Shaping the future of fintech in Peru: insights from INDECOPI's market study

Introduction: Market Studies carried out by the Authority

In Peru, the National Directorate for Investigation and Promotion of Free Competition (the Directorate) of the National Institute for the Defense of Competition and the Protection of Intellectual Property (the INDECOPI) has technical autonomy and acts as an administrative prosecutor, investigating and sanctioning anticompetitive conduct. It also issues opinions on the existence of unlawful conduct.

As part of its competencies, the Directorate may conduct market studies, through which the Directorate examines a market in its entirety (the regulatory framework, its structure, and the behavior of participants), in order to promote competition by making markets function better and more efficiently.

When competition problems are identified through market studies, a series of options are open to INDECOPI; among them:

1. it can initiate enforcement actions;
2. it can issue non-binding recommendations to the government, including all ministries, public agencies and independent regulators, to change laws, regulations or public policies when these are the root cause of the competition problems; or,
3. it can issue non-binding recommendations to the government to change the way public agencies operate when these are the main customers or suppliers in the market, and their behavior restricts or distorts competition.

The Market Study in the Fintech Sector

In November 2021 the Directorate published a report on the launch of a Market Study of Fintech in Peru (the Market Study). This was justified on the basis that it was important to evaluate, from the point of view of competition, certain behavioral patterns of both suppliers and consumers, regulatory issues and access to information provided by these companies (mainly those that carry out currency exchange, loans, factoring and payments/digital wallets). The study was especially timely given the disruptive role of Fintech's business model, the positive impacts it generates in the financial market, and the cost reductions it has created in financial services, both for consumers and companies.

As a result of the Market Study, in September 2023, the Final Report of the Fintech Sector Market Study in Peru (the Report) was issued, which was formally published and made available to the general public on 26 September, 2023.

The Report starts by highlighting some general aspects of the services and Fintech sector in Peru. Then, it goes to the regulatory environment (including the relevant entities and the main regulations that impact the activities of Fintech companies), to the delineation of the relevant market and to the characteristics of the financial services where Fintech companies participate. Finally, it lands on the risks to competition and proposals for recommendations to improve it.

Recommendations to improve competition in the Fintech Sector

The Directorate identified, through the Report, certain competition problems in the sector and made recommendations, mainly aimed at public entities. The recommendations made by the Directorate, which seek to promote greater competition for the benefit of consumers, are summarized below:

• Evaluate the possibility to facilitate indirect access of Fintech companies to the Electronic Clearing House.
• Evaluate a regulatory modification to specify that the municipal license to carry out the activity of currency exchange and/or lending, will only be applicable under the in-person modality.
• Evaluate Fintech lending companies as not taxed in terms of General Sales Tax.
• It is suggested that the competent entity (the Ministry of Production) disseminates the channels to report practices that restrict, limit or prohibit the transfer of the negotiable invoice, as well as develop a procedure that protects the anonymity of those complaints.
• It is recommended that, within the scope of the work agenda that allows a progressive implementation of Open Banking or Open Finance in the country, the participation of different public and private actors be included for validation and consensus in the establishment of appropriate standards.
• Regarding the opening and maintenance of accounts: (i) Entities in the financial system are recommended to manage risks linked to money laundering and terrorist financing, under a risk-based approach (case by case), following objective, transparent, non-discriminatory and proportional principles; (ii) Each bank could consider publishing the conditions or requirements for opening and maintaining bank accounts; and, (iii) Fintech companies must implement and adopt adequate schemes and procedures for the appropriate management of risks linked to money laundering and terrorist financing.
• It is recommended that the Central Reserve Bank of Peru, within the framework of the information it periodically generates, include in its public reports the progress made in the implementation of the interoperability mandate .

Therefore, although Peru does not have a specific regulatory framework for Fintech (although there are some activities of companies that may be subject to regulations), certain barriers to the entry and expansion of Fintech have been identified, as well as risks of exclusion and regulatory measures that limit competition and innovation in this sector. The Directorate's recommendations focus on ensuring that Fintech companies can compete on equal terms with other more “traditional” financial service providers (such as banks).

Impact of recommendations in the Market

These recommendations are relevant because, if proposed regulatory changes are accepted, they would have an important impact not only on Fintech, but also on the financial services market as a whole in Peru. From the perspective of Fintech companies, the recommendations are positive as they would allow them to compete on a level playing field, reducing significant costs for their operations and thus allowing them to reduce the prices they offer for their services to consumers (which could potentially lead to an increase in their customer portfolios). This could foreseeably generate a positive impact on the Fintech market in Peru, both for local and foreign companies, since Fintech companies could see the Peruvian market as attractive for the development of investments and new technologies.

On the consumer side, the benefits of implementing the recommendations also seem readily apparent: a bigger market offering more (and probably better) products and services, more competitors and, consequently, lower prices.

Where there could perhaps be greater reservations about these recommendations finally materializing is on the part of the “traditional” companies that offer financial services, as, if recommendations take place, they would have to compete on a level playing field with Fintech companies without the latter being subject to such strict regulation (with the requirements and high costs that this implies) as they are. Thus, on the side of traditional banking entities, it will be important to be very attentive to changes that may occur from a regulatory perspective, as well as to the development of new functionalities, services and products from Fintech companies, since it is possible that, in the near future, they would have to compete on the same basis and in equal terms with these actors.

Conclusion

The different players in the financial services market (potential or current, national or foreign, Fintech or traditional), should consider the recommendations made through the Report.

On the other hand, the authorities and regulators have the task of evaluating and considering the recommendations. In any case, we hope that both INDECOPI and the authorities linked to the financial sector make an adequate analysis in which the conditions of competition converge with the technical-regulatory aspects, giving rise to a context in which, a benefit is generated to the market and, consequently, to consumers in general.

¹ Special thanks to Ana Lucía Torres-Calderon for her support and collaboration in the elaboration of this article.
² Fintech is understood as those financial services provided through technology.
³ The digital wallet market has developed without being interoperable. This situation has been described by the Central Reserve Bank of Peru as inefficient, because entities that want to operate must pay access costs and make different developments to access them. Thus, the Central Reserve Bank of Peru has recently issued the Interoperability Regulation (Circular 0024-2022-BCRP), a regulation that seeks to address the aforementioned problem. Adequate implementation of these regulations is essential to mitigate this risk.
⁴ In this respect, Peru is different from some other Latin American countries like Chile, Ecuador, and Mexico, which have promulgated Fintech laws over the past five years. Notably, the number of Fintech companies in Mexico almost doubled in the four years after its law was passed. On the other hand, its current approach is similar to that of the United States and the European Union, which both lack a single, all-encompassing Fintech law.