Chile: Fintech

Since Chile is a civil law country, the primary source of payment laws are legislative enactments of the National Congress. In Chile the legal framework for payment services is based on the following laws: A) Constitutional Organic Law of the Central Bank of Chile (Ley Orgánica Constitucional del Banco Central de Chile or “LBC”), which empowers the Central Bank of Chile (Banco Central de Chile or “BCCH”) to establish all necessary and applicable regulations to allow the use of new payment methods, in order to ensure the stability of the Chilean payments system. BCCH is expressly empowered to enact rules that regulate companies engaged in the issuance or operation of credit cards, or any other similar system payment method or B) General Bank Law (Ley General de Bancos or “LGB”), which establishes that the Financial Market Commission (Comisión para el Mercado Financiero or “CMF”) is the administrative body responsible for the supervision of banks and financial institutions in Chile. Likewise, CMF is empowered with the authority to inspect and supervise companies whose business model consists of: the issuance or operation of credit cards, payment cards with provisional funds, or any other system similar to the aforementioned means of payment; provided that the companies routinely contract with consumers regarding the consumer’s financial obligations, such as the issuance of credit cards to consumers, or are within a sector that is regularly involved with the general public. C) Compendium of Financial Standards (Compendio de Normas Financieras or “CNF”) of the Central Bank of Chile: In exercising its powers, BCCH issued the following financial standards and rules regarding the means of payment: a) Chapter III.J.1: Issuance of payment cards; b) Chapter III.J.1.1; Issuance of credit cards; c) Chapter III.J.1.2: Issuance of debit cards; d) Chapter III.J.1.3: Issuance of payment cards with the provision of funds; and, e) Chapter III.J.2: Payment card operation. D) Updated Compilation of Banking Standards (Recopilación Actualizada de Normas de Bancos or “RAN”) of the Financial Market Commission: A compilation made by CMF of all the instructions given to banks and financial institutions in Chile, that correspond to provisions of more permanent application, and among which is: a) Chapter 8-41: Payment Cards. E) Law N° 20,950: In October 2016, the National Congress authorized the issuance and operation of payment cards with provisional funds by non-bank entities.

According to Law N° 20,950 non-bank institutions may issue and operate payment cards with provisional funds, as long as they comply with the requirements below: A) Set up a special corporation with one exclusive purpose (Sociedades anónimas especiales de giro exclusivo); B) Register in the Financial Market Commission’s Card Issuers Registry (Registro de Emisores de Tarjetas); C) The company’s sole purpose, as stated in its bylaws, must be the issuance or operation of payment cards with provisional funds and related activities to achieve this specific purpose; D) The company must satisfy the minimum capital and fund reserve amounts established by law; E) Establish a liquidity reserve; F) Establish risk management and control policies; G) The company must keep at all times: the account holders’ application for a card, and maintain a separated accounting of the funds provided to the holders; H) Provide CMF with all material facts and information about the company and the company’s activities as such factual events occur or such information or circumstances become known to the company.

