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According to Consuelo Mackenna, Senior Associate at Apparcel Uriarte Vassallo Abogados, “the challenge is to establish the guidelines under which Fintech firms can operate in the local market, but including some flexibility, as technological innovation outpaces regulations.”
“Chile is beginning to lag behind” is a phrase that is increasingly heard in several conversations of financial industry executives when analyzing traditional companies’ relationships with Fintech in terms of banks being able to buy or invest directly in technology firms.
This situation was addressed by Banco Bci’s Innovation and Digital Transformation manager, Ignacio Yarur, in a Chile Day panel when he called for banks to be able to invest in Fintech. This is currently prohibited by the existing legal framework, but this may change with the presentation of the Fintech bill that the Finance Ministry will present this year.
María Consuelo Mackenna, a senior associate at Apparcel, Uriarte & Vassallo, explains that “current banking regulations are quite strict regarding the vehicles in which they can invest, basically limiting them to invest in other companies that complement the banking business.”
Carey partner, Francisco Guzmán, says that opening the door for banks to invest in Fintech “would generate a relevant and positive impact on the market. For the vast majority of startups, raising capital is one of the most challenging issues. Therefore, allowing direct investment by financial entities would open up new growth possibilities for these companies.”
Fintechs could be considered as a complement to the banking business by incorporating them in the investment space, adds Mackenna.
Barros & Errázuriz partner, Sergio Eguiguren, believes that “local legislation should favor the means in which financial institutions and institutional investors can collaborate and invest in the Fintech industry.”
In that light, Guzmán points out that making the requirements for this type of investment more flexible “would allow financial entities to be at the forefront of innovation without being limited to developing in-house technology, which many times is inefficient.”
Experts agree that this consideration should be included by the executive branch in the Fintech bill and that there be modifications in the General Banking Law.
For example, Mackenna comments that considering Fintech as an investment space could complement the banking business, together with credit consulting, custody of financial instruments, and the provision of other financial services that banks provide or act as intermediaries in certain transactions with the general public.
Fintech: A change of mindset
CMS Carey & Allende partner, Diego Rodríguez, says that while a change in the legislation is a positive step for banks to be able to invest directly in Fintech, a transformation of the business model is also needed.
“Banks today are under more pressure than ever to move to a model in which technology plays a predominant role,” he says.
He adds that beyond the regulatory issue, “the underlying issue in Chile is whether a bank culture, as we traditionally know it, is compatible with that of a startup. In an acquisition, one invests in technology but above all in people, in talent. If, after the acquisition, synergies are not generated between the startup’s talent and the bank’s executives, that investment will not achieve the objective sought by the parties.”
Thus, “it is important to be clear that it will be very difficult for a bank to retain talent if it is incapable of generating new lines of business that are sufficiently challenging for the of Fintech founder. Banks need to be more open to the changes and processes that many of the Fintech companies already embrace,” he says.
The lawyer points out that “if the idea is to significantly scale the business, the acquisition by a bank will have a positive effect in the short term but not necessarily in the long term. The Fintech’s services may not go international if the bank does not have a presence in other countries.”
For this reason, he emphasizes that the key is cultural for the bank: “There must be a clear strategy that establishes the guidelines for the digital transformation to which it aims. Without this definition it is unlikely that investment in a company whose core is technology and innovation will have the desired results.”
International bank-fintech experiences
Rodríguez states that a decree was recently issued in Colombia that expressly authorizes financial entities to invest in Fintech companies whose purpose is to develop technology that is related to the purpose of the financial entity.
In Mexico, this type of investment is allowed with prior authorization from the National Banking and Securities Commission and, in some cases, from the Bank of Mexico.
Guzmán says that in the United States, where banking legislation is strict, these financial entities are allowed to link to Fintech through acceleration programs, investing through their own venture capital funds, associating with Fintech firms, acquiring these companies or setting up their own Fintech subsidiaries.
Mackenna says that Brazil is making progress since February in Open Banking and that Peru is starting to develop a neobanking industry.
Although there is no regulatory framework in Chile that facilitates banking investment in Fintech as in other markets, Eguiguren states that “I believe that in the coming years we will see many cases of collaboration between traditional banking and Fintech, either by forming alliances or investing directly.”
Article originally published in Diario Financiero
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