Lawyers in Mexico Benefit From the Nation's Fintech Boom
Fintech activity is expected to continue in the coming year, prompting law firms to pull lawyers from multiple practice areas to ensure they can meet demand.
November 26, 2019 at 12:55 PM
6 minute read
The original version of this story was published on Law.com
Lawyers saw a flurry of activity in Mexico this year as financial technology companies raced to meet a September deadline to file for operating licences. But for lawyers with fintech expertise, that was just the beginning.
The Mexican banking commission, the CNBV, estimates that about 200 of the more than 515 fintech firms operating in the country require an operating licence. As of the September deadline, only 85 companies had applied for one. The licence requirement was part of an expansive 2018 fintech law that borrows best practices from the U.K. and Switzerland and has already become a model to emulate in other Latin American countries.
Fintech firms that don't secure licences will either become targets for mergers and acquisitions or go through a wind-down process. Still more firms are waiting to enter the market. Either way, lawyers say fintech firms will need plenty more legal advice. The work is complex and multidisciplinary, meaning that firms pull from areas of expertise ranging from intellectual property to money-laundering prevention. Some even employ engineers.
"When your business model is posting photos online, that's one thing. When your model involves managing the money of others, it becomes more serious," says Rodrigo Orenday, a senior associate in the technology, media, telecom and corporate practice group at Mexican firm Santamarina + Steta, which filed licence requests on behalf of four fintech companies.
Latin America is a hotbed of financial technology growth, driven by consumers who are underserved by financial services in many countries. The big data company CB Insights found that fintech funding in Latin America hit a six-quarter high of $481 million across 23 deals for the second quarter of 2019, surpassing both China and India for the first time.
Part of this boom owes to geography, says Wylie Levone, a project finance partner in Hogan Lovells' Washington, D.C., office who also set up his firm's Brazil practice. In the case of Brazil, population 200 million, Levone notes that "culturally there are a lot of factors that make them early adopters" of technology, such as living in remote communities with limited access to traditional banking.
Fintech requires lawyers to get creative, both in terms of advice and billing. Many of these clients are fresh out of university with a startup mentality. And they are reluctant to lose control. Law firms must assess the potential for long-term relationships, accurately estimate the work required from each client and sometimes concede to a fee cap.
"Since these are new platforms, it's difficult to charge them by the hour," says Gustavo Mendoza-Müggenburg, also a senior associate in the corporate practice at Santamarina + Steta. He says many of his fintech clients have financial backing from Canadian and Spanish investors. "A lot of them come and say 'I'll pay you with cryptocurrency' – as a firm we don't do that."
Mauricio Ocampo was so inspired by the potential for startups and the opportunity to chart new legal territory that he abandoned a career track as an in-house corporate lawyer to start a specialised firm called Techno Law Geek in 2017. That same year, he founded the first Mexican chapter of Legal Hackers, which brings together lawyers, engineers and others interested in the intersection of technology and legal matters.
Techno Law Geek has three full-time lawyers plus three more staffers dedicated exclusively to finances, marketing and programming, so it can offer comprehensive advice on business plans and even highlight product design risks. The firm also has flexible payment plans, billing some clients monthly and others by the project.
Techno Law Geek filed licence requests on behalf of five Mexican fintech firms that now face additional regulatory hurdles in 2020. The CNBV will issue observations and require more documentation, and Ocampo does not expect the first licences to be issued until May. Additional aspiring startups have approached his firm for advice on how to operate in Mexico, he says.
Ocampo believes the Mexican fintech boom has only just begun. The main challenge he sees ahead, as a lawyer, is changing the mindset of clients. "Many have the mentality of a startup but now they're playing in the big leagues," he says.
Fintech companies need operating manuals, physical offices, capital increases and full documentation to prove that client income came from lawful activities. A single misstep – especially in money-laundering prevention – could result in the loss of a licence.
For lawyers, the regulatory work alone is extensive and ongoing. But fintech clients must also meet requirements for things like cybersecurity and fraud prevention.
René Arce, a partner in Hogan Lovells' Monterrey office, says his firm has pulled more than a dozen lawyers from different practice disciplines to collaborate on fintech at one point or another.
Activity spiked for Arce during the summer, when it occupied about half of his time as Hogan Lovells pushed to register six companies before the September deadline.
He also anticipates it will remain an active area for lawyers like him who have taken the time to delve into the nuances and complexities of the new regulation while weighing in on additional regulatory aspects still to come.
"We all have a learning curve – these are new business models and there are many grey areas for a sector dedicated to innovation," Arce says.
The biggest challenge is to understand the business models and translate them into legal language. But he's convinced that fintech is changing day-to-day lives and that it will permeate other practice areas at the firm.
"This is something that needs to be consistently cross-sold with other things we do," he says.
Fintech has already begun to dovetail with one of Arce's core areas of expertise: advising states and municipalities. Fintech companies are offering services and solutions to government entities with large payrolls. At the same time, local governments are looking to digitalise social-service payments and deploy disbursement mechanisms such as payment cards in a still-underbanked country.
"We really think fintech is touching on every activity that we do," Arce says. "It's making things more efficient – and we want to be there."
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