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Friday November 17 2017
Mexico: Promising Moves Towards New Banking Models
Author:
Xavier Faz & Paul Breloff


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Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. Last week we presented our learnings from Brazil. Today we continue with our analysis of Mexico and share this summary note on the Mexican branchless banking industry.

Mexico’s financial sector is beginning a significant transformation. It is setting the stage for a broad commercial offering through innovative products that reach lower-income segments of the population. Appetite to reach lower-income segments grew in the past decade following the notable growth of Banco Azteca and Compartamos.

More recently, regulation enabling the use of non-bank correspondents (or banking agents) has expanded the possibility to increase the reach of financial institutions at a reduced cost both for banks and for potential customers.

These regulations proactively reduce competitive barriers in the banking sector and open opportunities for banks to serve lower-income segments historically served by other financial service providers (financial cooperatives, MFIs, microfinance banks and retail stores-cum-banks). Large retail chains (including Telecom, the state-owned telegraph network) are developing shared correspondent networks, and most major players are adopting aggressive outreach strategies.

However, most of these strategies are still about reducing the cost to serve existing customers and much less about growing towards new lower income segments. The price points of shared channels, the lack of sensibility to poor people’s needs, and to certain extent, the mandate to banks to give away free transactions on their own ATMs are slowing the development of a meaningful offering.

New partnership models and ambitious experiments involving key players may drive the market towards more efficient models and more affordable low-income offerings beyond credit, but the learning curve is uncertain and is likely to require time.

Mexico is a market with a unique trajectory in financial access with notable success stories like Compartamos, Banco Azteca (a retail chain with a banking license and mini-branches), and some of the largest regulated financial cooperatives in Latin America.

More than a dozen banks entered the market in recent years following the lure of these successes. However, this has so far not translated into more competitive services or more equitable access for the underbanked.

In all, 35% of the economically active population completely lacks any form of formal financial services, 57% of the municipalities have no banking access, and only 25% of the Mexican population has a savings account. Even while Banco Azteca and Compartamos have added more than 10 million people to the formal financial system, the average interest rate for credit at these institutions is still high. Low-income segments in Mexico still need affordable payment services, savings and insurance products that are easy to access, and more options for credit.

Credit has been a major driver of uptake of financial services. As a result, most banks took a hit by the recent financial crisis (Mexico’s GDP dropped 6.5% in 2009 as a result of the global financial crisis), particularly new entrants. Many of these new banks are ailing with high PARs while other larger banks saw a significant deterioration in their earnings. While the appetite to cater to lower segments remains, the priority is on the stabilization of credit portfolios. Banks are likely to be cautious in devoting significant resources to initiatives that look especially risky.

New regulations on branchless banking have paved the way for the industry to develop a variety of branchless banking services, despite the complexity and excruciating detail in the regulations. They permit a range of approaches that encourage banking innovation (including licenses for specialized payments banks). As expected, these regulations have stirred the market. Banco Walmart was the first bank to get approval to use agents.

Nine other banks presented their business plans for setting up agents and were subsequently authorized. Based on the expansion plans presented by these banks, the number of municipalities without banking access could be reduced to 35%. In at least half of the cases, there are plans to offer products beyond bill payments.

We see important opportunities for experimentation, particularly around the use patterns of mobile accounts, the effect of bundling in the commercial offering, and tapping specific market segments for targeted value propositions. There is significant energy and momentum in the Mexican market and we expect innovative and promising approaches to begin emerging soon.

 

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