Financial technologies (FinTech) promise to democratize financial services by lowering the threshold for access and including marginalized communities who have traditionally been neglected as potential customers. The honorable goal is luring policymakers towards FinTech to increase rates financial of inclusion. However, before hopes are fully placed on technology, it is important to consider how these evolving services and products are regulated. The lack of proper guidelines and oversight can trigger reckless economic behavior, destabilize the market and potentially leave those it proposes to help, in worse financial conditions than when they started.
Mexico’s Credit Market and Crowdfunding Ecosystem
Mexico is one country that is currently experiencing the boom of FinTech services, and it is hoping to use this wave of innovation and development to increase financial inclusion in the credit market. A culture of institutional distrust, means that most people avoid formal financial institutions when they require credit, often turning to friends and family instead. The Mexican government believe FinTech services are a preferable method of finance, with the potential to replace the informal market, and to do so it has turned to crowdfunding platforms.
Crowdfunding is a concept that describes “a mechanism of sourcing capital by soliciting to a pool of individuals or organizations through online platforms”. In other words, it is a practice that allows for the collective funneling of resources by connecting borrowers and lenders through the internet. These digital means reduce the intermediary roles held by traditional institutions and widens the scope of individuals that can afford services. And in Mexico, this tactic has proven successful, with estimates currently measuring a 30% market concentration and a revenue stream of 30 billion dollars.
Crowdfunding Regulation in Mexico
Facing such rapid growth, the Mexican government developed the 2018 Law for the Regulation of Financial Technologies and Institutions (FinTech Law) to control and supervise the quality of financial services. Essentially, it aims to strike a balance between the protection of consumers and the emerging start-ups and technology providers by supporting the development of a fertile environment for entrepreneurial innovation, while fostering principles of financial inclusion and financial stability.
The Mexican government has chosen to implement one of the two approaches used in financial regulation. The approach – known as microprudential regulation – was widely used by global regulatory agencies before the 2008 crisis. Its firm-based method focuses on maintaining the internal structures of financial institutions steady to avoid flawed management of assets. It does so by implementing tools such as the outsourcing of risk assessments and the protection of institutions who are “too big to fail”, to avoid domino effects that might lead to market-wide shock.
The Mexican government saw potential in this approach and now crowdfunding institutions are adjudicated microprudential responsibilities, to protect investors through thorough risk analysis and incentivization methods that hope to avoid hazardous behavior. However, in comparison to traditional institutions, crowdfunding platform are excluded from federal protection. In times of crisis, crowdfunding platforms cannot rely on government aid to save them from bankruptcy.
The microprudential approach has been criticized for its detrimental effects on economies, mainly due to its dismissal of the market’s interconnectedness, and its promotion of risky behavior that pushes banks to act irresponsibly,knowing that the government will step in to aid in times of trouble. Furthermore, research has exposed how microprudential tools can increase inequality. This sort of criticism, highlights concerns that the current crowdfunding regulation in Mexico adopts tools that might potentially increase risk and adversely affect the development of financial inclusion; two of the goals it is purporting to achieve.
Macroprudential Regulation – Looking Beyond the Individual
As the Mexican crowdfunding market grows, government institutions should look at how a problem in the FinTech market could affect the economy as a whole. Here is where an alternative approach to regulation called macroprudential regulation (MacPru) might provide a safer approach to market regulation and oversight. MacPru policy zooms out of the institutional setting and focuses on managing the financial system as a whole. MacPru “supervision is analogous to the oversight of a forest, whereas microprudential supervision is analogous to the oversight of individual trees”.
For the Mexican market it would mean creating regulation that looks at the network of crowdfunding institutions and their relationship with the market to control the distribution of risk and diminish the possibilities of a crisis that would harm the population. This cannot be achieved by adopting an outdated and myopic view of financial institutions. It is more effective to symbiotically look at internal and external points of risk, because if Mexico wishes to pull individuals into the credit market it should not do so while implementing regulations that could, in the long term, push them out or at worse causes an overarching market instability that could adversely affect the whole country and its citizens, not just those isolated to a particular sector.
References
Carballo, I. E. & Dalle-Nogare, F. (2019). Fintech e inclusión financiera: los casos de México, Chile y Perú. Revista CEA, 5(10), 11 – 34. https://doi.org/10.22430/24223182.1441
Consejo Nacional de Evaluación de la Política de Desarrollo Social. (2019). ¿Qué funciona y qué no en inclusión financiera? https://www.coneval.org.mx/InformesPublicaciones/Paginas/guias/Que-funciona-que-no-en-inclusion-financiera.aspx
Lastra, R.M. (2015). Systemic risk and macro-prudential supervision. In, Moloney, N., Ferran, E., & Payne, J. (Eds.) The Oxford handbook of financial regulation (pp. 309–333). Oxford University Press. DOI:10.1093/oxfordhb/9780199687206.001.0001
Magnuson, W. (2018). Regulating fintech. Vanderbilt Law Review, 71(4), 1167–1226. https://scholarship.law.vanderbilt.edu/vlr/vol71/iss4/2
Manish, G.P. & O’Reilly, C. (2019). Banking regulation, regulatory capture and inequality. Public Choice, 180(1), 145–164. https://doi.org/10.1007/s11127-018-0501-0
