Chile: Fintech

As Chile is a civil law country, the primary source of Payment Law in Chile are legislative enactments of the National Congress. In Chile the legal framework for payment services are 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 system.

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 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 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 provision of funds,
e) Chapter III.J.2: Payment card operation.

D) Law N° 20,950: By enacting 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.

As noted above, pursuant to Law N° 20,950 it is possible that non-bank institutions issue and operate payment cards with provisional funds, as long as the non-bank institutions 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 such activities to achieve this specific purpose;

D) The company satisfies the minimum capital and fund reserve amounts;

E) Establish a liquidity reserve,

F) Establish a risk management and control policy;

G) The company must keep at all times: the account holder application for a card, and maintain a segregated 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.

Cash is still the most common payment method in Chile, primarily because people over 45 years old still prefer paying in cash. However, debit cards have grown significantly since Banco Estado created an easily accessible bank account associated with it debit card (Cuenta Rut). The Cuenta Rut bank account began operating in 2006 and today has more than 7 million customers nationwide, a surprising figure that shows the massive backing it received from the public. The large number of users shows the influence such account 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, Law N° 20,950 authorized non-bank entities to issue and operate payment cards with provisional funds. Thus, the law 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, the Chilean government recently announced that a proposal to modify the payment system including debit, credit, or payment cards would be introduced soon. The current system provides for three players to be involved in the process: a. Issuers (banks), b. Payment Processors (operators in charge of affiliating the stores to the card payment network and then processing these payments, Transbank is the leading company in Chile), and c. Stores. The proposal is to move on to a system of four players: a. Issuers (banks), b. Payment Processors, c. Debit, Credit, and Payment card companies, and d. Stores. In other words, the credit card companies would enter as new market players, whereby the Payment Processor would no longer have the ability to control the prices for the issuers and merchants.

Today, the use of the open application programming interfaces (APIs), that enable 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 personal information about their clients 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 services ecosystem where the processing of consumer’s personal information, such as financial information, is aimed primarily to improve the user experience of the owners of such information, through a diverse range of services.

In recent months, the CMF issued a document called “White Paper: general guidelines for crowdfunding and related services” (the “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 gave some general guidelines about online banking, especially regarding robo-advisors. The White Paper states that the regulation to come must establish the obligation to inform the client correctly or, in some cases, must prohibit certain activities in which conflicts of interest arise or are likely to arise, or where the objectivity is questioned. The White Paper also affirmed that it is appropriate to establish requirements for accreditation or suitability requirements for these service providers.

Concerning the stage of implementation of Open Banking in Chile, Chile is in the initial stage.
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. This is an issue in which the legislature must work together with the private sector, or at least with the concerns of the private sector in mind so that the legislation that arises is not dysfunctional and does not delay the significant progress that Fintech companies are having in Chile.

Chilean regulation on personal data protection (Law N° 19.628 regarding private life protection) which regulates the transmission, treatment, and storage of personal data, does not have a serious impact on the provision of financial services. Although this law regulates the processing of personal data, it is deficient at granting adequate protection to personal data, does not conform to the 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 proffers to create an agency or assign to an existing agency the task of oversight and inspection while also facilitating the beneficial and innovative uses of the data in evolving business and technological environments.

Chilean regulation on personal data protection (Law N° 19.628 regarding private life protection) which regulates the transmission, treatment, and storage of personal data, does not have a serious impact on the provision of financial services. Although this law regulates the processing of personal data, it is deficient at granting adequate protection to personal data, does not conform to the 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 proffers to create an agency or assign to an existing agency the task of oversight and inspection while also facilitating the beneficial and innovative uses of the data in evolving business and technological environments.

Currently, regulatory uncertainty is what represents the greatest risk for the growth of the Fintech industry in Chile. The White Paper is a good step forward in developing a regulatory framework that considers the importance of innovation. This would be achieved with the application of the principles such as: proportionality and neutrality both defined in response to question 6 above; flexibility, which is the possibility that different business models coexist and that these can change over time without the need to continually adapt the regulation or that doing so is rather simple; and modularity, meaning to recognize 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.

There are a number of start-ups present in each financial services sector: leading among them the payments and remittances sector (Mach, Khipu), followed by crowdfunding and lending (Cumplo, 2ble impacto).

In Chile, we already have 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. There are several other Fintech companies that have raised Series A, such as Cumplo, Omnibnk, Jooycar, and others raising seed round, like Fintual.

Within the Latin American region, there are fewer obstacles to begin operations in Chile. 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 Chile, through the promotion of investment, innovation, and entrepreneurship. CORFO works in different areas of interest by bringing together various programs and subsidies, some of these are in the areas of innovation, entrepreneurship, investment and financing, etc., through which both Chileans and foreigners can obtain funding, credit, and technical support in entering the Chilean market.

CORFO’s most known program is Start-Up Chile. Start-Up Chile is the leading business accelerator in Latin America. It was 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.

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 market promotes free 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 two-thirds 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.

