Latin America's second largest economy has created a solid banking system with liquid and well-capitalised banks and healthy ratios of non-performing loans, which has encouraged both local and international banks to expand their businesses in the country. Yet Mexico continues to display one of the lowest banking penetration levels in the region. Private sector credit makes up only about 30% of gross domestic product (GDP), compared with more than 100% in Chile and about 70% in Brazil, according to the World Bank. Despite the presence of a significant number of different financial institutions in Mexico, banks play a major role in such statistics.

Bringing financial services to larger parts of the population is a major concern for the Mexican government, which has set a 40% penetration target by the end of the current administration in 2018. At the same time, the financial inclusion gap, coupled with progress in technology and regulatory changes, also presents business opportunities. This is true particularly for younger customers, who are more receptive to mobile channels, and will shape the middle-class banking requirements of the future.

Fresh ideas

This is the sweet spot that tech entrepreneur Angel Sahagún Fernandez is aiming at. Mr Sahagun has recently received approval from the Mexican banking authorities to launch a new bank that will be accessible simply though mobile phones. “In [Mexico], cash is king: only a third of the population has a bank account. We want to revolutionise how people spend and save money – we’re building the first mobile-only bank for young people in Mexico,” he says.

The new bank, Almo, follows in the steps of Mr Sahagún’s previous venture, the account aggregator MoneyMenttor, which he launched three years ago, and now has 6000 users across Latin America. Low-income and young people are also key markets for that product.

Other tech firms operating in Mexico are aiming at low-income millennials. In 2012, venture capital investor Ignia, which specialises in businesses serving the base of the socioeconomic pyramid in Mexico, supported the creation of Barared, a network of more than 1000 kiosks in convenience stores in poor neighbourhoods. The kiosks are equipped with tablets and high-speed broadband, which clients can use to access telecommunication and financial services, including banking services. Barared has 983 affiliated stores, and in many retail outlets its in-store booths are the single largest source of revenue, according to the company.

“Banks focus on rich people because it’s more lucrative; there are no [effective] products for the young demographic,” says Mr Sahagún. “If you are a student, you need the right product for your lifestyle. [Typically] the only way to open a bank account in Mexico is to go to a branch, and wait for an hour for an executive to give you some papers that you then need to sign. It’s all very bureaucratic and expensive.”

Mobile impetus

The view that established banks prefer to avoid low-end customers is also reflected in the relatively low volumes of microfinance loans in Mexico, which stand at only about 0.5% of GDP, according to industry data.

Most large lenders in the country, however, have ramped up their multichannel strategies since new rules made mobile banking easier. In 2010, the Comision Nacional Bancaria y de Valores (CNBV, the country's national banking and securities commission), Banco de Mexico (the central bank) and the Secretariat for Finance and Public Credit harmonised different pieces of the regulation to create a new scheme of simplified accounts and develop a regulatory framework that would permit a flexible system for opening banking products – as well as facilitating the linking of those products to mobile phones. Further changes in the legislation have made mobile banking simpler, including less rigid requirements imposed by CNBV on electronic banking providers when it comes to processes and communication with authorities. 

Most banks in the country have taken advantage of the authorities’ new impetus towards mobile banking. BBVA Bancomer, Banamex, Inbursa and Banorte, which are among the country’s largest banks by assets, have all launched mobile banking services, and substantial investment has gone into developing multichannel solutions as part of lenders’ growth plans. 

“We’ve seen [many lenders] more reliant on alternative channels, and more banks stating that their business model is more reliant on online or mobile banking rather than having physical branches,” says Alejandro Garcia, a Mexico-based analyst with the rating agency Fitch. 

Luis Niño de Rivera, vice-chairman of Banco Azteca, which is part of the telecoms, media and financial group Grupo Salinas, says: “[The Mexican banking sector has] had a very good second half of 2014 and first half of 2015; credit in relation to GDP is growing. We are [on track] to reach [the government banking penetration] target.” The reasons, Mr Niño de Rivera says, have to do with greater bank credit being extended to smaller companies, growing consumer credit and a more lively mortgage market. The government’s reforms that make mortgage transfers easier and cheaper have helped, he adds. The wider financial sector reform can also be expected to improve the microfinance space by encouraging mergers between smaller specialist lenders.

Furthermore, a number of portfolio acquisitions point to renewed interest in the loan market, which may lead to more business with low-income customers. Earlier this year, BanRegio, a lender that focuses on small businesses, acquired a 600m peso ($36.5m) loan portfolio from the International Finance Corporation, and Santander completed the acquisition of 3.2bn pesos-worth of consumer loans from Scotiabank. More acquisitions may come, according to Fitch, and while some banks have chosen to renew their focus on high-end customers with proven credit history, others are seeking opportunities offered by the low banking penetration and the low-income market.