Historically, cash had been the most common payment method in Chile, primarily because people over 45 years old preferred paying in cash. The 2020 National Survey of Cash Use and Preferences, conducted in November and December 2020, by BCCH, however, revealed that, for the first time, debit cards were the most used payment method in Chile. On this regard, BCCH declared that, even though said result is probably strongly influenced by behaviours derived from the effects of the pandemic and the confinement of a large part of the cities, it could also be reflecting more structural changes regarding trends and preferences in payments in various segments of society. In relation to this, it is important to note that debit cards have grown significantly since Banco Estado created an easily accessible bank account associated with its debit card (Cuenta Rut). The Cuenta Rut bank account began operating in 2006 and today has more than 11 million customers nationwide, with over 43% of the debit market in Chile, a surprising figure that shows the massive backing it received from the public. The large number of users shows the influence such account has had on the expansion of various payment methods other than cash, such as debit cards, to pay at stores and using it to make online payments. Another major change, supporting both the continued increase in the use of cards and the use of digital payment platforms, was the enactment of Law N° 20,950. As noted above, this law authorized non-bank entities to issue and operate payment cards with provisional funds. Thus, it created the opportunity for new players to enter the payment system industry in Chile, making room for fintech companies to enter the financial market. Finally, since April of 2020, the Chilean Card Payment System has shifted from a 3-party scheme to a 4-party transaction model. This model is regulated in Chapter III.J.1: Issuance of payment cards of the Compendium of Financial Standards issued by the Central Bank of Chile. In this new system, the acquirer and the issuer have been separated. Therefore, the scenario is as follows: a) Customers; b) Merchants; c) Acquirers (payment processor company, mainly represented by Transbank) and d) Issuers (banks). Even though, this was a necessary change to catch up with the rest of the OCDE regulations, the implementation process hasn’t come without problems. The immediate effect of separating the acquirer and the issuer was an increase in the commissions paid by the commerce and ultimately by the customers. Because of this, on August 6^th, 2021, Law N° 21,365 entered into force, which subjects interchange fees for national transactions with payment cards, between the acquirer and the issuers, to maximum fees, differentiated by type of card, whether credit, debit or prepaid. Said maximum fees shall be determined by the Committee for the Establishment of Limits on Exchange Rates (Comité para la Fijación de Límites a las Tasas de Intercambio) before February 6^th, 2022, and should safeguard the proper balance between issuing and accepting payment cards.

Today, the use of the open application programming interfaces (APIs), that enables third-party developers to build applications and services around existing financial institutions, is not a current reality in Chile. Nevertheless, banks in Chile, through the use of APIs, do share their clients’ personal information with third-party service providers across private agreements, without a mandatory regulation that governs it. Thus, the parties operate under the rules of the free market economy and without government regulation. However, there is a growing belief that open banking represents the future of banking. The idea is based on the premise that what’s intended is a collaborative and integrated financial services ecosystem. A financial service ecosystem where the processing of consumer’s personal information, such as financial information, is aimed primarily to improve the user experience, through a diverse range of services. In February 2019, CMF issued a document called “White Paper: general guidelines for crowdfunding and related services” (“White Paper”), which indicates the general guidelines that the legislator should take into consideration when regulating fintech companies. Although the White Paper mainly focuses on crowdfunding, it also gives some general guidelines about online banking, especially regarding robo-advisors. Today Chile is in the initial stage of implementing open banking. In this regard, the lack of regulation means there is an absence of barriers to hinder the entry of new actors but, on the other hand, it also plays against the financial industry and open banking since the same lack of regulation generates a certain level of distrust and uncertainty in the public. Notwithstanding the above, on September 3^rd, 2021, the Ministry of Finance sent to the Congress the bill called “Financial Innovation Law” (“Fintech Bill”), after the CMF published in February 2021 the document “Fintech in the fields of the securities market”, as guideline to the project. The Fintech Bill proposes to create the Registry of Financial Services Providers (Registro de Prestadores de Servicios Financieros, the “Registry”) to be kept by CMF. The purpose is that the services of collective financing platform, alternative transaction system, intermediation of financial instruments, order routing, credit counselling, investment counselling and custody of financial instruments may only be provided by those entities registered in the Registry. Said entities shall be subject to a number of obligations, among which is the obligation to provide their clients or the public, the information to be determined by CMF. Moreover, along with the Fintech Bill, the Ministry of Finance published a report named “Guidelines for the Development of a Framework of Open Finance in Chile”, which purpose is to study the regulatory changes necessary for the development of an open finance framework in Chile, which allows the agile and secure exchange of information between financial providers, with the consent of customers, as an enabling condition for the development of new applications and financial services according to the customer needs. It is, therefore, reasonable to expect that soon, regulation in Chile will experiment changes that will allow progress in this matter.

Chilean regulation on personal data protection is mainly treated in Law N° 19,628, which fails to have a significant impact on the provisions of financial services. Although this law regulates the transmission, treatment and storage of personal data, it’s deficient at granting adequate protection to personal data, since it doesn’t conform to OECD standards, and is decidedly less strict than the European General Data Protection Regulation (“GDPR”). For this reason, there is currently a bill submitted to the Chilean Congress that seeks to extend privacy protections. The proposed bill assigns the Transparency Counsel the task of overseeing and supervising while also facilitating the beneficial and innovative uses of the data in evolving business and technological environments. And also focuses on establishing specific requirements in the consent the data owner must grant, for companies to able to process it. Therefore, the more private and intimate the data is, the clearer and specific the consent of the owner shall be.

