Fintech, Interest Rates and Pension Reform

Though the COVID-19 crisis remains an immediate and ongoing threat, industry stake holders and government officials are beginning to look beyond the pandemic. Up to 80 fintech platforms will soon receive legal approvals based on Mexico’s novel Fintech Law, while Banxico seeks to stimulate a rapidly ailing economy with further interest rate cuts. Meanwhile, Afore savings have grown dramatically once again, while the discussion to reform the poorly performing system continues.

All this and more in The Week in Finance!

Eighty Fintech Companies Set for Approval

Mexico’s active fintech market is to gain another competitive boost with up to 80 platforms set to be formally approved by the Financial Technology Institutions of the National Banking and Securities Commission after processes were sidelined as the COVID-19 crisis took hold.

According to El Economista, approval processes for the platforms will restart on Aug. 17, though 74 of the 80 companies will not have their operations affected as they were created prior to Mexico’s groundbreaking Fintech Law that was passed in March 2018.

These approvals will recognize the companies as being compliant with the Fintech Law. The law’s principles promote competition, financial inclusion and consumer protection across the financial markets.

Fintech and financial digitalization have benefited from the COVID-19 crisis, which caused the closure of thousands of bank branches during the shutdown. As previously reported by MBN, traditional banks have seen rising numbers of online users, with BBVA adding 400,000 digital clients in 1Q20 alone.

Banxico Cuts Interest Rates

Banxico has cut its interest rate to 4.5 percent, down from 7.25 percent at the start of this year, after a unanimous board decision, El Financiero reports.

Cutting interest rates is a frequently used strategy in times of financial uncertainty, providing a monetary stimulus to counter commodity prices and consumption falls. According to INEGI, private consumption in the internal market fell 23.5 percent year-on-year in May, a -1.7 percent monthly variation.

Banxico said that there had been some GDP recovery in June, which has contracted by 18.9 percent annually, primarily driven by “the reopening of some sectors” and the relaxation on restrictions on movement and a small increase in external demand.

Afores Hit Record Amounts

Afores savings figures rose by a massive 13 percent to MX$4.3 billion (US$194 million) during 1Q20 against a background of political chatter regarding a reform to the pension system. El Economista reports that according to the National Commission of the Retirement Savings System (CONSAR), the 13 percent rise was the highest seen in a first quarter since 2012 as interest rate cuts made by Banxico have made retirement savings more attractive.

Reforming Mexico’s inadequate pension model remains a key aim for both the government and private industry despite the slowdown in progress due to the health pandemic. The pensions system has been criticized by the government for the low rate of contributions required by employers and workers as being insufficient to see out the retirement needs of the majority of Mexican citizens. At the end of July, Finance Minister Arturo Herrera announced a reform proposal that would see employee contributions rise from 6.5 percent to 15 percent while the employer contribution would grow from 5.15 percent to 13.87 percent.

This week, Herrera also said the reform was needed to help fund Mexico’s economic growth in the post-pandemic period through the financing  of long-term projects.