Chile’s new fintech law, which came into effect this month, will provide an incentive for other regional regulators to move forward with a framework, analysts say, as the risk of falling behind could hinder a domestic sector’s ability to draw investments, build trust and advance inclusion.
Last October, the Chilean Congress unanimously approved the bill to regulate fintech and establish the basis for developing open finance. The law had been initially proposed in 2021 by the previous government to encourage competition. But it was delayed because of the Constitutional process.
The new fintech law grants legal certainty to technology-based financial services providers. On the one hand, it establishes the basis for Open Finance in Chile. On the other, it expands the list of fintech entities regulated by the Financial Market Commission on the grounds of risk-based proportionality. It also defines virtual assets such as cryptocurrencies.
“In my opinion, one of the most valuable elements of the new fintech law is the principle of proportionality,” Herbert Schulz, Co-founder at payments fintech Radar, told Fintech Nexus. “The law generates a regulatory burden proportional to the size and scope of each company.”
A growing ecosystem
The Fintech law comes into effect at a time of growth in the ecosystem. According to a study by the Inter-American Development Bank, Chile’s number of companies grew from just 65 in 2017 to 179 as of 2021. They have also been successful in drawing external investments, with almost three-quarters reporting some kind of foreign financing.
Local association FinteChile estimates Chile’s fintech law will result in $400 million in yearly investments two years from now. Also, that it will lead to the number of companies more than doubling to 400, an estimate in line with the strong growth that the sector has posted in the last five years.
“Chile marked a significant milestone at the regional level,” Delfina Peña Bunge, director at FinteChile, told Fintech Nexus. “Latin America is moving towards fintech regulation.”
Bunge points to the case of Colombia. There, the government published a decree in mid-2022 to begin conversations around open finance. Also, to potentially come up with its own fintech law.
Although there is still a long way to go regarding secondary round regulations, fintech participants are confident that the news is already rippling at a regional level.
A long way to go
To be sure, regulators in Latin America benefit from the growth of the sector. Fintechs have played a significant role in advancing financial inclusion in the past few years, where most economies have high underbaking rates.
At any rate, it is a long process. And it is not over once the bill is approved. “Publication to implementation takes no less than two years,” Peña Bunge said.
Despite coming into effect this month, there is still a road ahead as regulators set specific norms and detailed regulations. And the devil is in the details.
“Now all our attention is focused on implementing the law,” Schulz said. “In the next 18 months, we should already have the norms from the Financial Market Commission that will establish how this law should be put into practice.”
Chile’s fintech law and the case of Mexico
Regarding regulation, the case of Mexico offers a lukewarm example. The country was the first to issue a tailormade legal framework in 2018. However, roughly five years later, some fintech experts claim it was not as useful, and that secondary round regulations diluted the potential goals it sought to achieve. Also, that the pace of fintech licenses granted by the regulator has been too slow.
But fintech experts are confident that Chile’s fintech law implementation will be different.
“Unlike Mexico, Chile has a much more advanced digital ecosystem. Technology is already a part of Chilean’s culture,” Peña Bunge, also a co-founder at Floid, said. However, she acknowledged that there will likely be “friction” between different parties –like banks – when implementing the law.
According to the Inter-American Development Bank report, Chile had, as of 2021, the strongest financial inclusion metric in Latin America, with 74.3% of its population with access to bank accounts.