Currently, in Chile, there are no specific regulations of sandboxes or any regulation that allows for these kinds of scenarios. In fact, we must consider that sandboxes appear as a less burdensome regulatory environment for Fintech companies. However, in a country where there is no specific regulation for the fintech world, it will be challenging to find a “less” regulated instance. In general, in Chile, there’s no limitation for innovation or the emergence of new financial services. The exceptions are financial services specially regulated by law, such as banking, fund management and securities brokerage. The White Paper proposes that the regulatory framework generated in the future should be neutral and proportional. The regulatory framework should be one in which the requirements are differentiated and proportional depending on the risks inherent to the particular activities carried out by each entity. Understanding neutrality as a regulation that should not generate asymmetries between those companies high in technology and those that use technology to a lesser extent. As it was noted above, on September 3^rd, 2021, the Ministry of Finance sent to the Congress the Fintech Bill. This has been the most important step forward in developing a regulatory framework that considers the importance of innovation, and is one of the measures included in the Financial Innovation Agenda, that the Ministry of Finance has been promoting, and which is aimed at facilitating the development of business models based on technology, thus favouring access to digital financial services to sectors that are not served today by institutions of the traditional financial sector.

Currently, regulatory uncertainty is what presents the greatest risk for the growth of the fintech industry in Chile. However, and as noted above, this has been one of the concerns of the Ministry of Finance, which has been promoting the Financial Innovation Agenda. The Fintech Bill -the most important step forward in developing a regulatory framework- was sent to the Congress on September 3^rd. 2021. It is reasonable to expect that it will be approved with no major changes, which would give a regulatory framework for fintech in Chile, reducing the existing uncertainty. The White Paper, on the other hand, establishes that, in order to develop efficient regulations for the fintech industry, the following principles must be observed: proportionality and neutrality (both defined in response to question 6 above); flexibility (which is the possibility that different business models may coexist and change over time without the need to continually adapt the regulation); and modularity (meaning it recognizes the possibility of disaggregation of the value chain).

At the moment in Chile, there are no tax incentives to promote fintech investment. Investments in fintech are treated like any other type of investment. However, letter B) of article 14 of the Income Law, establishes that amounts paid, credited into account or made available to taxpayers without domicile or residence in Chile, as remuneration for the use and subscription of platforms of technological services of Internet, shall be exempt from the Impuesto Adicional (which is of 35% of the paid amounts), provided that said payment is made by companies that -among other requirements- in the three business years prior to that in which the respective payment is made, have an average annual income from their business of no more than 100,000 Unidades de Fomento (USD$ 3,821,285 approx.).

There are a number of start-ups present in each financial services sector. The main one being, the payments and remittances sector, (Mach and Khipu regarding national remittances and Global 66 operating with international money transfers), followed by the crowdfunding and lending sectors (Cumplo, Doble Impacto). During 2021, Chilean companies Cornershop (online grocery delivery) and NotCo (manufacture of plant-based products) reached the status of “unicorn”, with a valorisation of $3.000 million (USD) and $1.500 million (USD), respectively. There are also Chilean companies that have raised Series C funding such as ComparaOnline, an insurance tech company that has raised more than $30 million (USD) according to some public databases. Betterfly, on the other hand, company valorised in $300 million (USD) has recently raised Series B funding for $60 million (USD) in the largest Insurtech round in Latin America. There are also several other fintech companies that have raised Series A, such as Poliglota, Cumplo, Omnibnk, Jooycar, and Xepelin (digital financing for SMEs) which in June 2021 achieved the largest Series A investment in a Chilean start-up, with $230 million (USD); and others raising seed round, like Fintual.