Need for growth

The biggest push to credit, however, will come from economic growth, according to Mr Garcia, who is sceptical about the government’s 40% credit-to-GDP target. The central bank’s recent downward revision of GDP growth for 2015 is not encouraging – the Mexican economy is now expected to expand by between 1.7% and 2.5%, rather than the central bank’s previous 2% to 3% forecast. The government has also downgraded its growth expectations. It had initially anticipated 3.7% growth for this year, while its current estimate is that the economy will expand by between 2.2% and 3.2%.

Finance minister Luis Videgaray has attributed the disappointing results to external factors such as the global slowdown and a worse-than-expected US recovery. Domestically, the pace of expansion for financial intermediation services also seems to dampen government’s hopes for wider financial inclusion. 

“We believe that financial intermediation could be growing at 1.5% or a maximum of 2% of GDP per year, so if banking penetration is about 30% at the moment, it seems ambitious to think it can reach 40% in three years,” says Mr Garcia.

While financial inclusion can be helped by mobile banking, which brings financial services directly to people without the need to travel to a bank branch, Mr Sahagún is not convinced that incumbent players have really taken innovation in their stride. He says that when pitching his mobile banking idea to the local market, only BanRegio was willing to listen. 

Once open for business, in January, Almo will have BanRegio as its partner. Deposits made to Almo will be held by BanRegio, which will also deal with regulatory matters. The Almo debit card, however, will be run through the Visa network and managed by Almo, with all marketing activities, customer acquisition and customer services delivered by Almo. Mr Sahagún is now in talks with other banks to provide loans and investment services through the new brand. 

   

                                                                                                                                                                                                                                                                        

    

Filling the tech gap

But many incumbents may be excused for not gushing over tech newcomers such as Almo. Beside the disappointing level of credit in relation to the size of the economy, and despite millennials’ appetite for tech, Mexico lags behind when it comes to online purchases in general. To some, the online or mobile banking market in Mexico may still not be fertile enough.

According to the CNBV, there were only 318 mobile banking contracts for every 10,000 people in Mexico at the end of 2013. That ratio, although growing at an annual rate of 230% since the end of 2011, equates to a total of about 2.7 million banking contracts – which was only 2.6% of total mobile subscriptions and 1.9% of total bank accounts in Mexico. Further, Amipci, a local association that aims to promote the use of the internet by businesses, the government and citizens, has found that Mexicans still prefer to visit a bank branch to deal with their accounts.

Amipci drew its survey from just under 2500 internet users who also have a bank account. It found that 54% prefer to visit a branch when dealing with banking matters and 49% think that alternative channels are not secure enough.

Fortunately, this trend is improving as more retailers are offering products online and people are becoming more accustomed to e-commerce. Given the limited size of Mexican banks’ physical networks, this will come as welcome news. According to International Monetary Fund data, Mexico has 1.45 bank branches for every 10,000 people – the second lowest number across Latin America. According to CNBV, the largest branch networks are owned by Banco Azteca, which has more than 2000 units; BBVA Bancomer, which has approximately 1800; and Banamex, which has 1700.

Despite these figures, Mr Sahagún remains optimistic. “Some reports say that in Mexico, only 20% of people buy over the internet, but e-commerce is growing,” he says. “In five to 10 years we’ll be huge in e-commerce, and today we have this excellent opportunity to innovate. It’s difficult for banks to copy our [nimble] model; they [work best as] our partners. It’s more realistic that another start-up would copy us. Mexico is a huge market, with more than 30 million young people.”

Beyond retail

Financial inclusion in Mexico is a concern that goes beyond retail banking. Gerardo Salazar, CEO of Banco Interacciones, sees great opportunities in the municipalities in the country that are currently underserved by banks. “There are more than 2500 municipalities in Mexico, but no more than 400 entities [are clients of] public or privately owned banks – we have a challenge trying to cover more clients at the municipality level. That’s [financial] inclusion for us,” he says. 

Banco Interacciones lends to Mexican states and municipalities, and provides project financing as well as lending to small businesses that serve the public sector. Providing larger financing to municipalities would not only help deliver better services to citizens, but it would also create a market for Mexico’s institutional investors and the savers and pensioners that they represent. There is certainly a need for larger sums to develop local infrastructure, according to Mr Salazar. 

“Given the very specialised banking model we follow, we are very involved in infrastructure projects – water projects, for example. You’ll see that at least 30% of water treatments don’t function at a minimum standard. There is a need to channel some of the savings we gather from [in Mexico into those development projects],” he says. “There are long-term savings in pension funds that are currently not being channelled in significant volumes into long-term projects. This is a challenge for the Mexican banking sector. We have to connect those two things that are made for one another.”

Mexico has set itself some ambitious targets. Whether or not the level of credit to individuals, businesses or even local authorities will reach 40% of GDP remains to be seen, any improvement is welcome and needed. Improving local infrastructure through bank financing will also have a direct positive effect on people’s lives, both as users of that infrastructure and as savers and pensioners looking for healthy returns. Innovating delivery channels and banking solutions for young customers will help create a prudent attitude towards spending and saving. All of this, will ultimately benefit Mexican banks’ bottom lines.