Mexico is one of the leading countries in Latin America to encourage the creation and adoption of digital banking and financial services. According to the World Bank, there is a direct relationship between the increase in the use of information technologies and financial inclusion.
This is because digital financial services provide a lower-cost platform to access bank accounts, financing, reduce vulnerability to economic shocks, expand consumption choices, build up assets, and more.
Commercial banks and incumbent financial institutions support the economy only down to a certain level, as there are voids that they’ve not been able to fill. This is where digital banking becomes the most convenient and efficient way to bring financial inclusion. Especially for population groups that have historically been excluded: women, people living in rural areas, and older adults.
Mexico in numbers
According to a 2021 Rapyd Research report, out of the Mexican population that already owns a bank account, 65% are willing to migrate to fully digital banks. For the significant percentage that is still unbanked, a digital account that can be accessed through mobile devices represents their first step toward financial stability. The 2020 National Survey on the Availability and Use of Information Technology in Households revealed that 75.5% of the population was a cell phone user and that 72% had Internet access.
Digital banking can especially benefit the population living in rural areas. One of the main reasons why many still don’t have accounts in commercial banks is because it implies traveling long distances and wasting a lot of time and money. Instead, digital banking frees them from this burden.
How mobile money boosted Kenya’s financial inclusion
A great example of how digital banking can have an enormous impact is Kenya’s implementation of M-Pesa, an electronic money transfer product. In 2006, before M-Pesa was launched, only 26.7% of Kenyans had access to formal financial services. By 2016, this number had risen to over 75%.
The M-Pesa is a platform that enables users to store value on their mobile phones. Its electronic units of money can be used for multiple purposes: transfers to other users, conversion to and from cash, and payments for goods and services.
The big differentiator is that people do not need a bank account to access this platform, and bank branches in Kenya are few and badly distributed. To get cash from the app or make a deposit, M-Pesa agents that function as ATMs hang out at key locations with cash and a cellphone, including in remote and rural areas. Initially, people didn’t even need a smartphone to use it, as the system worked through text messaging.
Research found that mobile money systems in Kenya ultimately had a strong influence on reducing poverty. It revealed that families that lived closer to these mobile money agents were less likely to live in poverty, and suffered fewer consumption shocks that stripped them from basic needs.
Why digital banking adoption in Mexico is still low
Mexicans still have a strong preference for cash, and struggle to perceive a benefit from adopting digital payment services, even when Mexico has some of the most innovative fintechs in the region. But this is not an easy problem to solve, as there is a vicious cycle of effects that stop people from changing their habits.
One underlying problem is that fees and commissions for these services are higher in Mexico than in other countries in Latin America. This, in turn, makes it very difficult for a critical mass of users to adopt them. Achieving an economy of scale would allow fintech players to lower their fees and become more accessible to a larger percentage of the population, including low-income consumers. If this constraint was removed, the situation would be very different.
Another issue is that Mexico has particularly rigid and strict regulations to authorize financial agents. Thus, many businesses are naturally discouraged from becoming agents. The consequence is that the most common kind of financial agent in Mexico is the not-so-affordable retail chain store.
Fintechs also have to create their products with these issues in mind. Billpocket, for example, offers the lowest commission in the market for its digital payment solutions: it is a single commission of 3.5% plus the value-added tax.
Financial inclusion matters for Mexico’s economic growth
The research available quite undeniably demonstrates that greater equality makes way for sustainable and strong economic growth. And broadening access to financial services is a straightforward method to impact a country’s economy. When people are financially empowered and gain access to opportunities, a lot of doors open for them.
Some obstacles must be overcome for financial technology to truly serve the purpose it was created for. Fintechs can provide a way for underserved Mexicans to be financially independent and stable. We’ve mentioned that regulation, high fees, and commissions are a problem. But also, the private and public sectors need to address the issue of financially educating its population and reducing the perception of risk and insecurity that comes along with digital banking. Unleashing the potential that fintechs have to play a fundamental role in improving the standard of living is no easy task, but it is for sure not an impossible mission.