnología Financiera), regulates the activities of issuing, administering, redemption and transmission of electronic payments, which are carried out through computer applications, interfaces, webpages and other platforms.
Can payment services be provided by non-banks, and if so on what conditions?
Payment services in Mexico may be provided by non-banks, specifically:
a) E- money institutions: Considered under the Fintech Law, e-money institutions must obtain the authorization from the Banking and Securities Commission (CNBV) to receive or transfer funds in cash in Mexican currency, prior to establishing the disposal means and mechanisms to be implemented. In addition to this authorization, e-money institution must maintain the minimum account levels established by the Bank of Mexico.
In accordance with Circular 12/2018 issued by the Bank of Mexico in September 2018, e-money institutions may be authorized to perform their operations in Mexican currency, as well as with any of the following: (i) cryptocurrencies; (ii) foreign currencies; (iii) act as a clearinghouse; or (iv) to operate, design or market derivative financial instruments with underlying assets.
b) Payment aggregators: payment services may also be provided by payment aggregators in terms of Article 2 of the General provisions regulating disposition means networks as the network participants with service agreements with clients to support online money transfers to third parties by means of any telecommunication, digital or IT device. Payment aggregators, to act as such, must be registered with the CNBV and are subject to inspection and verification by the financial authorities.
What are the most popular payment methods and payment instruments in your jurisdiction?
Cash is still the most common payment method in Mexico; primarily due to the limited awareness of payment cards, the novel development of e-money platforms and the limited access to banking infrastructure among the rural population and the informal economy.
Debit and credit cards have grown significantly since the earlies 2000´s following the introduction of electronic payroll services and mass media campaigns endorsed by financial institutions aimed to increase the banked population number in Mexico. Social welfare benefits and local governments social programmes funded through debit cards have also been relevant in fostering financial inclusion. Mexican e-commerce has also been developing rapidly in Mexico since 2010, following the entrance of major online retailers to Mexico.
What is the status of open banking in your jurisdiction (i.e. access to banks’ transaction data and push-payment functionality by third party service providers)? Is it mandated by law, if so to which entities, and what is state of implementation in practice?
Open banking in Mexico is soon to become a reality following the enactment of the Fintech Law and will be implemented in Mexico through the Application Programming Interfaces (APIs), allowing financial institutions to exchange financial data of their clients through open programming interfaces, respecting privacy and confidentiality under the provisions of the Federal Law on Protection of Personal Data Held by Private Parties (the ‘Data Protection Law’).
In accordance with Article 76 of the Fintech Law, Fintech institutions, clearing houses, traditional financial institutions, money transmitters and credit bureaus must develop APIs allowing connectivity and access to other APIs. The characteristics of the transactions carried out by the APIs servers, shall be subject to the general provisions issued by the Bank of México for this purpose, which to date are still pending publication.
How does the regulation of data in your jurisdiction impact on the provision of financial services to consumers and businesses?
The Data Protection Law applies to private parties, whether individuals or private legal entities, that process personal data, with the exception of:
A. Credit reporting companies, and
B. Persons carrying out the collection and storage of personal data that is exclusively for personal use.
Therefore, the Data Protection Law and its regulations are unquestionably applicable to financial services entities (including Fintech institutions) in control of personal and financial data, same that must adhere to the principles of legality, consent, notice, quality, purpose, fidelity, proportionality and accountability in terms of the Data Protection Law.
What are regulators in your jurisdiction doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions for fintechs?
Sandboxes are considered as part of the Fintech Law; however, general (secondary) provisions applicable to sandboxes must be published during the first quarter of 2019. Article 80 of the Fintech Law, establishes that legal persons, other than Fintech Institutions and other entities supervised by the National Commission for the Pension Saving System and the National Insurance and Bonding Commission and the Bank of Mexico (jointly as the ‘Supervisory Commissions’), must obtain authorization to carry out activities that require sandbox models to operate.
The authorizations referred to in the previous paragraph shall be for a maximum period of two years and shall be subject to review by the Supervisory Commissions. The Fintech Law also provides that financial institutions and other supervised entities, may temporarily carry out operations or activities comprised within their corporate purpose through sandboxes.
Do you foresee any imminent risks to the growth of the fintech market in your jurisdiction?
Although the Fintech market is expected to grow locally during the upcoming years, it is of our opinion that risks may arise in relation with: (i) the lack of secondary regulation for APIs and sandboxes; (ii) the amendments to privacy regulation; (iii) corporate governance rules that may become a burdensome for small ventures commencing operations in Mexico; and (iv) political changes in Mexico which may impact the administrative structure of financial regulators.