Recognized as the first among the Latin America and Caribbean economies, in relation to its capacity for innovation, by the 2020 edition of the WIPO’s Global Innovation Index, Chile has been becoming the Latin American’s hub for start-ups (even being called as “Chilecon Valley”), receiving the investment of many venture capital investment funds. Within the Latin American region, Chile is the country with fewer obstacles to begin operations. In addition, it’s essential to highlight the role of the Corporation for the Promotion of Production (Corporación de Fomento a la Producción or “Corfo”), a Government Agency, under the Ministry of Economy, Development and Tourism of Chile that seeks to improve the competitiveness and effective diversification of the Chilean industry, through the promotion of investment, innovation, and entrepreneurship. Corfo works in different areas of interest by bringing together various programs and subsidies, such as innovation, entrepreneurship, investment and financing, amongst others. Through this institution, both Chileans and foreigners may obtain funding, credit, and technical support for entering the Chilean market. Corfo’s most known program is Start-Up Chile, created by the Government of Chile to promote global technology ventures to use Chile as a platform to scale regionally and globally. Nowadays, Start-Up Chile is one of the largest accelerators in Latin America, offering financing and support alternatives for Chilean and foreign companies, with a functional product to use Chile as a platform for growth. One of its initiatives is the tech visa, which simplifies the immigration procedure, specifically focused to attract advanced human capital from abroad for the development of creative industries, advanced manufacturing, global services, and the technology industry in general. Finally, it should be noted that the Chilean economy is stable and strong due to the low inflation rates, and little corruption index in comparison to other Latin American countries. The Chilean free market system promotes competition and commercial openness, while the authorities take care of fiscal discipline. This sustained growth has allowed the country to sign Free Trade Agreements with markets that represent almost twothirds of the world’s population. This wide network of treaties has given rise to true international cooperation and production chains that are attractive to foreign fintech entrepreneurs.

As noted above, in 2017, Chile introduced a tech visa which simplifies the immigration procedure, specifically focused to attract advanced human capital from abroad for the development of creative industries, advanced manufacturing, global services, and the technology industry in general. Any foreigner may apply for the tech visa if: (a) he/she is a professional or technician in the areas of science and technology, or has a proven experience in innovation in Chile or abroad; and (b) is committed to be hired as a dependent worker by companies in the technology industry, which have either an invitation letter or a sponsorship from: InvestChile (the government agency responsible for promoting Chile in the global market); Start-Up Chile; or the Ministry of Economy. The main advantage of this tech visa is that it has a fast track that allows the resolution in a term not exceeding 15 business days (this term may vary because of COVID-19), which will ultimately grant the visa and Identity Card. In Chile, there are no visa caps, so everyone who submits the documentation and meets the requirements will obtain a tech visa.

The fintech industry in Chile hasn’t been able to have a substantive influence on migration policies since the executive and legislative powers have focused on attending the migration crisis in Latin America. The increasing flow of expatriates from Ecuador, Colombia, Haiti, Venezuela, etc., has diverted the attention of the Chilean government in favour of managing this humanitarian situation without leaving space on the agenda to introduce changes to the existing visas, or to create new visas that favour access to talent (aside from the tech visa).

In Chile, fintechs may protect their intellectual and industrial property submitting applications to National Institute of Industrial Property (Instituto Nacional de Propiedad Industrial or “INAPI”). This allows them to protect, among others, their brands, patents, utility models, vegetal varieties, industrial designs. Although a fintech company is not required to register any of the above, it is useful to do so. When registering intellectual and industrial property rights, a fintech acquires an exclusive right of exploitation in Chile, forbidding third parties to use it without authorization. Nevertheless, registering will imply that the intellectual or industrial property will be considered a public record. In case of trademarks, the protection lasts ten years from registration approval, with the ability to renew it for the same period, for an indefinite number of times. Regarding patents, the requirements are higher than those established for trademarks, since in this case, the fintech will need to demonstrate a novel character, an inventive level, and a possibility of industrial application. As to protection periods, INAPI will issue a protection for patents that shall last 20 years, without the possibility of renewal. For other property rights, like industrial designs, the protection will last 10 years. The protection of intellectual or industrial property rights does not include their registration, but the possibility to oppose it when being applied by third parties, which can end in a trial at the Industrial Property Court. Finally, if a fintech wants to protect copyright, then they shall register with the Direction of Libraries, Archives and Museums (“Dibam”), which is in charge overseeing the protecting such rights.

