From a resolution by the Ministry of Finance in 2016, which authorized non-banking entities to operate payment services, until September this year, when the so-called “Fintech Law” reached the Lower House of Congress, Chile saw its ecosystem grow and reach 176 financial services startups.
In its first step towards regulating the ongoing fintech revolution, Latin America‘s fifth-largest economy makes room for open banking and expands the role of the Central Bank. But there are also sensitive points that can hamper financial innovation in the region’s most banked country, where 73% of the population has a bank account and 12.4 million credit cards (little more than one card for each adult) are active.
The bill reached the hands of deputies in early September, forwarded by the ministries of Finance and Economy, Development and Tourism. Last week, the general text of the bill, which has 45 articles, was approved by the Finance Committee of the Lower House of Congress — each one of the articles, however, is still under discussion and can be modified in the plenary vote. The bill still needs to go through a second vote in the Chilean Senate to go to sanction.
The regulatory framework for fintechs has been under discussion for over two and a half years in the country. It started with the intention of the industry and the government to regulate crowdfunding platforms and related services, but it ended up becoming something bigger.
As has already happened in countries such as Brazil and Mexico, the new regulatory framework seeks to define some parameters for financial technology companies and to establish from what moment they need to be regulated entities by the Comisión del Mercado Financiero (CMF), the Chilean SEC. In addition to crowdfunding platforms, alternative payment and transaction systems, credit and investment advisory services, as well as companies that make custody of any type of financial instruments (including crypto assets) are targeted by the regulatory framework — that is, a good part of the activities performed by fintechs today.
What changes with the new fintech law in Chile
In general, the Fintech Law establishes that companies and entities interested in operating one or more of the activities mentioned above will have to request their inclusion in the CMF’s Service Provider Registry. The Commission, in turn, will need to respond to the request within 30 working days. If the request is accepted, the entity’s inclusion in the Registry must occur within three days of the response. All these deadlines are one of the concerns of experts and entrepreneurs. In addition to the mandatory registration, waiting for authorization to start operating can discourage the ecosystem.
Fintechs working with the custody and intermediation of financial instruments, in particular, will need to have a net worth of UF 5,000 (about $193,000) or the equivalent of 3% to 6% of a reference equity yet to be defined by a CMF calculation (whichever is greater between these two possibilities will count). Currently, the requirement is 10,000 UF.
This kind of escalation of standards and requirements is expected, but it also needs to follow the level of innovation of each ecosystem. In Brazil, the last change to raise the bar for fintechs occurred in October last year, when the Central Bank established that, as of March 2021, all payment institutions dealing with at least BRL 500 million (around $91 million) in transactions would be required to request authorization to offer digital accounts — starting in 2023, this requirement will apply to institutions of any size.
The Nubank, Latin America‘s largest neobank, was born offering only a credit card. Only after it obtained a license from the Central Bank to operate as a financial institution, the startup started offering its NuConta.
In terms of equity, the change promoted by the Central Bank in Brazil aimed to led payment institutions non-integrated to authorized entities to a “new definition of regulatory capital.” Now, to become a payment institution regulated by Brazil’s Central Bank, a fintech needs at least BRL 2 million in equity. For payment initiators (players that receive the transaction request but do not execute it), the minimum equity required is BRL 1 million.
“Indeed, the Fintech law seems to have low barriers to the entry of new competitors, since only some of these companies will be regulated, depending on their activity and size. However, there are some provisions of the bill that may contradict this principle, such as the fact that companies must not only register with the CMF but also have its authorization to operate, which can take up to 6 months and be subject to criteria of the authority on duty, so it can be a discouragement to enter the market”, points out lawyer Cristián Reyes, from Aninat Abogados. He advises the country’s association of fintechs (FinteChile).
The proposal also implies that fintechs that fall under the activities regulated by the CMF will have to stick to these activities and will not be able to offer other services outside the scope of the law also bothers representatives of the ecosystem. It is unknown whether a fintech that performs more than one activity will imply a “multiplication of minimum requirements and guarantees” and how this would happen.
By collaborating with the discussions around the new legislation, Chile‘s Central Bank also plays a more participative role in the country’s innovation ecosystem. Article 16 of the Fintech Law introduces the bases for open banking in Chile, bringing, for example, which institutions will participate in the system (banks, issuers, payment institutions, payment initiators, among others). The new framework also modifies an organic law that deals with the regulatory powers of the monetary authority, extending these powers to the so-called stablecoins (cryptocurrencies of more stable value).
“In general terms, the Chilean Fintech Law took into account the experience of other countries to avoid models that could hinder the free entry and activity of companies. For this reason, sandboxes, for example, and heavier requirements, such as the intervention of the Central Bank, as it exists in other countries, were discarded. However, the prior authorization of the CMF, as stated, goes against this general principle and, in my opinion, should be eliminated”, says Reyes.