Mexico City — Mexico’s central bank (Banxico) has turned a spotlight on fintech companies, amid the growth of the sector in the country, warning that the role they play to improve financial services and promote financial inclusion is not without risks.
However, Banxico also acknowledged that there are opportunities for companies in the sector, and which have shown an ability to adapt quickly to changing circumstances.
“The current juncture and tightening financial conditions may put pressure on some fintech companies, putting their business models to the test,” the central bank said in its Financial Stability Report, published this month.
The central bank warned that potential difficulties for fintech startups include a lower availability of resources to obtain financing, greater risk aversion on the part of users, and a possible increase in delinquency.
Given the evolution of fintech in the country, the Banxico report highlights the importance of monitoring the growth of the sector to ensure its healthy development.
“Monitoring startups is important because the use of new technologies can open up risks to the financial system in areas where new participants do not have the experience that traditional financial institutions have been developing over the years,” the Banxico report states.
“Although currently small, its accelerated growth and interaction with the financial system could, at some point, have implications for financial stability that must be detected in a timely manner.”Banxico's Financial Stability Report, June 2022
Startups and the financial sector
The Banxico report states that there are certain financial services companies operating in Mexico that have not sought authorization to operate as a fintech, and which operate under the modality of variable capital companies, and are therefore not regulated.
Such companies, both financial and non-financial, use technology to innovate in business models related to financial services. For example, online securities trading platforms, automated financial advisors and those applying cloud technologies, but they do not perform an activity governed under the law that regulates fintech companies.
In 2021, there were around 512 fintech startups in Mexico, an increase of 16% over the 2020 figure, according to a bi-annual survey conducted in Chile, Colombia, Mexico and Peru by Finnovista and the Inter-American Development Bank (IDB).
The fintech sectors with the most significant activity in Mexico are those providing loans, payments and remittances, technology companies for financial institutions, and corporate finance management. On the other hand, the fastest growing sectors are digital banking and lending, according to the Finnovista and IDB report.
Of the fintechs that received investments, 61% were of less than $500,000, while 25% received between $500,000 and $5 million in investments.
The majority of that funding came from investors or entrepreneurs providing seed capital to startups in exchange for an equity stake, followed by resources raised among friends and family, and finally from venture capital funds.
The total value of transactions conducted through fintech platforms is increasing in Mexico, despite, or possibly due to, the impact of the pandemic, according to the report.
Translated from the Spanish by Adam Critchley