There is no specific regulation of cryptocurrencies in Chile. Today, CMF does not consider them as securities, and for BCCH they are neither not currency. Cryptocurrencies are considered non-regulated financial assets. Since there is no specific regulation, they are supplementally regulated by the general tax rules, the rules on Prevention of Money Laundering and Financing of Terrorism, the rules contained in the Civil Code and Commercial Civil Code, which each regulates contracts between private parties. Notwithstanding, the Fintech Bill mentioned above, expressly recognizes the existence of cryptocurrencies defining them as a financial instrument. As explained in question 4, companies that custody cryptocurrencies must be registered in the Registry of Financial Services Providers (Registro de Prestadores de Servicios Financieros) and comply with all the corresponding obligations. If approved, the Fintech Bill would be the first law in Chile regulating cryptocurrencies.

There is no specific regulation in relation to Initial Coin Offerings (ICOs) in Chile, either in the current legislation nor in the Fintech Bill. However, it is possible that they are included in the future, either in the same Fintech Bill during its processing, or after the Fintech Bill is approved, by means of complementary regulation. Moreover, considering other cases in Latin America, like the preventive alerts on ICOs in Mexico, it is possible that CMF, BCCH or even the Ministry of Finance decide to pronounce on this matter.

There are a range of different projects to integrate blockchain into all sorts of areas, from health with a blockchain-prescription system, to public entities, and financial institutions as a way to improve security and productivity. Since 2018, the National Commission of Energy has been using the Ethereum Blockchain to track and record energy data such as prices and storage, allowing for a more secure storage of all records. In May 2021, on the other hand, the National Electrical Coordinator of Chile (Coordinador Eléctrico Nacional de Chile), started a program called Renova, which purpose is to track each megawatt per hour of renewable energy from its generation to its consumption, by the registration of the data on a Blockchain platform. Also, Santiago’s Stock Exchange (Bolsa de Comercio de Santiago) was the first in Latin America to adopt blockchain protocols in its national and international transactions, in order to use smart contracts in the purchase and sale of assets, which have resulted in more efficient operations. Furthermore, in 2019 the Chilean Central Bank, the Central Stock Deposit, along with Chilean fintech QuantumX, successfully concluded a proof of concept for the emission of crypto-bonds. However, although the technology is compatible and is proven to accelerate the process of bonds emissions and provide a safer protection of information, the Central Bank will not yet start issuing bonds through this technology until there is an adequate legal framework for it. Another project that uses blockchain technology is Godzillion, which is a decentralized crowdfunding platform that seeks to decentralize the financing of startups, unifying them with investors through tokens that represent stocks, thus creating a register of shareholders in Blockchain. Finally, there are some cryptocurrencies exchanges, like the company Buda and CryptoMKT.

Banks and retailers in Chile have started to test AI for virtual customer assistants (chatbots) for improving user experience (UX), followed by the automation of their internal processes, such as anti- money laundering (AML) protocols. Robo-advisors are computer-based algorithms that process big data that may be submitted by the user, and then it recommends certain investment portfolios according to the user’s preferences (i.e. age, risk-aversion, expected cash returns, length of the investment, amongst others). Some examples of the robo-advisors are Fintual (which recommends diversified portfolios to investors and also serves as an investment platform) and FOL (which serves as a platform for mutual fund investments). Currently, there is no legislation that impedes or discourages this industry, except for the investment advisory for pension funds, which, according to Law N° 21,314, which entered into force in April 2021, may be provided only by entities previously registered in the Registry of Social Security Advisors kept by the CMF. It has been favourable for innovation purposes that regulation is often behind technology. Recently, the Ministry of Science, Technology, Knowledge and Innovation of Chile finished the draft of the National Artificial Intelligence Policy, which was preparing since 2019, and which focuses on the enabling factors of artificial intelligence, the development and research of AI, plus the ethical and regulatory aspects of its use. The publication of the National Artificial Intelligence Policy is expected for this second semester 2021. Signals like this makes us think that regulation will aim to encourage the use of IA in Chile. In fact, the Ministry of Economy, Development and Tourism has just announced that in order to correct that exists between the rapid evolution and adoption of technology and the regulatory and legislative processes of the country, it will implement the sandbox methodology to analyse the interaction of new uses of IA.

