Banxico Boosts Digital Payments EcosystemBy Andrea Villar | Mon, 10/18/2021 - 09:19
Q: Why is the transition to digital payments important for Banxico and what is its role in advancing financial inclusion?
A: Every Mexican should be able to send and receive electronic payments or transactions in a seamless, efficient, transparent and safe way. This is Banxico’s visionbecause we consider payments to be a stepping stone on the financial inclusion pyramid. We believe that once people start entering the world of electronic payments many opportunities will open to them.
Once users have generated a history of electronic payments, several other financial services can be offered to them much more precisely. New technologies have become a part of people's lives and smartphones play an increasingly important role in their routine, so the flow of information that can be generated by introducing electronic payments can be significant. This is positive for societies as a whole. For instance, financial entities can help to better characterize money flows and offer businesses a loan when their sales are low and then investment opportunities when they are high. This can generate a win-win proposition for both the financial sector and end user. If the positive effects stemming from the introduction of e-payments add up, growth and welfare for the whole population can be achieved.
Q: Financial inclusion demands the participation of the entire financial ecosystem. How is Banxico ensuring that every player in the market is aware of their role in this?
A: The financial system is so complex that it is impossible for a single entity to coordinate it all. It is not possible for one entity to dictate what everyone else should do. One of our responsibilities is to create an ecosystem in which market forces can come in and coordinate everyone. The system should not be built on what an authority says but on market forces to operate efficiently. To achieve this goal, we set up the infrastructure from a back-office perspective to allow different actors to join the ecosystem.
We see a lot of fintechs and bigtechs trying to enter the digital financial ecosystem and we need to create the conditions so that all those who want to do so can compete on a level-playing field. We want different ideas and proposals to join the market. We want to lay the groundwork so that, even if you are a fintech with a customer base of more than 50 million users outside Mexico, you cannot take over the market immediately. We do not want a winner-takes-all situation in the financial system but a Darwinian ecosystem where ideas succeed or fail based on the benefits they bring to the general public.
For this to work, we need to open the ecosystem to external ideas that can be applicable across broad segments of the population, which are likely to come from small fintechs. For example, a startup with 10,000 clients relying on a closed ecosystem to generate a payment system will most likely fail. But, if this small business is allowed to join the financial ecosystem and these 10,000 customers can easily pay using a different financial institution, the startup will find an easier path forward.
We encourage a network effect among the various potential participants in the financial market so that their ideas compete, not the size of their network. If that was the case, small companies would be out of the market and just a couple of bigtechs would have sufficient scope to provide an adequate financial service. This would kill lots of potentially great ideas for society and particular market niches. Banxico’s role is to generate infrastructure and conditions in the ecosystem so that everyone can join. From the regulatory side, we establish conditions so that competition can flourish. We have to provide the infrastructure so the technical element and innovation can take place, while issuing regulation so no one can take advantage of other participants and the interests of users are protected.
Q: CoDi has been one of Banxico's efforts to establish the right market conditions. What challenges have you faced in increasing its penetration?
A: CoDi is just a fraction of the ecosystem we have been developing. The Interbank Electronic Payments System (SPEI), for instance, is a powerful infrastructure that powers others in the financial system. We have peaks of around 17 million transactions a day, have already processed more than 1 billion transactions this year and expect to have 2 billion transactions by the end of 2021. Every month, we see increases of up to 100 percent over the previous year. We are talking about millions of transactions, so growth of this magnitude is quite amazing. We believe that SPEI is a core functionality for the financial ecosystem and we have to keep improving it so that more users can join the electronic payments party.
To get people on board with electronic transactions, we look for ways to simplify them, such as CoDi, our request-to-pay solution. We have other projects to lay more foundations for building an open financial ecosystem. At Mexico's Central Bank, we want users to have the power to start their payments from wherever they want and not from wherever their financial institution wants them to.
Q: What are the next steps for SPEI and how do you plan to manage an increase in transactions while keeping them secure?
A: Security is not an issue because it can be scaled very efficiently. However, scaling up processing power and payment settlement processes is an interesting challenge. At Banxico, we have been working for about six years to improve SPEI. We have already generated a structure that allows the system to clone itself to duplicate its ability to process transactions. With this solution, we are just buying time because we already have a project in the pipeline: SPEI-2. This new platform will have a fully scalable system where it is not necessary to clone the whole ecosystem, only the necessary components where bottlenecks are occurring.
Q: Mexico remains a cash-loving country. In addition to this, what other challenges have you identified in the market and how do you plan to overcome them?
A: We understand that cash is highly efficient. When a customer goes to a shop all they have to do is take out cash and pay; the worst that can happen is that the seller has no change. Even if the 40 million users who have a bank account in Mexico wanted to carry out digital transactions, most of them live in communities where the local corner shop does not accept electronic payments. It does not matter if a person can make electronic payments if they do not have a place to do so. Faced with this reality, users are naturally expected to keep withdrawing cash every payday.
For shop owners to accept electronic payments, the best strategy is to drive the ecosystem through a tool that almost everyone has: a smartphone. We know this process will take time and people will have to get used to the new way of making and receiving payments. Some say that this system has not advanced because financial education is necessary but I do not think this is true. Banxico and financial institutions have not been active enough with marketing campaigns to let consumers know about the different solutions we have developed. But perseverance will win the race at the end of the day.
Q: If it is not a matter of financial literacy, what are the hurdles preventing people from making the transition into the financial digital ecosystem?
A: Some have preconceived perceptions that are not necessarily true, such as the taxation. Many believe that if they start making electronic payments, tax authorities will immediately take most of their money. However, there is no direct link between using electronic payment and being audited. Others believe that electronic payments are difficult but most small-business owners have been impressed by how easy is to use CoDi. All products in the financial sector must become as user-friendly as possible to encourage consumers to use them and leave misconceptions behind.