A New Era for Mexico’s Payment System

By | March 27, 2019

In September 2017, the Mexican financial authorities, led by the Ministry of Finance, began drafting the Law to Regulate Financial Technology Institutions (Fintech Law). After several months of discussion, the Mexican congress enacted the Fintech Law in March 2018 by unanimous vote. Along with the Fintech Law, new secondary legislation was enforced, including the General Rules Applicable to Financial Technology Institutions (Fintech General Rules); Circular 12/2018 regulating the operations of electronic payments entities; and the general provisions applicable to Article 58 of the Fintech Law (Anti-Money Laundering Provisions). Combined, these legislative changes make Mexico the first country in Latin America to enact federal legislation that regulates activities performed by financial technology (fintech) companies, and one of the first countries in the world to incorporate a legal framework for the fintech sector.

The Fintech Law is designed to regulate services provided by fintech companies and to oversee their organization and role in the financial system. Covered activities include:crowdfunding, electronic payments, and cryptocurrency exchanges. The law also envisions a UK-style regulatory sandbox that would promote consumer-friendly innovation in the financial sector. Mexican financial authorities hope the law will provide legal certainty to market participants, promote financial inclusion while mitigating risks to consumers, and provide companies with greater access to capital. However, accomplishing these goals cannot come at the expense of increased instances of money laundering – an acute problem in Mexico – which is why authorities will continue to maintain strict anti-money laundering regulations.

Promoting Financial Inclusion

Ever since the previous financial reform in 2013, the government has consistently worked to promote financial inclusion. These efforts have rendered modest success – today, 40% of Mexicans hold an account with a mainstream financial institution. Considering the same metric in Brazil is 70%, there is certainly room for improvement in Mexico.

A clear legal framework for the incorporation of ancillary financial institutions, such as Popular Financial Entities[1], Multiple Purpose Financial Entities[2], and Credit Unions, has given Mexican firms and consumers greater access to loans and savings products. However, most of these institutions still have a large number of cash-based customers with no credit history; essentially, they are lending to customers that use cash for the vast majority, if not all, of their transactions.

Last December, the new government, led by President Andrés Manuel López Obrador (AMLO) began a six-year term. In concordance with his main goal of eradicating corruption, AMLO has embraced a policy of bringing people into the formal economy by way of bank accounts (commonly referred to as bancarization). More bank accounts mean less cash in circulation, thereby reducing corruption and money laundering while increasing tax revenue. Therefore, the new government recognizes the need to reform the banking sector to make it more accessible for the general population. Doing this requires greater use of technology.

New Government Initiatives

The Mexican Congress and the Ministry of Finance are working with banks, through the Mexican Bankers’ Association, to create consumer banking accounts that charge no fees and commissions. According to the National Banking and Securities Commission, bank fees currently represent roughly one-third of bank revenue, and most Mexican consumers do not have access to no-fee checking or savings accounts. The government is also considering a plan that would allow minors between the ages of 15 and 17 to open a bank account without the permission of their parents or legal guardians. This idea is premised on the fact that over 1.5 million adolescents are already working and earning income. Combined, the government estimates that these policies will bring up to 30 million Mexicans into the banking system.

The above efforts will make little difference without rapid technological deployment and adoption by Mexican financial institutions and consumers, which is why the government is focused on upgrading the country’s payment systems and allowing new players into the market. Currently, most large-value payments settle through SPEI, a Mexican Central Bank system that allows real-time money transfer between active account holders from the same or other financial institutions. SPEI is mainly used to settle pre-programmed payments[3] rather than real-time payments.

For retail payments, Mexico still relies on a check-based system, which is slowly becoming obsolete as younger generations utilize checks less frequently. Debit and credit cards also play an important role in Mexico, as these payment methods are largely accepted at establishments across the country. However, many small businesses do not accept credit or debit because of high fees and commissions and a preference for cash.

Increasing financial inclusion in Mexico requires consumers transition away from a cash-based economy, which is why the government launched CoDi, an instant retail payment system that will be carried not only by all banks, but thanks to the Fintech Law, by other entities that provide financial solutions (and comply with CoDi’s requirements). CoDi is designed to take advantage of Mexico’s broad smartphone networks by utilizing QR codes as a payment method. This March, the Central Bank announced that it is testing CoDi, along with Amazon – who offered to support to the Central Bank in implementing CoDi –  to allow users to pay through QR codes, in a manner similar to that used by Chinese fintech giants, AliPay and WeChat Pay (CoDi is expected to begin officially operating in the last quarter of 2019). On March 8th, the Central Bank issued comprehensive regulations that dictate how new technology companies can enter the market and provide innovative solutions using the CoDi platform. The regulation establishes: (i) the obligations for participants to guaranty the proper operation and adoption of payments through CoDi; (ii) the implementation of the operative processes for the performance of transactions through CoDi; and (iii) the reception and handling of transactions.

Private Sector Involvement

Mexico has more private sector payments firms than any other country in Latin America. There are over 60 local and international companies that offer alternative solutions to micro, small, and medium size companies for receiving electronic payments – using either a credit card, like Clip (similar to Square in the US), or using QR codes, like Flux. While these new participants were fostered by the Fintech Law, Mexico needs additional competition in the payments sphere if meaningful progress is to be made in bringing the country’s 130 million consumers into the banking sector.

Conclusion

As a leftist president from a working-class background, AMLO understands the challenges a large informal economy presents to good governance in Mexico. Cash-based economies are a breeding ground for corruption, and if AMLO is to fulfill his campaign promise to eradicate corruption, financial technology will need to play a leading role. I expect to see additional innovations in the Mexican payments industry for years to come.

 

[1] Popular Financial Entities are microfinance corporations duly authorized by the National Banking and Securities Commission in accordance with Article 9 of the Savings and Popular Credit Act, whose purpose is to grant microcredits or provide savings products to persons in rural areas where there is no retail banking presence.

[2] Multiple Purpose Financial Entities are corporations registered with the Protection and Defense of Users of Financial Services Commission and supervised by the National Banking and Securities Commission and the Ministry of Finance. They operate as independent outlets with the purpose of providing financing to small- and medium-sized companies as well as to consumers for larger purchases. These entities may also provide financial lease and factoring services.

[3] These are payments that you organize in advance and/or anticipate periodically. For example, payroll payments. Usually it takes 1 business day to register a new account in SPEI.

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