Digitalization, Fintechs Disrupt Traditional SectorSun, 04/01/2018 - 13:24
The disincorporation process the financial system underwent in the 1990s as well as Mexico’s signing of several free trade agreements that permitted the participation of foreign financial entities in the domestic sector helped create the diverse financial system Mexico enjoys today. Technology is proving to be the spur for even greater change that will also address a key issue for the industry: inclusion.
According to data from INEGI, from 2010 onward, financial and insurance services have contributed over 4 percent of the country’s annual GDP. In 2016, financial and insurance services experienced 7.7 percent growth, a mark that is expected to be surpassed in 2017. Just in the first six months of the year, the industry posted an average 9.7 percent growth rate. But there is capacity for more, as well as hurdles ahead.
Much of the recent investment in the industry has gone toward digitalization and automation of services. Nuno Matos, CEO of HSBC Mexico, says his bank launched this strategy about four years ago. “HSBC recognized that it needed to embrace the digital challenge and take it to the next level. Globally, HSBC initiated its Retail Transformation Program, in which the bank has invested almost US$1.7 billion in its top 6 countries, which includes Mexico.” Investing in a digital strategy goes well beyond offering online banking services. Matos says that HSBC’s digital investment encompasses the bank’s digital platforms, online and mobile banking, as well as voice recognition at the bank’s call centers.
For Citibanamex, the strategy has been focused on furthering mobile banking. “Five years ago, we launched Transfer, the first payment platform for cellphone services, in alliance with América Móvil and Inbursa,” says ErnestoTorres, CEO of Citibanamex. The strategy has paid off. In only four years, transactions through Transfer have gone from 9 million to an expected 310 million by the end of 2017, with the number of active clients growing at an annual rate of 57 percent.
While the digital revolution has impacted every productive sector in the world, in Mexico, digitalization services are part of bank efforts to further financial inclusion and adequately interact with the fintech ecosystem. Among OECD countries, Mexico is ranked last in terms of financial inclusion. Luz Adriana Ramírez, Director General of Visa México, says that only 40 percent of the adult population has access to a bank account or a formal financial service. The reasons vary, but the lack of banking infrastructure such as ATMs or bank branches as well as labor informality contribute to weak numbers.
Torres says the solution for furthering financial inclusion includes a mix of technology and infrastructure. “To increase access, we must move forward simultaneously in different directions: using the most advanced technology and new digital channels and taking advantage of social media and Big Data, expanding and modernizing our infrastructure, establishing a network of correspondents to reach more clients and providing products and services that best fit the needs of each client.”
The appearance of fintech companies has also sparked strategical changes. “Their appearance has made traditional financial institutions amplify, adjust and modernize their products and services,” says Torres. Though much has been said regarding the relationship that will prevail between the banking sector and fintech companies, Torres says there is no animosity. “Contrary to what is commonly thought, the relationship between fintech companies and traditional banks will be more collaborative than competitive; we can coexist in the Mexican market.”
Fostering a digital ecosystem also follows price logic. Antonio Junco, Director General of Mastercard Mexico and Central America, says that the use of cash can cost between 0.5 and 1 percent of the country’s GDP. “Using cash is extremely expensive.” In addition to the direct costs that usually encompass issuing expenses, transportation and security elements, Junco says that it is necessary to add indirect costs such as corruption, money laundering and fiscal evasion.
Misconceptions regarding the functioning and benefits of the financial system are not exclusive to commercial bank customers. José-Oriol Bosch, CEO of BMV Group, says that companies and businesses also need to strengthen their financial culture. “The biggest challenge is creating a financial culture in Mexico that is open to investing in the stock exchange.” According to Bosch, Mexican companies tend to believe the BMV is only accessible to billion-dollar companies, but the reality is quite different. “We are trying to encourage smaller companies to participate but the lack of financial culture is a challenge. Many of these companies think they are too small for the stock exchange while regulation allows them to participate with 20 million units of direct investment (UDI) paid in capital, which is as little as MX$120 million (US$6.2 million).”
For some companies, the challenge lies in accessing capital; however, Mexico has developed an ecosystem of private equity that can help boost the number of public companies. Still, Mexican companies are reluctant to use these financing tools. “Private equity funds arrived before Mexican companies understood what private equity could do for them. This has led to a slower adoption rate of private equity among medium-sized companies,” says Arturo Saval, Senior Managing Partner of Nexxus Capital. Similarly, fiscal policy plays an important role for adoption of financial products. Saval says that it could also be a tool to foster participation in the BMV. “In most countries, a company eyeing an IPO understands that its fiscal burden will likely be reduced because the host country recognizes that the company will be in the country for a long time. In Mexico, this special tax regime is not applied.”
During 2017, the tides of uncertainty flowed into the country from the US, a result of protectionist policies espoused by President Trump targeting Mexico and NAFTA, which sparked the ongoing renegotiation of the treaty. The financial sector tends to be one of the most susceptible to international turbulence and unpredictability but Raúl Martínez-Ostos, Chairman of the Board and Director General of Grupo Financiero Barclays México, says a new NAFTA deal has the potential to further strengthen financial ties in the region. “For the financial sector, having clarity is important to generate more investment between the financial entities of the three countries. We can work together to ensure the safety of our co-nationals and the integrity and stability of the financial sector.” Despite overall optimism, some pundits say that uncertainty should not be taken lightly. “In general, the discourse has become more optimistic compared to the initial shock the markets displayed when President Trump was elected. This optimism might be a little exaggerated. I think we are embracing an assumption of a new normality that may not be that easy to sustain,” says Octavio Liévano, Country Head of Crédit Agricole. Domestic uncertainty also abounds with federal elections set for 2018.
Martínez-Ostos believes investor confidence should not be confused with lack of tasks to be completed. “It is essential to maintain the basic principles of responsible macroeconomic management and to foster an environment of clarity, certainty and transparency.”