Anabel Pérez
Co-Founder and CEO
Startup Contributor

Mexican Banks Should Look to Collaboration to Remain Competitive

By Anabel Perez | Fri, 06/04/2021 - 09:06

Since the onset of the pandemic, Mexican consumers have embraced digital financial services at an accelerated pace. ACI Worldwide Research finds that Mexico was one of the fastest adopters of mobile wallet transactions in 2020, growing by more than 40 percent and ranking 10th worldwide. Additionally, Capgemini found that internet banking and direct transfers became the preferred payment method for 68 percent of Mexicans during the health crisis. These trends reveal that Mexico, historically cash-reliant, is transitioning into the world of digital-first financial services and experiences, addressing an increasing demand in the market. To keep up, incumbents must partner with challengers to provide a robust breadth of innovative services that enrich the digital economy for all.

Fintech’s Essential Role

As more consumers adopt digital financial services in Mexico, the broader expectation for innovative digital financial services increases and expands to the B2B arena as well; half of banking consumers transact with neobanks to take advantage of features such as 24/7 customer service, contactless payments, digital wallets, and P2P payments. This increasing expectation is being met by Mexican fintechs: Q1 of this year saw fintech funding reach an all-time high of $1.29 billion and Latam Fintech Hub found investors are chiefly focused in the sector, demonstrating the country’s desire for a digital-forward approach to finance. With this amount of capital bolstering these challengers, Mexico’s financial infrastructure is beginning to shift radically.

So, how can banks and financial institutions compete rapidly and without overhauling their entire infrastructure? Collaboration is the key.

Build, don’t tear down: Many banks and incumbents have proprietary legacy systems at their core, which are unable to support the digital-first strategies and products that challengers can. In order to do so, many players have chosen to overhaul their existing systems in favor of new technology, spending millions of dollars and months or years to complete.

But there is an alternative. Many financial institutions are increasingly moving away from the traditional mindset of building, owning and controlling the bulk of tech capabilities and partnering with tech enablers and BaaS companies – fintechs that utilize a wrap-and-digitalize approach, which envelope existing infrastructure with increasingly open and flexible digital capabilities.

This approach enables these institutions to enhance traditional tech stacks as needed, providing single-product offerings or a range of value-added services immediately or gradually. Partnering with fintechs empowers banks to offer in-demand digital-first experiences without rebuilding their whole systems.

Cut costs, and time: Fintech partnership can save banks time and money, allowing them to go to market with new products quickly to satisfy consumer demand. Furthermore, it helps with the reality of an increasingly limited talent pool, and the difficulty of building specialized in-house teams. Wrap-and-digitize approaches can cut down modernization budgets by millions and sometimes years. Beyond technical infrastructure, many banks are not equipped with the expertise to be successful in the digital finance ecosystem. The right fintech partner has done it before and can advise on strategy and execute product expansion without internal reorganization and reallocation, offering incumbents the space to focus on their core businesses. With the resources saved through this relationship model, banks ultimately are in more favorable positions to scale.  

Now’s the time: In addition to growing competition and consumer demand, mandates from the government encourage fintech development and digital innovation. As of November 2020, 39 banks were participating in the government-backed CoDi (Cobro Digital) payments system, and issuers like Visa and Mastercard have received authorization from the Central Bank of Mexico to provide domestic network processing services all throughout the country. Mexico’s 2019-2024 financial inclusion policy endorsed digital payments to cash long before the pandemic even started, but with last year’s accelerated digital adoption, fintechs are being welcomed into the financial ecosystem with open arms. The growing sector brings boundless opportunity for banking innovation through strategic partnerships.

Moreover, global payments giants, long-time partners to traditional banks and FIs, have also embraced collaboration by creating licenses, certifications, and tools to facilitate growth and transformation through partnership. This means that incumbents no longer have to go through tedious certification processes with Mastercard and Visa themselves but can be connected with a certified or licensed fintech to achieve their product vision. These certifications and licenses are available for a range of fintech use cases and geographic regions and can guide financial institutions in their selection process in a few ways. First, to demonstrate which partners have the tools needed for the incumbent’s product vision. And second, to see which partners are certified in future regions the team would like to expand their product offering to.

As digital-first financial products and features become the new normal, legacy players, banks, and financial institutions will fail to remain competitive if they do not urgently begin their digital transformation journeys. Complete system and personnel revisions are not needed, as these institutions can rely on fintech partnerships for digital enablement and expertise. The right collaborations between incumbents and fintechs not only help banks remain competitive by meeting consumer needs, but also help them thrive by saving precious time and money that can be reallocated toward scaling and growth.

Photo by:   Anabel Pérez