Big Money and Big Opportunities in Mexican Fintech

Big Money and Big Opportunities in Mexican Fintech

Big Money and Big Opportunities in Mexican Fintech 1254 836 Blackpeak

Mexico’s fintech market has surged in the past five years, as international venture capital rushed into the country to capture growth opportunities. The number of fintech startups in Mexico reportedly grew by 71% in 2020 alone, even during a year in which a global pandemic hampered economies around the world.

One of the reasons for this investment boom, despite Mexico’s political instability and the challenges brought about by COVID-19, is that there is a large addressable market for financial solutions which has remained largely untapped by traditional banking institutions. Roughly 40 million people in the country – or one third of Mexico’s population – are “unbanked”. At the same time, its population is also rapidly becoming more digitally savvy, creating the right environment for startups to fill the market gap in finance.

Investors also value the growth potential that Mexico-based companies offer – not only domestically, but also regionally. According to Crunchbase, for a Colombian fintech company to match Mexico’s addressable market, it would have to expand across at least four countries with markets similar to Argentina, Peru, Chile, and Ecuador. The sheer market size is one of the reasons that Mexican fintech startups experienced a 69% compound annual growth rate between 2014 and 2019, as reported by the Mexican Association of PE & VC Funds.

The exceptional circumstances around COVID-19 accelerated Mexican consumers’ demands for faster and easier banking experiences. With the banking industry unable to meet this demand, others stepped up to offer fintech solutions. Amazon, for example, took advantage of the company’s strategic relevance and strong digital infrastructure to offer its own financial products – such as debit cards – in Mexico.

Mexico’s venture capital market has also begun welcoming big global investors. Venture capital funds usually consider regulatory limitations before investing, and for Mexican startups to translate any global interest into funding, it was important to ensure that foreign investment was completely unrestricted. In 2018, Mexico changed the rules governing Investment Project Fiduciary Securitization Certificates, which securities issuers and other stock market participants need to facilitate cross-border investments, making it easier for startups to attract foreign funding.

Meanwhile, the regulatory environment in Mexico has become very welcoming to fintech. Part of Mexico’s strategy for attracting venture capitalists is a “regulatory sandbox” for fintech startups. This framework allows fintech startups to conduct product testing in a controlled environment while ensuring the existence of appropriate safeguards for consumer protection. Such regulatory sandboxes can also promote competition, ultimately to the benefit of consumers.

The 2018 Mexican Fintech Law provides a legal framework for companies that want to provide fintech solutions. According to the law, companies that were operating in a regulated space before the law’s enactment were allowed to continue operating until they obtained a license from the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores (“CNBV”). This benefited new ventures that needed to get started as fast as possible to avoid losing market advantage, as obtaining a license can take 6–9 months.

Digital banking events company Lendit Fintech USA predicts that companies whose licenses are approved will likely receive additional investment. The same is true for companies whose operating models have been validated by the CNBV.

In Mexico, fintech is positioned for exceptional growth as the market and regulatory environment become more mature. Meanwhile, the entry of new international investors and growth in the number of competing startups validates the need for fintech solutions, and the opportunity for exponential growth in this market.