The low-hanging fruit of Mexico’s financial system


-Although Mexico counts with a startup ecosystem that is booming with new fintechs, there are still opportunities available for innovation.

-Mexico’s population is largely unbanked but still has access to the Internet: financial inclusion for people in rural or vulnerable areas is an obvious opportunity for startups to innovate through technology.

-Access to credit is still low, and startups can fill the void when it comes to providing convenient and low-cost credit solutions for a great part of the population.

-Another market that startups need to keep an eye on is the younger generation, which finds obstacles when trying to access traditional banking services.

With over 440 fintech startups, Mexico is one of the fastest-growing countries in Latin America for this industry. But, although it is one of the most developed markets in the region, there are still some “low hanging fruits”, obvious weaknesses in the financial system of Mexico that can be seen as opportunities to innovate and supply a market that is still underserved.

Mexico provides a unique platform for fintechs to thrive: a large part of its population is unbanked, but uses the Internet actively. It is also one of the biggest consumer markets in the world, with large banks and financial institutions, but has low credit penetration and financial inclusion. Some obstacles constrain the development of digital financial services, such as regulation and the lack of a critical mass of users.  Nevertheless, there are still opportunities available to appeal to the Mexican market

According to the World Bank, 65% of Mexican adults do not have any type of bank account, and only 10% save through a financial institution. And regarding the means of payments, in Mexico over 90% of daily purchases under 500 pesos are made in cash: most people still don’t have access to electronic payment systems. Financial institutions and commercial banks are not being able to support local economies down to the village level, and this is where mobile banking and other innovations can fill the void. Large percentages of the rural population in Mexico do not have access to financial institutions because even traveling to a bank branch would be beyond their economic capacity. Sending funds through transfers or deposits between traditional bank accounts is in most cases not an option, and presenting documentation and bearing the cost of maintaining a minimum average balance is a serious burden. 

Since 2015, the Government of Mexico has been introducing reforms in this industry. Although the 2018 “Fintech Law” focused on fostering financial inclusion by introducing “banking agents” and paving the way for an economy based on electronic/mobile payments, mobile banking is still highly regulated. Payment institutions, crowdfunding, electronic money, and more require authorizations issued by the CNBV to provide their services. Overall, Mexico has stricter regulations than other countries to authorize financial agents, and this might discourage smaller shops from becoming agents. 

Still, Mexico presents the ideal conditions for a fintech company to innovate: out of a population of 126 million, approximately 62% have smartphones . According to an INEGI survey, in 2020 the percentage of homes with either a fixed or mobile internet connection was up by 4.2 points compared to 2019, and this number will continue to grow. Particularly, many people choose to have mobile phones instead of computers, because they cannot afford them. Given the number of people seeking to make financial transactions or payments that do not have access to a traditional financial institution or to a computer, providing solutions to mobile banking and payments is the obvious sector in which to do business.

The number of mobile banking services has increased in the past decade, and smartphones have played a crucial role in making financial cards accessible to low-income people in Mexico. But the proportion of the population that is adopting these services is still small compared to the enormous size of the market. Maybe, this means that the products available are still not being able to reach a mass amount of population, so there is still room to innovate and expand the reach of digital financial services. The regulation of mobile payments is lighter than the regulation for mobile banking, and this was designed specifically to foster financial inclusion, by simplifying the processes for low-value payments.

Another relevant aspect of the lack of financial inclusion in Mexico is the low access to credit. The gaps in its access harm small and medium companies and rural areas alike. Although small and medium businesses provide more than 90% of Mexico’s private-sector employment, only 3% have access to formal credit. This is an alarming number, given that it is a key factor to boost the economic growth of any country. Also, according to the World Bank, 90% of the credit that is granted is given in urban areas, while more than 20% of the population in Mexico lives in rural areas. This lack of credit depresses the economic activity of these regions, perpetuating and intensifying economic inequality. 

One of the main ways in which adults access to credit without a transacting account is via retailer-issued credit cards. This is because these credit cards have lower minimum income and ID requirements, in comparison to bank-issued credit cards. Retailer credit cards, though, tend to involve higher fees and interest rates, as well as some hidden costs. This lack of convenient solutions for access to credit also presents a very clear opportunity to fulfill a need that has yet not been met.

Another sector which entrepreneurs should pay attention to is the young consumers market. Without a credit history and financial stability, they are attracted to fintechs that attack the weak points of traditional banks, institutions that pose several barriers and that prove to be inaccessible for younger people.

The context we are in right now is an ideal one for the fintech industry to reshape how it is built, or to launch new products and services to make payments accessible to more people than ever before. Payments that are instantaneous, efficient, that do not entail high costs, and that are secure for consumers. Although regulation in Mexico still needs to be even more developed towards creating an advance in digital financial services, this country has been a pioneer in Latin America in creating a framework for fintechs to unleash their potential, and so they will in the near rather than distant future.

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