Chile’s New Fintech Law: A Step Forward for Competition and Inclusion

Chile's new regulation sets up a framework for technology-based financial service companies, promoting competition and financial inclusion through innovation.

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Chile’s Fintech Law came into effect yesterday with the goal of promoting competition and inclusion through technology and innovation in financial services. The regulation sets up a regulatory framework for technology-based financial service companies, which were previously not required to register with Chile’s Financial Market Commission (CMF) and were thus not supervised by the Commission.

The legislation also creates an open banking system that facilitates the exchange of customer information between financial service providers and related entities.

Although the regulation has taken effect, there are still processes to be completed. The CMF has clarified that the implementation of the Fintech Law will require the issuance of over 70 regulations, which will take a maximum of 18 months to be finalized.

This means that the regulator has until August 2024 to establish all regulations and Fintechs have 12 months after that to register and obtain operating licenses.

Industry players are now focused on what the future holds, according to Samuel Cañas, President of the FinteChile Association.

“Our industry’s primary concern is that the secondary regulation of the Law should align with the Law itself, particularly in terms of creating high-quality regulation that has a comprehensive understanding of the various businesses it will regulate. Above all, it is crucial to maintain the principles of proportionality and technological neutrality. It is important not to create a regulatory burden that hinders the emergence of new players who may not have the resources to handle overly demanding processes and capital requirements.”

SAMUEL CAÑAS, PRESIDENT OF FINTECHILE.

Cañas goes on to say that the law was a demand from the Chilean Fintech industry, which has seen it as necessary for promoting greater innovation, competition, and financial inclusion over the last five years. He believes this will have a positive impact on the country’s economy.

3 positive aspects of Chile’s Fintech Law

One of the positive aspects highlighted by the President of FinteChile is that the law recognizes open finance and empowers users to become the owners of their financial data.

“Previously, this customer data was concentrated in the banks, but now it can be shared with other companies with the express consent of the users and based on high security standards,”.

SAMUEL CAÑAS, PRESIDENT OF FINTECHILE

The second aspect highlighted by Cañas is that the industry now has a clear regulation. From his perspective, the Chilean Fintech Law will provide clarity to both clients and entrepreneurs.

As for the third aspect, Cañas mentions the expectation that “the regulation will attract more capital and drive further growth in the sector.”

These aspects were discussed in a study published by FinteChile in 2019. It outlined key points that the industry deemed important to address and that would be resolved with regulation.

At that time, most Fintechs operating in Chile emphasized the need for building customer trust, attracting greater investment, and forming partnerships with traditional financial institutions.

They reported difficulties in growth due to the absence of a regulatory framework, which is highly valued by customers in the financial sector. Startups operated in an environment of low trust, hindering their ability to form partnerships, access financing, and attract top talent.

On the other hand, “most Fintechs pointed out that there is still a shortage of venture capital in Chile, which local investors associate in part with regulatory barriers to investment,” the study notes.

Moreover, obstacles to forming alliances with banks and other traditional financial institutions were seen as “a significant challenge” by Chilean Fintechs, preventing them from scaling their businesses. The Fintech Law aims to solve these issues.

Chile's New Fintech Law: A Step Forward for Competition and Inclusion

The 3 negative aspects of Chile’s Fintech Law.

Sebastián Ovalle, compliance officer at Fintual, agrees with Cañas about the high demands the law sets for companies to remain operational.

For example, they are required to have a minimum equity of 5,000 UF (unidades de fomento), an amount equivalent to around 170 million Chilean pesos or USD 220,000. This amount obliges Fintechs operating in Chile to maintain capital tied up (although it may be invested) to demonstrate financial solvency, according to Ovalle.

The second aspect that Ovalle considers negative is that the Fintech law obliges startups to maintain a risk management structure, with policies and control measures that allow them to ensure the operational continuity of the company.

“These measures are probably already in place because they are critical for the proper functioning of any company, but now Fintechs will have to comply with the parameters established by the CMF,” added Ovalle. He then clarified that, whoever does not comply with the requirements stipulated in the Law runs the risk of not continuing to operate, since the CMF will have the power to cancel its authorization.

The third negative aspect is the fact that, in order to be able to provide their services, Fintechs, in addition to registering in Chile’s Registry of Financial Service Providers, must have authorization from the CMF to start operations. Something that, in Ovalle’s view, “adds some unnecessary bureaucracy and time to the process”.

How does the Fintech Law impact the cryptocurrency sector in Chile?

Fintechs have been challenging a banking sector that, until now, has had no incentive to innovate. When talking about these financial technology companies, the topic of inclusion is usually mentioned, because they offer services where banks have not had reach.

Currently, Fintechs play a relevant role in society because they solve some problems that affect the common citizen, such as reducing costs, saving time and simplifying services.

According to a study by the Inter-American Development Bank, the number of Fintechs in Latin America reached 2,482 in 2021, experiencing a 112% growth compared to those in 2018.

8% of fintechs operating in Chile offer services with cryptocurrencies. Source: FinteChile Report.

Chile concentrates 7% of the Fintechs in the region, that is, some 173 companies operate in the country, where more than 13 offer services with cryptocurrencies.

Chile’s Fintech Law includes the definition of the term cryptoasset, but does not constitute a regulation for the sector as such, but rather establishes rules for companies operating with bitcoin and other digital assets.

Ultimately, the regulation brings benefits to the cryptocurrency sector by putting an end to the past conflict between exchanges and banks.

The confrontation arose after banks argued that the ecosystem’s activities were unregulated and that exchanges did not comply with anti-money laundering procedures. This led to the closure of all bitcoin exchanges’ accounts in 2018.  

In Chile 68% of fintech clients come from a sector that was never served by the traditional financial system, and now with the new regulation, their reach is expected to extend much further.

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