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Analysis

Digitization Still a Roadblock to True Financial Inclusion

By Sofía Hanna | Mon, 01/24/2022 - 16:01

Digitalization has been key to advancing financial inclusion in Mexico. However, a bigger change is needed, with awareness and regulation the major priorities to make inclusion a reality. “The Mexican market is screaming for disruption in its financial and banking markets. This is why so many startups and fintech are coming to Mexico since they can provide better products and services,” MBN experts say.  

The world is gradually ceasing to use cash and attempts are being made to boost electronic payments, especially among the poorest population sectors, which is where much of the informal economy thrives. According to a study by BBVA Bancomer, the informal economy represented 26.2 percent of GDP and about 56 of the workforce in 2019. At the same time, the number of banknotes and coins in circulation accounted for 62.7 percent of GDP, while about 95 percent of purchases worth MX$500 or less (US$25 or less) were made with cash payments. At this moment, trying to implement a 100 percent digital economy would not be viable or even beneficial. Instead, the goal in starting to move toward a digital economy would be to focus on highly efficient hybrid models in which the two universes (physical and digital) can coexist, says Vicente Aguirre, Business Development Head, Arcus Financial Intelligence, and MBN Startup Contributor.

“The risks of not digitally transforming are too great to ignore, which pushes business owners to let the fear go and adopt such tools to ensure survival. I tend to share this view, particularly considering how much this sector stands to gain from this new digital reality,” Vice President and General Manager at GCS American Express Mexico and Latin America Jorge de Lara told MBN.

Consumers are also showing preference toward businesses that have a variety of payment methods. This preference has been so evident that in the next 12 months, 70 percent of businesses surveyed in Mexico are planning to adopt or increase their use of automated payments. Meanwhile, 74 percent will adopt or increase automation when receiving payments from clients, and 73 percent will automate vendor transactions, as reported by American Express’ Global Business Spend Indicator.

 

 

Where Does Mexico Stand?

Digitalization is already a crucial component of Mexico’s financial inclusion strategy. Facilitating access to financial products and services to private clients and MSMEs while growing digital payments in both the public and private sector are two of the main objectives of the National Financial Inclusion Policy established for 2024, according to the National Banking and Trading Commission (CNBV).

There have already been efforts to advance digitalization and financial inclusion in the public sector, such as SPEI and the CoDi payment system, which allows account holders to pay in any establishment via a QR code generated by a smartphone. While this option offers an easy and accessible way to advance digitalization, results have been lacking, according to Jaime Márquez, Director of Business Development, Grupo STP/LGEC. “During its first year (up to September 2020), 5.1 million bank accounts enrolled, according to official data from Banxico, just about 30 percent of the goal that had been set. Furthermore, the pandemic put the brakes on the implementation of the platform,” Márquez told MBN.

As of Jan. 16, 2022, according to data from Banxico, approximately 12.196 million accounts had registered to receive payments through CoDi. Meanwhile, only 785,974 accounts had made a payment using CoDi and 624,532 had received the payment through the platform. Banxico also reports that as of September 2021, there were over 79.3 million active accounts with an associated active debit or credit card, which means that CoDi penetration in terms of use would stand at between 0.7 and 0.9 percent.

While there are many advantages to this system, awareness is still lacking among the general population. “When people, especially those owners of small businesses such as grocery stores, workshops or fonditas, see the benefits of implementing this new way of charging for their business, the growth will be exponential. What we need now is an extensive dissemination campaign to continue enrolling small businesses and take the next step to CoDi being present in the large self-service chains,” says Márquez.

Digitalization efforts have been most evident in the private sector, mostly led by fintech companies. These players have been essential in the digitalization of the financial system, partly because of banks’ resistance to change and their disinterest in providing financial services and capital access to the unbanked Mexican population. Having said that, banks have gradually delved into new business models through apps that give users more freedom when managing their finances, even allying with fintech newcomers to further strengthen their offering. “New business models have become a way to transform the bank and develop competitive advantages that will help us to attract new clients and do business,” Jordi García, Head of New Business and Strategy, BBVA, said during the Singapore Fintech Festival.

Fintech regulations are still evolving, however. “Fintech companies must formulate robust and ethical growth strategies with the best interest of their consumers in mind. To do so, companies are placing a salient emphasis on cybersecurity that is necessary to avoid security breaches and maintain consumer confidence,” says Stefan Moller, Co-Founder and CEO of Klar. There are also many aspects of fintech that have not been addressed by regulation, which still offer major opportunities to companies and new investors. “Despite banking-as-a-service (BaaS) being an international trend, it is still not properly recognized in the regulatory framework of Mexico. However, this model can be adopted using other regulatory figures such as technological providers or digital agents, in which clients open accounts with one financial entity that offers a co-branded product with them,” says Rocío Robles, Partner at Tenet Consultores.

In the end, the secret to reaching an almost or even full digitalization will rely on having solutions that can be used for payments, deposits or cash withdrawals, both in local convenience stores and large supermarkets. “Only through pushing the existing limitations can we expect structural change. Otherwise, we can only expect marginal change,” says Pablo Viguera, Co-Founder and Co-CEO of Belvo. 

The data used in this article was sourced from:  
MBN, BBVA, CNBV, Banxico
Photo by:   Jonas Leupe, Unsplash
Sofía Hanna Sofía Hanna Journalist and Industry Analyst