financial system

Mexico’s Case: when tech is not enough for inclusion

Tech is not enough for inclusion in Mexico

For years, FinTech firms have been eyeing Mexico’s vast market of 130 million individuals – a largely untapped frontier for both domestic companies and international ventures.

In 2021, over 40% of the Mexican population was considered financially excluded, according to the ENIF survey. Almost half of the population lacked access to basic financial services such as banking, saving, credit, and insurance.

There is no doubt that FinTech has played a critical role in improving financial inclusion in the country by bringing financial services to those who were previously unbanked.

However, despite these improvements, financial inclusion metrics lag behind, highlighting a disconnect between industry progress and the broader adoption of financial products in the Mexican economy.

Does Mexico need more than technology to guarantee the financial inclusion of its population?

The ecosystem

Mexico’s FinTech ecosystem is indeed thriving, boasting nearly 1,000 companies, including 217 foreign entities from over 22 nations.

Over the past five years, the domestic sector has demonstrated impressive growth, with a notable compound annual growth rate of 18.4% in the number of startups.

FinTech companies across the Latin America region have positioned themselves as a spearhead to tackle this challenge. Central Banks have often fostered their growth in recent years to support the inclusion of more individuals and businesses into the ecosystem.

Why is financial inclusion stagnating in Mexico?

According to the country’s latest Financial Inclusion National Survey, the percentage of adults with at least one financial product—be it savings accounts, loans, insurance, or pension accounts—remained stagnant at 67.8% in 2021, even slipping slightly lower than the 68.4% recorded in 2015.

This signifies that almost 30 million Mexicans still remain outside the financial system, despite consistent growth among fintechs in recent years with an alleged focus on expanding the financial inclusion frontier.

The report indicates that 44.6% of all FinTechs in Mexico aim at segments of underbanked individuals and businesses.

However, most companies still focus on "stealing" customers already operating within the traditional financial system rather than onboarding new, albeit likely less profitable, clients.

Indeed, the number of Mexicans with savings accounts has increased but from significantly low levels. While in 2015, 44.1% of adults reported having one, in 2021, that figure was 49%—still notably lower than in most other Latin American countries. New results to be released later this year could show some improvement in more recent times.

These data suggest that, despite the wide array of FinTech products aimed at financial inclusion, there is still a long journey ahead to reach a significant portion of the market.

FinTech players blame regulation

So what’s the problem? Experts argue that most FinTechs in Mexico cater to clients who are already banked. Regulatory requirements may constitute an entry barrier.

In Mexico, when opening an account, clients are required to transfer funding money via the Electronic Payment System (SPEI). If a customer only has cash, they must visit a bank branch to make the deposit via SPEI.

«Most FinTechs in Mexico rely on a client who is already banked - said Daniel Medina Siller, a consultant in financial inclusion and deputy FinTech credit manager at Walmart’s Cashi, to FinTech Nexus.

Even to open an account, you need a transfer of money via the Electronic Payment System. In the case of only having cash, going to a bank branch is the only option».

According to Siller, it is crucial for the advancement of financial inclusion to relax the requirements for unbanked clients. «It’s important that they are not forced to have a debit account or conduct transactions through traditional institutions to open accounts - he says. They should be able to receive remittances or money transfers directly through the app without the need for a previous bank account».

FinTech players often blame regulatory hurdles as a key factor in Mexico’s struggle to establish a successful instant payment ecosystem similar to Brazil’s PIX.

While Brazil’s PIX experienced remarkable success upon its launch in 2020, Mexico’s CoDi has faced challenges. Even years after its introduction, most of the population remains completely unaware of its existence, with only a few relying on it for day-to-day payments, according to data from the regulator.

Another contributing factor to the low financial inclusion in Mexico may be the longstanding condition of limited competition in the Mexican banking market.

Encouraging the participation and growth of more digital finance companies may increase the offerings available in the market and meet the needs of population segments that have, up to now, been overlooked.