Incentivising Mexico's formal banking activity remains major priority

Since the economic, financial and banking crisis of 1994-95, many Mexicans have lacked full confidence in the integrity of the banking system. It shrunk greatly during and immediately after the crisis. In the intervening years, banking regulations have been greatly tightened, foreign entrants to the sector have come to dominate, and credit as a share of the national economy finally appears to have regained its historic peak reached in 1971. One reason for the banking sector’s arrested development is a lack of clients — in 2015 more than half of Mexicans still did not have a bank account.

Promoting financial inclusion is not only an important business opportunity for the banking sector, it is crucial to the country’s economic development and can help bridge stark social inequalities. “Mexico performs particularly poorly on many financial inclusion indicators,” Facundo Vazquez, CEO of Divisas Martinez, an exchange house, told OBG. “That being said, progress is being made on many fronts. This will have wide-ranging implications for cash-orientated businesses such as currency exchange houses that will be forced to develop different lines of business.”

In time, a deeper and more extensive banking system can work to further help Banco de México in implementing its monetary policy by making what economists call the “transmission mechanism” more sensitive to fluctuations in interest rates.

By The Numbers

In June 2016 the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV) and the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI) together launched the results of its 2015 National Survey on Financial Inclusion for individuals aged 18 to 70, the first since 2012. Although the survey found that only 44% of the adult population had a savings accounts, this was up by nearly a quarter since 2012, when the number stood at 36%. In absolute numbers, this translated into an extra 8.6m people gaining bank accounts in three years, but means 42.6m adults still had no account as of 2015. The INEGI also reported an increase over the same period in the number of Mexicans with a retirement savings account, rising from 28% to 41%. However, progress has been slower with respect to other products. Those having a loan account increased from 27% to 29%, while those with insurance increased by a similar proportion, from 22% to 25%. The progress being made in the number of adults with bank accounts is underpinned by a shift in the way they are accessing financial services. The number using bank machines and third party establishments known as agents, for example, supermarkets, to use their accounts increased from 38% to 43% and from 30% to 34%, respectively. However, the proportion using bank branches actually declined slightly, from 40% to 39%, between 2012 and 2015. The number of adults with an account that also have a mobile banking account more than doubled, from 1.4m to 3.2m, so that one in 10 account holders were using mobile services by 2015. Of the 30.3m account holders that do not use mobile banking, more than a third — 10.2m — say they do not see a need to open one. Given that 75% of adults report having a mobile phone, and nearly half of those, or 29.1m people in total, do not have any form of bank account, the scope for using mobile banking to increase the size of the banked population is clear.

Obstacles To Growth

Those with no bank account are less likely to be well educated, to work in the formal sector and to live in a major urban area, while they typically have an average monthly income of only MXN4224 ($256), amounting to just 60% of what those with bank accounts earn. Among the 31.6m adults who have never had a bank account, exactly half cite having insufficient or irregular income as the single biggest impediment. Of the 11m people who do not have an account, but did at one time, 50% say that the main reason they no longer have an account is that they had left employment, and therefore no longer needed access to their bank account in order to receive payment of their salary.

Two-thirds of Mexican adults have received some financial education about saving, with the vast majority learning from their parents. Only 17% of those with savings accounts compare various kinds before opening one, however. The numbers are somewhat better among those who use loans and insurance, with the numbers coming in at 29% and 28%, respectively. Moreover, 51% of adults are not aware of the existence of basic bank accounts and 53% did not know where to go if they have a financial problem, while three quarters don’t know about deposit insurance. Among those who already have bank accounts, more than half do not know that they can migrate free of charge to the account into which they receive their salary (53%) or whether their main account has charges or not (53%).

More than 90% of Mexicans prefer to pay by cash. At the same time, 84% of those with a bank account also have a debit card, although only half had used it in the past three months. Of those that prefer to pay by cash rather than debit card, 29% say it is because of habit, 23% because of a lack of trust, and 22% because they feel it gives them better control over their spending.

Impediments & Solutions

One of the key obstacles to opening a bank account – and the reason cited by half of those who do not have one – is lack of an income that is large enough or stable enough to justify opening one. In a country where half the population live in poverty, this is hardly surprising. While reducing poverty requires a comprehensive, economy-wide approach, there are a number of policy measures that can be introduced to improve financial inclusion among even those on lower incomes.

For a start are labour reforms under way to reduce informality and give workers a more secure income that would allow them to open a bank account. “Informality is still a central issue that needs to be addressed in a comprehensive, multifaceted manner. In order to change the employment market, a new relationship of understanding is needed between employees, employers, the government and the younger generation,” Francisco Barroso, director-general of Invex Grupo Financiero, an investment bank, told OBG.

Perhaps one of the most promising avenues to rapid improvements in financial inclusion is the application of new technologies. The 2013 Digital Strategy included four elements in its Action Plan on the Digital Economy, one of which was to ensure financial inclusion through mobile banking schemes. In particular, it sought to build new patterns of connectivity through local networks, the expansion of correspondent banking and mobile banking in rural areas. It also aimed to promote financial education that fosters the use of savings and credit instruments by the underserved population. There has already been some progress: as mentioned above, the numbers using mobile banking services are growing rapidly, while the number who have a mobile phone – but not yet a bank account – is considerable.

Whether promoting financial inclusion through new technologies or other means, it is critical to ensure the right infrastructure is in place. Although declining slightly in relative importance as new technologies and options have taken off in recent years, bank branches are still the most common outlet for clients to access financial services. In fact, the number of bank branches declined marginally from 16,742 to 16,395 between 2014 and 2015, but the number of bank machines increased from 41,985 to 44,429 during the same period. Investment in telecoms technology, particularly in rural areas, is also important to ensure the reliability of the mobile banking system. In recent years, there has also been significant investment in infrastructure in agent banks, which allow clients to access financial services through third parties like supermarkets. According to the CNBV, this has seen the number of agents per 10,000 adults increase from 1.86 in 2012 to 2.81 in 2015. This follows an increase in the number of such agents from 22,423 in 2012 to 27,422 in 2015, sharply up on the 9,753 in place in 2011.

National Financial Inclusion Strategy

In 2016 President Enrique Peña Nieto launched Mexico’s comprehensive National Financial Inclusion Strategy. The strategy is based on four basic principles: access, usage, consumer protection and financial education, which were constructed around six axes. These axes are developing citizens’ knowledge, technological innovation, developing infrastructure, improving the supply of financial products to underserved population segments, improving confidence in the financial system and generating data to help better monitor the success of financial inclusion efforts.

Although progress in increasing the banked population has been impressive in recent years, there is still a long way to go to achieve the vision of a financial system from which all Mexicans can benefit. Buoyed by the 2014 telecoms reform, which is fostering investment in infrastructure and bringing down user prices, growth in mobile banking holds out particular promise for further rapid progress. Likewise, the increasing prevalence of agent banking outlets looks set to continue, which should further boost financial inclusion efforts.