Given the difficulties and complexity of managing an insurance business, most start-ups have decided to focus on some parts of the value chain and partner with insurers and reinsurers. The most common way in which Insurtech start-ups operate is as advisors for insurance companies for quoting and comparing which insurance is more suitable for the needs of the client. Thus, connecting the user with an insurance provider so that the acquisition of insurance begins with a request through the platform or website. This is what ComparaOnline.com does, since it recommends determined insurances to each client, based on their specific profiles and needs. Another example of Insurtech in Chile is Jooycar, a fast-growing Chilean company that has been disrupting in the auto insurance market by providing car connected platforms and services, using telematics and machine learning to develop Usage-Based Insurance (UBI) products for commercial users, as well as personal and individual users, and the only Chilean-based company ranked among the top ten most important insurtech in America. Finally, Betterfly, mentioned in question 9 above, consists in an online benefits platform for company employees, which rewards their healthy habits with life insurance. Their business model consists of a fix membership of $ 2,990 (USD$ 3.81 approx.) per collaborator, paid by their employer, which includes benefits such as access to 24-hour telemedicine, support for mental health through psychologists, fitness, meditation, mindfulness, nutritionist, finances. and wellness education.

According to Finnovista Fintech Radar 2021 payments and remittances platforms are the core of the Chilean fintech industry, representing 23% of the market. This includes companies like PagoFacil, Global 66, Mach, Flow and Amipass. There has been an increasing demand for payment solutions for consumers that don’t qualify for commercial banking solutions (i.e. credit cards). On the other hand, Enterprise Financial Management (“EFM”) solutions, represent 20% of the industry which provide automated solutions for managing operations within companies.

The relation between fintechs and incumbent financial institutions is at an early stage, but growing. Chilean companies tend to develop their own technology, i.e. BCI Bank launched MACH, its mobile wallet to send and receive cash quickly and has its own virtual prepaid card, and in June 2021 received the authorization of CMF for the operation of its own payment network, called BCI Pagos. On the other hand, Grupo Consorcio (a leading financial services company and the largest insurance group in the Chilean market) has invested $500 thousand (USD) in Chilean fintech Pago Fácil, an online payment platform that allows customers to make payments process in a quick and easy way. Nowadays, we can only see few cases of incumbent financial institutions, such as the aforementioned, working together with fintech, but it’s something growing.

Historically, banks and financial institutions had not been keen to show the public their support to fintech development. In the last years, however, they have shown a change in their behaviour. Considering the importance and development that fintechs have had in today’s world, banks and financial institutions have been making efforts to work together with them. A few examples of this: As we mentioned, BCI Bank launched the mobile app Mach and its payment network BCI Pagos, and the investment of Grupo Consorcio in Pago Fácil. Furthemore, Santander has partnered with One Pay FX. This is a blockchain based payment solution, which is currently being used as a digital wallet, but in the future, it’ll also be used for international money. Moreover, in August 2021, the Association of Banks and Financial Institutions (Asociación de Bancos e Instituciones Financieras, “ABIF”) together with the Fintech Association (FinteChile) agreed to establish a technical working table to promote the development of Open Finance in Chile and address the challenges of this initiative. ABIF and FinteChile stated that implementing Open Finance will allow to have a completer and more integrated panorama of financial services, compare products, and generate personalized services, which should result in a more inclusive, transparent, competitive and secure financial market. To achieve this, the associations will analyse and share the best experiences and international standards at the work table, and will advance in parallel with the regulatory proposals that are being worked on by the Government.

Currently, there are no big disruptions in the industry. The major operators (commercial and investment banks, insurers, and brokers) operate under strict regulations, which, together with the lack of proper regulation, represent a strong entrance barrier for smaller competitors. Thus, small fintech companies are often being acquired by these major players to be incorporated in the major financial institutions’ platforms.