What tax incentives exist in your jurisdiction to encourage fintech investment?
To date the Mexican Congress has not yet approved any type of tax incentive for Fintech companies and no regulation in this regard is expected to be issued in the short term. Some local incentives (which vary from State to State) may be considered to promote the development of Fintech companies in specific geographic regions.
Although there is no specific value added tax (‘VAT’) provisions applicable to cryptocurrencies as of yet, it is expected that these type of virtual assets will receive a similar tax treatment to that applicable to foreign currencies, shares, debt certificates, real estate participation certificates and derivatives (i.e. the application of a 0% VAT rate). Also, the export of certain technological services from Mexico qualifies for the application of a 0% VAT rate, provided that certain conditions are met.
Which areas of fintech are attracting investment in your jurisdiction, and at what level (Series A, Series B etc)?
Equity finance has become a useful tool for Fintech companies, both crowdfunding and e-money institutions in Mexico, depending on the stage of development of each company. Based on a venture capital report published by MassChallenge (CUOQ, Kenny et al, MassChallenge Mexico, Levantamiento de Capital Guía Especializada sobre financiamiento e inversion para emprendimiento de alto impacto en México, 2018), several Mexican entrepreneurs in the seed stage (0 to 2 years) are recurring to Series Seed Capital through Angel investors for amounts varying from 10,000 to 500,000 US Dollars (USD), while start-ups in the growth stage (2 to 5 years) are being funded by Venture Capital Funds (both Series A and B) in amounts varying from 550,000 to 5 million USD.
If a fintech entrepreneur was looking for a jurisdiction in which to begin operations, why would it choose yours?
Mexico has become a suitable option for Fintech companies in the region for a number of reasons, such as: (i) the maturity of the entrepreneurship public programmes, grants and access to services through INADEM; (ii) telecommunication infrastructure in Mexico; (iii) the enactment of the Fintech Law and the first package of its secondary regulations; (iv) lower average wages and costs; (v) lower cost of basic in the region (such as electric power for crypto-mining projects); (vi) a strong banking infrastructure; and (vii) the existence of several venture capital funds aimed for Fintech companies.
Access to talent is often cited as a key issue for fintechs – are there any immigration rules in your jurisdiction which would help or hinder that access, whether in force now or imminently? For instance, are quotas systems/immigration caps in place in your jurisdiction and how are they determined?
Pursuant to Article 7 of the Federal Labour Law (‘FLL’), foreign individuals are permitted to work in Mexico, and the employee base of Mexican employers must be made up of at least 90% Mexican citizens (i.e. 9 to 1 ratio).
If there are gaps in access to talent, are regulators looking to fill these and if so how? How much impact does the fintech industry have on influencing immigration policy in your jurisdiction?
Per the FLL, with respect to technical and professional employees, employees have to be Mexican citizens, but foreign employees may be employed on a temporary basis if there are no Mexican employees available with the required skills for the position, in which case: (i) the employer may temporarily employ foreign workers in a proportion not exceeding 10% of those with such skills; and (ii) Mexican employees must be trained to permanently occupy that position.
There is no specific provision in the FLL requiring to file a report disclosing the proportion between Mexican and foreign employees. However, the labour authorities may impose a fine to the company for not complying with the provisions set forth in Article 7 of the FLL.
Mexican citizenship restrictions do not apply to chief executive officers, or general managers or directors.
What protections can a fintech use in your jurisdiction to protect its intellectual property?
In accordance with the Mexican Industrial Property Law (Ley de la Propiedad Industrial), inventions and processes are patentable. The inventor of a utility model or an industrial design, shall have the exclusive right to exploit it for his/her own benefit or by others with his/her consent, this right will be granted through patent in the case of inventions and registrations in the case of utility models and industrial designs.
The right to obtain a patent or a registration shall belong to the inventor or designer, as the case may be. The patent will have a validity of twenty non-extendable years, from the date that it was filed and will be subject to the payment of the corresponding fee; the registration of the utility models will have a validity of ten non-extendable years, and the registration of the industrial designs will have a validity of five years. Computer programs are also subject to copyright registration.
In addition to local provisions, Mexico is subject to the provisions of the Paris Convention for the Protection of Industrial Property, Chapter 20 of the United States-Mexico-Canada Agreement and Chapter 18 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
How are cryptocurrencies treated under the regulatory framework in your jurisdiction?
