Ignacio Aldonza
Lead Partner for Financial Services
EY Mexico
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Insight

Technology to Boost the Financial Ecosystem

Wed, 02/21/2018 - 15:55

The structural reforms implemented during Enrique Peña Nieto’s administration have elevated optimism about Mexico, despite the economic and political uncertainty in some of the world’s most influential countries, says Ignacio Aldonza, Lead Partner for the Financial Services Office at EY Mexico. “There are so many reasons for confidence as the structural reforms move forward. Although the expected level of growth and investment varies according to sector, in the financial segment we see a clear bet in favor of Mexico.”

That bet is heavily favoring digital technology and leading to the rise of a fintech ecosystem with the potential to reach segments of the population that until now have had little or no access to banking services, including loans. Smaller companies and startups are spearheading the fintech push, supported by private capital funds. “Companies like Clip, kubo.financiero, Konfío and Kuspit have received funding valued at around MX$88 million. Investors look for two things: a capable management team and an idea that is viable,” Aldonza says, adding: “We want Mexico to become a fintech development hub.”

Technology is revolutionizing industries, including the financing segment, and creating significant cost reductions, accessibility and an undeniable focus on the client. “In the digital world, everyone has access to information and the customer is king. What companies are doing to remain competitive is to lower their prices, transforming into businesses with low profit margins where volume plays a larger role,” says Aldonza.

Recognizing the impact that digitalization and an expanding fintech market will inevitably have on the sector, the bigger banks are also putting their money where their ideas are. In the early months of 2017, Aldonza says that BBVA Bancomer had invested US$3.5 billion and will invest another US$1.5 billion, Citibanamex is committing US$1.5 billion to renovate its infrastructure and Banorte will invest US$1 billion, all aimed at strengthening their digital strategy. “Banks are committing a significant amount of resources to enter the digital world.”

To fully develop this emerging market, the government must do its part to ensure a level playing field for the new players going up against their established counterparts. “The government must play a role in the development of the fintech ecosystem. It must help these new companies to compete fairly with banks but also to provide them with a legal framework that protects users,” Aldonza says.

The nascent focus on technology is bound to provide the system with one element it currently lacks: dynamism. In addition, new players will boost competition and force those already entrenched here to improve their services. Aldonza says that promoting competition is one reason behind the creation of BIVA, the second Mexican stock exchange. In his view, the world is moving toward digitalization and the further use of technologies to reduce costs, a message the current stock exchange needs to hear. “Perhaps the purpose of BIVA is to encourage the Mexican Stock Exchange to incorporate technological tools and become more competitive,” he adds.

While market players across industries remain jittery about the nationalistic rhetoric coming from the administration of US President Trump, Aldonza says investments already made in Mexico will remain and some sectors will be relatively unaffected, regardless of how that rhetoric plays out. “The US business community will avoid any direct challenge to their president but they will not pull out investment already committed to Mexico.” Besides, even if the US were to pull back, for instance in the automotive industry, others would be more than happy to step in. “Mexico is not a fiscal paradise. This means that companies established in the country have not followed the logic of paying less taxes. Companies with operations in the country are here because the country offers significant and real competitive advantages.” In the end, Aldonza says, US consumers will not be willing to finance their president’s patriotism.