Chile's fintech law would contribute "substantially" to growth in the industry, as well as boost startups' access to investor capital, Kevin Cowan, vice president of the country's Financial Market Commission, or CMF, told S&P Global Market Intelligence.
The proposed bill to regulate financial technology services in the country is expected to sharply increase competition in the Chilean financial system. "Impact of the bill on the financial sector as a whole should be substantial," the official said.
The CMF vice president said the government was drawing lessons from previous regulatory experiences in Latin America, including Mexico's three-year-old fintech law and Brazil's pro-competition regulation such as open banking and low-cost payments.
Recent experiences in Latin America suggest that tailor-made regulation can "substantially accelerate sector growth by expanding sources of funding," Cowan noted. On the contrary, he said, a lack of a regulatory framework "can limit access of fintech startups to funding due to concerns about regulatory uncertainty."
The bill, which was submitted to Congress on Sept. 20 by President Sebastián Piñera's government, sets the stage for regulation of cryptocurrency providers, peer-to-peer lending, digital banks and online investment brokers, among other subsectors in the fintech industry.
It also legally embraces open banking, a wide-ranging enterprise that shifts ownership of financial records from institutions to clients. Open banking mandates that financial institutions must share customer data through application programming interfaces at the user's request. The overarching goal is to reduce information asymmetry in the market, allowing fintech newcomers to have immediate access to financial records. In turn, this access to information is expected to make lending and other financial services more competitive in Latin America.
On Nov. 2, the bill was unanimously approved by the finance commission at the lower house, paving the way for the bill to be subject to voting in the upcoming months.
"The law expands the perimeter to include those financial services currently being provided in Chile without regulation or supervision," Cowan noted. The proposed bill requires fintech companies to register with the CMF and seek a license to conduct business.
Since 2016, the number of companies in the industry has more than tripled. The Chilean ecosystem had 179 fintech startups as of 2021, according to data from sector firm Finnovista, and 67 of those companies were created since mid-2019.
"Opportunities for fintech companies tend to unlock as progress is made on regulation," Bruno Diniz, a fintech professor in Brazil, said in an interview. In the Finnovista report, 85% of companies surveyed stated that open finance regulation would positively contribute to industry scale growth.
Elsewhere in the region, the emergence of fintech competitors has been significant. In Brazil and Argentina, digital players such as Nu Pagamentos SA or MercadoLibre Inc. have managed to grab a significant market share from traditional banks. Chilean fintech players are not yet perceived as a major threat to local banks, according to industry experts, but that could change with greater availability of capital.
Open banking, open finance
Sebastián Piñera's government is confident that it can get the fintech bill approved before leaving office in March 2022. If successful, Chile would join Mexico and Brazil as Latin American countries with a specific framework for the sector. "The legislation is looking to align the industry with best practices from fintech laws in other countries," María Mercedes Cangueiro, a financial analyst with S&P Global Ratings, said.
Chile's fintech law could take Chile and Latin America one step closer to open finance, as other regional regulators might be pressured to follow in the Andean nation's footsteps, industry experts told Market Intelligence. Open finance, which is based on open banking, is an even broader concept. It applies not only to bank loans but also to other verticals such as insurance, pension, investments and real estate.
In a region where half the adult population is underbanked, regulators have increasingly turned to the financial technology sector to propel inclusion. With Brazil as a leading case, regional governments are moving forward with guidelines that promote competition and innovation in the industry.
"Open banking is the key ingredient in Chile's fintech law," Angel Sierra, president with regional think tank FinTech IberoAmérica, said in an interview. "A regulatory framework is given to cryptocurrencies and crowdfunding, but the main attraction for the financial industry is open finance."
Sierra, who has been involved in discussions pertaining to the bill, argues that "other countries will accelerate toward open finance" if the bill is approved in Chile. "It is a matter of time but governments will see pressure mounting."
Reducing bank loan spreads in Latin America has been a major concern for regional regulators, and open banking could be the most adequate framework to achieve that goal. In places such as Brazil, average loan spreads can hover above 20%, according to data by the World Bank.
Brazil's leading case
Last year, Banco Central do Brasil made profound changes to financial regulation, setting the stage for competition in the payment market through PIX, a low-cost payment system that was widely adopted by the population. And its plans on open banking set an ambitious agenda that looks to disrupt the credit market.
Brazil is now widely seen by fintech enthusiasts as a go-to model for regulation in the region. Instead of designing a single comprehensive piece of legislation, the country issued separate strings of regulation aimed at specific subsectors.
"Brazil's central bank is the one carrying the fintech baton today," Sierra said. "Brazil's fintech ecosystem is very powerful, and (the regulator) has put the bar so high that others have begun to feel the pressure."
Century-old traditional banks are already feeling the pressure. In Brazil alone, more than 110 billion reais in bank revenue are under threat, according to a study by consultancy firm Roland Berger. The entrance of new online competitors has left banks vigilant of their market share. "After PIX, open banking will be the next disruptive transformation in the banking business," João Braganca, a consultant with the firm, said.