How Long Will Cash Dominate in Mexico?

Poverty Premium is a term that describes the idea that people with fewer economic resources pay more for essential goods and services. Financial services are essential, and many in Mexico pay a lot more than they should for these services just because they use cash instead of digital payments. The use of cash is associated with several hidden and other more conspicuous costs. But why has it remained so popular, and what could change this? 

It’s expensive for consumers …

In December 2014, Tufts University(1) estimated that obtaining cash cost Mexican consumers MX$2.3 billion (US$133 million) and 48 million hours. This could easily be aggregated as MX$6 billion, or about  25% of what the country received in remittances from the US in the same year. And this does not even account for accidental loss, theft and corruption. 

Those with fewer financial resources tend to use cash over cards and electronic payments. Their reliance on cash means that a higher percentage of their income is spent on handling money than in the case of higher earners.

… and expensive for the state.

According to EY, the cash-reliant informal economy costs Mexico 2.56% of GDP, equivalent to 19% of its tax revenue in 2019 or the combined budgets of public education, health and well-being.(2)

So why are Mexicans still using cash so much?

In the past decade, as the use of the internet has spread across Latin America, so has the use of banking. However, in Mexico, the gap between the rate of adoption of the internet and the rate of adoption of banking really stands out.(3)

What is still holding this transition back is a combination of different factors that include:

1. Lack of connectivity
2. Fear of taxation 
3. Lack of trust in banks 

a. Fear of fraud
b. Fear of hidden fees and abuse
c. Poor customer service, especially when something goes wrong
d. Poorly designed banking services (both digital and physical) 

However, the use of cash seems to be decreasing since the start of the pandemic. Before the pandemic, about 90% of the population would use cash as their primary means of payment. This dropped to 87% in 2021 and to 82% in 2022, according to the Bank of Mexico.(4) Meanwhile, the use of debit cards grew 50%, from 16% before the pandemic to 24% in 2022. 

What could accelerate the transition?

1. Getting everyone online! This might be the easier barrier to tackle.
2. Enlightened tax policies: Creating incentives for informal businesses to formalize and not giving people reasons to fear that their use of the banking system will result in higher taxation.
3. Subsidy payouts: Government subsidy payments could be delivered into bank accounts. This certainly delivered positive results in Brazil and is already happening in Mexico.
4. SPEI interfaces should be revamped: While DiMo (real time payments using phone numbers) is a step in the right direction, CoDi (real time payments using QR codes), in its current form, is unlikely to reach scale. On the consumer front, there is still friction involved in signing up for it. Additionally, given that payments under MX$8,000 made through CoDi and DiMo are free, banks have little incentive to promote it and cannibalize the interchange income they derive from card payments (both as acquirers and as issuers). It’s important to learn from the success of PIX (instant payments via QR, cell phone numbers, among others) in Brazil and provide the right incentives for the private sector to embrace CoDi enthusiastically. Just a year after it launched, PIX became the No. 1 form of payment by number of transactions in Brazil.(5) Mexico launched real-time payments almost 20 years ago, nearly two decades ahead of Brazil, and yet, thanks to PIX’s exponential growth (6) real-time payments in Brazil now have far higher penetration than in Mexico (almost 60% of the population versus less than 8%). 
5. Education: Studies have found that the availability of banking services tends to benefit people unequally. Those with higher levels of education benefit more.(7) Financial education will help encourage the use of banking products and help people derive greater benefits from them.
6. Bank branches: Chile, the country in Latin America boasting the highest banking penetration, has fewer branches per inhabitant than Mexico. A more careful analysis is required, but it may seem like the presence of branches may not be the main driver for inclusion. The ability to bank online and through retailers might be more relevant, as the experience in Brazil seems to suggest.
7. Simplifying the regulatory landscape: From homogenizing how different financial entities operate — for example, onboarding rules for SOFOMs (Multiple Purpose Financial Society,, Banks, SOFIPOs (Popular Financial Societies) — to considering the merger of regulatory entities to improve coordination.
8. Competition that actually moves the needle: The advent of fintech from within and outside the country should improve the quality of services, reduce costs, and improve market practices, all of which should make the use of banking more attractive to consumers. Competitors that remain too small to succeed will not scratch the surface. We need players who will pose a serious threat to incumbents. That’s where we at Revolut come in. We are positioned to really shake things up. For instance, we already offer our users in the US the possibility to send money to Mexico cheaper and faster than most other alternatives. And once we are live on both sides of the border, we will provide instant, free P2P transfers across the US-Mexico border, as we do in all countries where we operate.

Those who stand to benefit the most from Mexico’s transition away from cash and toward digital payments are the country’s poorest. It will be our great privilege to help reduce the use of cash and make financial services accessible to all. And it will fill us with pride to be facilitating faster, safer, cheaper movement of money across the US-Mexico border, potentially saving Mexican families billions of dollars.
 

1. https://dev-digital-planet-fletcher.pantheonsite.io/wp-content/uploads/2023/08/The-Cost-of-Cash-in-Mexico.pdf

2. https://imco.org.mx/wp-content/uploads/2020/12/20201207_Menos-dinero-en-efectivo-_Documento.pdf

3. https://www.bbvaresearch.com/en/publicaciones/financial-inclusion-and-digitalization-dynamics-in-latam/

4. https://www.eleconomista.com.mx/sectorfinanciero/De-la-poblacion-82-usa-efectivo-pero-sigue-a-la-baja-20230622-0098.html

5. https://www.ft.com/content/e1c7b0e7-4c17-40c4-8e03-16c698674efa

6. https://www.elibrary.imf.org/view/journals/002/2023/289/article-A004-en.xml

7. https://www.nber.org/system/files/working_papers/w30057/w30057.pdf