Banking Sector Embraces Digitalization, Financial Inclusion

National economic development depends heavily on a country’s financial capabilities and the evolution of a strong and healthy banking and financial ecosystem. For several years, banking and financial entities in Mexico have enjoyed significant growth rates that have boosted the performance of many economic sectors. According to INEGI, in 4Q18, the financial services and insurance sector in Mexico surged 9 percent higher compared to the year-earlier period, accounting for MX$924 billion (US$48.1 billion) for that quarter which was roughly 5 percent of the country’s total GDP. Significantly, up to that point, the segment had registered almost eight years of consecutive quarterly growth.

According to tCNBV, by January 2019, the country had 50 multiple banking institutions with a total value at MX$9.4 trillion (US$490 billion), up from the MX$8.96 trillion (US$480 billion) represented by the Mexican banking system in January 2018. The total portfolio value of these companies was MX$5.19 trillion (US$270 billion) in January 2019, a MX$440 billion (US$22.9 billion) increase compared to the same month in 2018.

Given Mexico’s history and past economic crises, capitalization has been a crucial issue for authorities and banks themselves. Mexican regulations establish that banking institutions must have a minimum Capitalization Index (ICAP) of 8 percent. However, Basel III, an international regulatory framework for banks, establishes a minimum ICAP of 10.5 percent. The Mexican Banking System passes with flying colors, delivering a 15.9 percent ICAP by 4Q18. According to HR Ratings, the strength of the Mexican banking system is such that 35.4 percent of the banks in the country had AAA credit scores by the end of 2018. Gustavo Méndez, Advisory Partner and Financial Services Leader at Deloitte, says this reflects one of the greatest strengths of the Mexican banking system. “The Mexican financial system is solid and capitalized,” he says. “The 2014 Financial Reform ensured the solidity and liquidity of banks, resulting in the robust system that we have today.”

FINANCIAL INCLUSION
 

While the sector is strong, there are glaring gaps that require attention, with financial inclusion among the top priorities. “The base of the social pyramid has been long underserved, un-banked and credit invisible for the financial sector,” says Julio Carranza, Director General of BanCoppel. According to the 2018 National Report on Financial Inclusion, between 2012 and 2016 there was a 3.8 percent increase in the number of deposit accounts in the country, which is an average of 12,277 accounts per every 10,000 adults. However, the IMF’s Financial Access Survey (FAS) still puts Mexico below its Latin American peers, such as Peru, Colombia, Argentina and Chile, in terms of deposit accounts.

Méndez adds that the lack of access to financial services is heavily rooted in the country’s economic informality and employment seasonality. “Banks are focused on the formal sectors and can lend money based on this,” he says. “People in the informal sector do not have access to credit since they do not have proof of payment and the bank does not know how much they earn.”

However, the blame is not entirely on the financial system. “In Mexico, there is a reluctance to use banks and regulated financial entities. For this reason, using brands that are well-known but that are not necessarily tied to the financial system, such as Coppel and Elektra, has worked well to lure more people into the banking system,” says Gerardo Márquez, Founder of Evolve Fintech. Companies like BanCoppel and Banco Azteca have implemented this approach to grown their clientele. “BanCoppel is the second-largest issuer of debit cards in Mexico and the third issuer of credit cards. The bank opens on average 600,000 new accounts every month,” says Carranza.

DIGITALIZATION: ONE BIG STEP FORWARD

Although bank digitalization is the natural response to technological advances, in Mexico it also can be a powerful ally in the sector’s move toward financial inclusion. “Financial inclusion in Mexico will come through technology and not from the traditional banking model,” says Francesc Noguera, Director General of Banco Sabadell México. The incorporation of payments made through smartphones, in particular, will open a window of opportunity to bring more people into the financial system. “Having a significant number of payments made through smartphones … forces people to have a bank account, which then can help to increase credit and to expand services to a larger segment of the population,” Noguera adds.

The government and Banxico are pushing toward the implementation of the CoDi (Digital Payment) platform, which will allow users and businesses to make transactions using QR codes. Antonio Junco, Executive Vice President of Government Relations for Latin America and the Caribbean at Mastercard, points out that the implementation of QR technology can bolster the number of businesses that can accept digital payments and at the same time reduce infrastructure costs. Méndez adds that the use of cellphones as a bank account and payment method could help to eliminate friction in payment systems and to understand the behavior of the informal sector.

But it may be the past that hinders the future, despite the significant strides that banking institutions are making to implement a digital strategy. “Systems inherent to traditional banking players are the biggest challenge when trying to digitalize operations. These do not allow them to move at the speed that the market demands,” says Márquez. The fintech industry is not similarly restrained, which is why it has gained relevance in the past couple of years. “Big banks have operating systems with platforms that were created many years ago and changing them would cost a lot of money,” says Méndez. Rather than go it alone, many banks have chosen to work in collaboration with fintech businesses, going so far as to  integrate them into their processes. “Fintech can help in the innovation and in the evaluation of creditors or borrowers in a nontraditional way,” says Méndez.

PROGRAMMING A BOOST
 

In January 2019, President López Obrador presented his administration’s program to boost the financial sector. The plan is centered around eight pillars whose goal is to bolster the banking and stock markets to “boost more dynamic, inclusive and fair economic growth.” The plan, which will be carried out between Banxico and the SHCP, contemplates the creation of a payment platform using mobile devices, easing the process to obtain a loan associated with payroll and providing flexibility for financial intermediaries and Afores, among other elements. Raúl Martínez-Ostos, Chairman of the Board and Director General of Grupo Financiero Barclays México, says the governmental plan encompasses several areas of the financial sector that need to be addressed. “Programa de Impulso al Sector Financiero covers topics like technology and digitalization,” he says. “At the same time, the initiative tackles the problem of organized crime that affects the financial sector as much as any other.”

The initiative may not be the only measure needed to boost the sector and alleviate its problems but it is certainly a good place to start, says Martínez-Ostos. “One initiative may not radically change the country’s financial landscape but is an important step that authorities are taking along with the private sector to pave the road toward greater economic dynamism.”

AMLO’s 8 Pillars for the Finance Sector

• New payment platform for mobile devices
• Payroll loans from any bank
• Regulation for repurchase and securities lending transactions
• Incentives for companies to list on the stock market while removing discriminatory factors that hinder investors
• Flexibility for financial intermediaries in their repurchase and securities lending operations
• Flexibility for Afores’ investments
• Allowing young people between 15 and 17 years of age to open a bank account
• Focus on national development banks to benefit 15 million new clients in rural areas, vulnerable municipalities and semi-urban areas