In accordance with Article 30 of the Fintech Law, a digital asset is ‘the representation of value recorded electronically and used by the public as a means of payment for all types of legal acts and whose transfer can only be carried out by electronic means, without the virtual asset being understood as a legal tender currency in the national territory, a foreign exchange or any other asset denominated in legal tender or foreign currency’.
For an asset to be considered a digital asset in accordance with the Fintech Law, the following conditions must be met: (i) it must represent a value; (ii) it must be registered electronically; (iii) it must be used by the public as a means of payment; and (iv) its transfer may only be possible by electronic means
The Fintech Law also gives the Bank of Mexico the authority to define the characteristics, conditions and restrictions of cryptocurrency transactions in Mexico.
How are initial coin offerings treated in your jurisdiction? Do you foresee any change in this over the next 12-24 months?
In Mexico there is no specific regulation for initial coin offerings. The general provisions for public offers are regulated by the Securities Market Laws (Ley del Mercado de Valores), that defines public offers as those offers of securities, with or without price, that are made in national territory through mass media to subscribe, acquire, sell or transmit securities, aimed to an unknown group of persons.
The securities subject to public offer shall be registered in the National Securities Registry (Registro Nacional de Valores), and obtain an authorization form the CNBV. In accordance with Mexican Law, there are only two type of entities that can offer securities in the Mexican securities market: (i) public companies, and (ii) investment promotion corporations.
Are you aware of any live blockchain projects (beyond proof of concept) in your jurisdiction and if so in what areas?
The main existing projects in Mexico based on blockchain technology are those related to cryptocurrencies, an example of this is Bitso, a digital exchange platform that provides security and allows users to buy and sell cryptocurrencies among themselves with a Mexican bank.
Although there are no governmental public projects, there are several groups focused on the promotion of the benefits of the blockchain technology with the purpose of modernising financial transactions, reducing costs and eliminating AML issues in public contracts. Among some of the proposals, it is the implementation of the blockchain technology in public bids, public offers, and banking operations. There are other projects to incorporate companies to mine crypto currencies in Mexico.
To what extent are you aware of artificial intelligence already being used in the financial sector in your jurisdiction, and do you think regulation will impede or encourage its further use?
Mexican financial institutions are not only at the forefront of the implementation of artificial intelligence, but a significant percentage of them are already in a process of digital transformation in order to streamline their processes.
According to GFT Banking Expert Survey 2017, 30% of the Mexican banks have a defined digital transformation strategy, while 50% have a digital transformation strategy being developed. Regarding AI, 23% of the Mexican banks consider this type of technologic as a strategic tool, 40% consider it as an important but only tactical change.
There is no AI regulation per se, however due to the technologic progress, regulation should foster its further use in the near future.
Insurtech is generally thought to be developing but some way behind other areas of fintech such as payments. Is there much insurtech business in your jurisdiction and if so what form does it generally take?
Celent Fintech Survey states that as of July 2017 (SALDÍVAR, Belén, El Economista, Las insurtech tomaran fuerza en seguros, 2018) only 15 of the 238 fintech start-ups in Mexico, are part of the insurance sector; that is, 6% of the total. Nevertheless, experts state technological innovation and the Insurtech will mature before 2020.
Insurtech companies are to be regulated by the National Insurance and Bonding Commission, however, to date there are no specific provisions in this regard.
Are there any areas of fintech that are particularly strong in your jurisdiction?
These are basically crowdfunding and e-money institutions.
What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
Mexican traditional financial institutions have actively cooperated with Fintech institutions by including digital transformation tools in their business, with the aim of being at the forefront. However, the picture is still extremely conservative.
To what extent are the banks and other incumbent financial institutions in your jurisdiction carrying out their own fintech development / innovation programmes?
Please refer to question 17 above regarding digital transformation.
Additionally, Fintech companies in Mexico have already been acquired by big traditional banks (such is the case of Openpay, a payment platform that allows accept payments on websites or apps acquired by BBVA Bancomer in 2017).
Are there any strong examples of disruption through fintech in your jurisdiction?
Absolutely, Fintech has become a disruptive industry in the recent years.
From a regulatory point-of- view, cryptocurrencies have become a trending topic for regulators and tax authorities to define the strategy on how to deal with such type of assets and also, it has now become obvious that Fintech institutions will be of the highest importance in the development of the financial markets in Mexico, and will have an impact on several topics such as privacy, competition, anti-trust and consumer protection legislation.