Innovative banks and new regulations in Mexico push inclusion through technology

Despite its solid performance amid uncertain macroeconomic conditions, Mexico’s banking system has lagged behind in its ability to increase the availability of financial services across the country. To address this, the authorities have recently approved a number of regulatory changes to structure the provision of IT-based financial services. The move is expected to accelerate the adoption of new financial products and services that can be delivered to more citizens through digital platforms. Moreover, the government expects that setting out rules for non-traditional financial service providers will encourage the development of innovative products and lower the costs of financial services. In March 2018 Congress approved the Law to Regulate Financial Technology Institutions – also known as the Fintech Law – with the aim of structuring the necessary legal framework for new technology-based financial services and crowdfunding platforms to operate in the country.

Growth Avenues

Encouraging financial access through the use of technological tools makes economic sense for Mexico. According to the 2017 “National Report on Financial Inclusion”, financial service penetration in the country hovered around 68% in 2015, up from 56% in 2012, with 52.1m adults using at least one financial service product. Conversely, mobile phone penetration has risen from 85.7% in 2012 to 90% in the third quarter of 2017, according to the Federal Institute for Telecommunications (Instituto Federal de Telecomunicaciones, IFT).

Taken together, these figures point to a high-potential growth avenue for banking operations. Indeed, the uptake of mobile communications has progressed despite economic and social constraints across several of Mexico’s regions, and has grown in urban and rural settings alike. Banking inclusion, however, has been largely blocked by a combination of risk-averse banking policies and the inability of traditional brick-andmortar networks to expand to all areas of the country. “The banking sector is made up of 48 institutions with a total of around 12,500 branches across the country. But for fintech players, their distribution channel is the smartphone. In some communities there are no bank branches but there is internet access, so this is a great opportunity,” José Ignacio Valle, partner for financial services at Deloitte, told OBG.

Regulatory Measures

Before it gained approval in Congress in March 2018, the Fintech Law cleared the Senate vote in December 2017. However, more details of its implementation should come with the approval of the secondary laws, which is set to take place in the latter half of 2018.

The basis of the law is the identification of new players in the financial services market, defined as fintech institutions, which the new law groups into two distinct categories: collective financing institutions and digital payment fund institutions. The new Fintech Law also regulates the use of virtual assets, such as cryptocurrencies, opening the door for both traditional and non-traditional financial institutions to participate in their exchange and commercialisation.

Another focus of the law is to adequately establish the legal boundaries that prevent digital financial service providers from being used for money laundering or other organised crime activities. For this purpose, the regulation included minimum identification requirements for customers.

The Fintech Law places companies and service providers under the combined oversight of the three main bodies that regulate traditional financial institutions: the Ministry of Finance, the Bank of México (Banxico), and the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV). These three bodies comprise an inter-institutional committee in charge of allocating operating licences to fintech companies and sanctioning them when necessary. “The law has many benefits. Not only does it push for financial inclusion by attracting new customers to the banking system, but it also improves consumer protection,” Álvaro Meléndez Martínez, chief economist at the CNBV, told OBG. “Several companies exist already, but from now on users and consumers will be protected and interact with fintech firms that are regulated.”

Market Players

Under the new law, rules will apply to players already active in the market. According to the Mexican legal system, secondary regulations must be passed within six months after the March 2018 approval of the law by Congress. After secondary laws have been passed, both new and existing firms will have up to one year to request operating licences. A further six-month timeframe is given to the regulator to distribute the licences, meaning that it could take until March 2020 for fintech firms to be properly licensed – although this does not prevent them from operating normally in the meantime. As of mid-2017 there were roughly 240 fintech start-ups operating in Mexico, according to Finnovista.

Recent years have seen the emergence of a number of businesses offering innovative financial services. Besides navigating the gap between access to financial services and the widespread use of IT hardware and applications, fintech players are working to bridge existing market imbalances. “In Mexico there are about 11m people with an expensive consumer loan, paying an average annual interest rate of 63%,” Juan Carlos Flores Acevedo, co-founder and director-general of Doopla, a firm that connects lenders and borrowers, told OBG. “Another 15m people are saving in the formal sector and receive an average annual return of 3% on their savings. There is a difference of about 60 percentage points in these two rates, so there is a great distortion in the market.”

Doopla launched in 2015, opening an online platform for borrowers to secure cheaper credit than what is offered by banks, while also allowing investors to receive higher returns than they would normally get by depositing their money in the banking system. As opposed to a traditional bank, which lends from its own balance, Doopla merely acts as an intermediary between lenders and borrowers. Since its inception, the firm has been used to distribute more than MXN40m ($2.2m) in total loans, with an average maturity of 18 months, average individual loan tickets of MXN80,000 ($4320) and an average annual interest rate of 18%. Many of Doopla’s borrowers use the platform to reduce their exposure to traditional consumer credit from banks.

Another online operator, Konfío, offers corporate credit to small and medium-sized enterprises. Loan tickets range MXN50,000 ($2700) to MXN2m ($108,000), to be repaid over a maximum period of 24 months, with an average annual interest rate of 29%.

Security Perceptions

Despite the advantages and cost savings that local fintech firms have achieved – mainly by reducing the high intermediation costs of most financial services – convincing citizens of the advantages of online transactions might require more effort on the part of sector authorities. According to a 2017 survey of telecommunications users produced by the IFT, only 15% of millennials in the country use fixed internet for online shopping and just 12% make bank transfers through their computers.

The same study found that while eight out of 10 Mexican millennials used smartphones to access social networks, only two out of 10 used did so for banking transactions. Therefore, getting young Mexicans to take up online banking applications and electronic payment systems will ultimately determine whether or not technology can help improve financial inclusion in the country in a sustained way.

Part of the lower adoption levels can be traced to security challenges faced by electronic payment systems and online platforms in Mexico. The National Commission for the Defence and Protection of Users of Financial Services (Comisión Nacional para la Defensa y Protección de Usuarios de Servicios Financieros, CONDUSEF) found that between January and September 2017 the number of online fraud cases targeting the banking system increased by 102% compared to the same period of 2016, surpassing 2.5m cases. As reported by local media in February 2018, CONDUSEF, Banxico and the telecommunications industry will work together to target digital transaction fraud.

Partnership Potential

Because fintech companies are more likely to focus on segments of the market that traditional banks have shown less interest in serving, the emergence of new players will likely improve financial inclusion rather than increase the overall banking penetration rate.

“Banks are looking at these new actors and deciding whether to enter the arena or not. If fintech firms perform well, banks will likely consider strategic alliances or acquisitions, and then – using their financial muscle – they could potentially expand the segment,” Alfredo Calvo, director of financial institutions ratings at Standard & Poor’s Global Ratings, told OBG. “Banks do not see fintech as a threat, but as an opportunity.”