Chile’s long-awaited fintech law was finally brought about in October when Congress unanimously approved it almost a year after it was initially introduced.
As fintechs in the country await for the law to come into effect, experts that spoke to Fintech Nexus weigh on its likely impact on the economy and the financial sector.
The Chilean fintech ecosystem represents roughly 7% of all fintechs in Latin America and the Caribbean, according to a report by the Inter-American Development Bank.
Chile is one of the most financially advanced economies in terms of inclusion, and as of 2021, there were 179 fintech companies in the sector. That is roughly three times as many as it had five years ago, the latest illustration of the steep growth rates in the industry and its potential to advance competition in the financial sector.
“The law comes to fill a regulatory vacuum that was much needed,” Tomás Pintor Willcock, a Capital Markets advisor to Chile’s finance ministry, told Fintech Nexus. He is hopeful that the new framework will lay the foundations for expanding the sector. “The fintech ecosystem has been growing strongly in recent years, with a growth rate in the number of startups close to 40% every year.”
Chile joins Mexico
With the law, Chile joins Mexico as the two countries in the region with tailor-made legislation. The project gives legal grounding to business models within the industry, such as crowdfunding, investment advice, financial market intermediation, and custody, among others. It also incorporates cryptocurrencies and alternative finance and, perhaps most importantly, opens the door for open finance.
Open finance, a framework for sharing financial information through APIs, is becoming a trend in Latin America. It is also a key driver for a more decisive inroad of financial technology companies into credit, a segment today dominated by large banks. With the user’s consent, fintechs can now access financial records and assess risk more comprehensively.
“This law arises from the need to legalize an industry that already existed and was limited in a certain way by the lack of regulation,” Delfina Peña Bunge, founder at Floid and director at FinteChile, told Fintech Nexus. “It allows for a more equitable ecosystem, in which financial inclusion is possible for everyone through technology.”
Indeed, earlier versions of open banking were already taking place in Chile. Before the fintech law existed, there had been agreements between banks and fintechs on standards for information exchange via web scraping. The regulation is a formal framework for information exchange and establishes security protocols.
Open finance in Chile
In establishing Open Finance, Chile follows in Mexico and Brazil’s footsteps. Companies looking to participate must register with Chile’s financial markets regulator. They must comply with a set of technical standards to connect to the different APIs of financial entities and access a customer’s financial profile.
“Citizens will have the possibility of sharing their positive data with financial entities that up to gauge risk only through traditional sources such as bureaus recently,” Peña Bunge said. “Although they are reliable sources, they do not always show the client’s current financial status.”
According to her, there has been a “very positive” reaction from traditional lenders in the country, which are collaborating in designing the API infrastructure. “This is going to take a while, but banks are aware that this is the future,” she said.
She argues that a collaborative ecosystem and better data aggregation will allow them to understand their customers better, potentially leading to new clients that were until now not eligible for credit.
Collaboration with banks
“Banks were rather reluctant years ago to fintech regulation,” Herbert Schulz, Co-Founder, and CEO at Radar, a payments fintech, told Fintech Nexus. “They pointed out that any fintech should bear the same regulatory treatment as banks. But that changed over time; today, the reality is substantially different. Banks are actually looking to work with fintech.”
Following the fintech law approval, attention is now focused on secondary regulation rounds. The financial market regulator, the CMF, should detail how the law should be implemented.
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Pintor Willcock, the advisor to the government, is confident that both companies and citizens will reap the benefits. “Fintech and traditional financial institutions will see greater flexibility to provide innovative and secure financial services,” he said. “And by promoting competition, innovation, and financial inclusion, technological products and services quality will improve substantially.”