Chile introduced a tech visa in 2017 as a simplification of the immigration procedure, specifically 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 can apply for the tech visa if he/she is a professional or technician in the areas of science and technology, or with a proven experience in innovation in Chile or abroad, and who is going to be hired as a dependent worker by companies in the technology services sector, with an invitation letter and / or certificate of sponsorship from: InvestChile (the government agency responsible for promoting Chile in the global market as a destination for foreign direct investment in the case of foreign capital companies); Start-Up Chile if they are participating in that program; or the Ministry of Economy if they are national companies.

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, counted from the date of submission and that ends with the obtaining of 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 has not been able to have a substantive influence on migration policies since the government and the legislature have focused on the migration crisis in Latin America. The increasing flow of expatriates from Ecuador, Colombia, Haiti, Venezuela, etc., diverted the attention of the Chilean government in favor of addressing the immigration situation from these countries without leaving space on the agenda to introduce changes to the existing visas, or to create new visas that favor access to talent, (aside from the tech visa).

In Chile, Fintechs can protect their intellectual and industrial property submitting applications to INAPI (Instituto Nacional de Propiedad Industrial or National Institute of Industrial Property (NIIP)). This allows them to protect, among others, their brands, patents, utility models, vegetal varieties, industrial designs.

Though 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 for the same period for an indefinite number of times. In the case of patents, the requirements are higher than for trademark. The Fintech needs to demonstrate a novel character, an inventive level, and a possibility of industrial application. Regarding patents, the protection issued by INAPI will last twenty years from registration approval, but this period is not renewable. For other property rights, like industrial designs, the protection will last ten 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 Tribunal.

If a Fintech wants to protect copyright, then the DIBAM (Direction of Libraries, Archives and Museums) oversees the protection of such rights.

There is no specific regulation of cryptocurrencies in Chile. Cryptocurrencies are considered non-regulated financial assets and, since there is no specific regulation, the applicable legislations are the Civil Code and Commercial Civil Code, which each regulates contracts between private parties.

There is no specific regulation in relation to Initial Coin Offerings (ICOs) in Chile, and The White Paper does not mention initial coin offerings.

Furthermore, there is no legislative project or draft project concerning ICOs and we do not foresee that it will change in the near future.

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.

The Ministry of Energy is about to start using the Ethereum blockchain to track and record energy data such as prices and storage, and to elevate the security of all records. Furthermore, the Bolsa de Comercio de Santiago (Santiago’s Stock Exchange), announced the implementation of blockchain protocols in their national and overseas transactions. This project will be a consortium between the Santiago Stock Exchange, the Central Stock Deposit, and telecom company GTD.

Finally, there are some cryptocurrencies exchanges, like the company Buda and CryptoMKT

Banks and Retailers in Chile started to prove AI for virtual customer assistants (chatbots) to improve user experience (UX), followed by the automation of their internal processes, such as anti-money laundering (AML) protocols. There is also the existence of robo-advisors which are computer-based algorithms that recommend certain investment portfolios according to the user’s preferences, like age, risk-aversion, expected cash returns, length of the investment, amongst others. An example of the latter is Fintual which uses AI to recommend to an investor one of their diversified portfolios, while also serving as an investment platform. Another example is FOL which is an AI platform to invest in mutual funds.

Currently, there is no legislation that impedes or discourages this industry. It has been favorable to innovation that regulation is often behind technology. The only piece of prospective regulation is the White Paper. President Piñera instructed the Ministry of Science to come up with an Artificial Intelligence Policy by April 2020. In our opinion, regulation will be neutral – neither impeding nor encouraging – the use of IA in Chile.

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 startups operate is as advisors to quote and compare which insurance is more suitable for the needs of the client, and 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 – recommends certain insurance based on the client’s profile and needs.

Another example of Insurtech in Chile is Jooycar, a fast- growing Chilean company disrupting the auto insurance market that provides a car connected platform and services, using telematics and machine learning to develop Usage-Based Insurance (UBI) products for commercial users and personal/individual users

According to Finnovista Fintech Radar 2019 payment and remittances platforms are the core of the Fintech industry, representing 26% of the Chilean 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 (e.g. credit cards).

Enterprise Financial Management (EFM) solutions, represent 17% of the industry which provide automated solutions for managing operations within companies. As many of these Fintechs state: using EFM

The relation between Fintechs and incumbent financial institutions is at an early stage. Chilean companies tend to develop their technology internally. For example, BCI Bank launched MACH, its mobile wallet to send and receive cash quickly and has its own virtual prepaid card. Nowadays, we can only see a few cases of incumbent financial institutions working together with Fintech.

Banks and financial institutions have not been keen to show the public their support to Fintech development, and have instead acquired tech companies to complement their platforms. However, there are some examples of banks working together with Fintech:

• As we mentioned, BCI Bank launched the mobile app Mach, which is both a mobile wallet and as pre-paid virtual card.
• Santander has partnered with One Pay FX, a blockchain-based-payment solution. In Chile, it is being used as a wallet, but in the future, it will be used for international money transfer.

Currently, there are no big disruptions in the industry. The major operators (commercial and investment banks, insurers, and brokers) operate under strict regulations, which 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.