Galileo’s Tory Jackson explains why Mexico, where cash remains king, is becoming fertile territory for homegrown fintech innovators
When the localised lockdown ends, the streets of downtown Mexico City will erupt once more into a riot of Mariachi music, spice-laden aromas and boisterous bartering. On a normal day in a normal time, locals weave between Sombrero-sized pans overflowing with Mexico’s world-famous cuisine, sizzling and spitting from street-side stalls, while traders shout over a cacophony of car horns, waving fists clutching crumpled pesos.
This is Mexico: gateway to Latin America (LATAM) and the second-largest economy in the region, after booming Brazil. Bustling with trade between its 130 million consumers, Mexico’s colourful street commerce is no tourist façade; it represents a society in which cash is a way of life; or, as a PYMNTS report recently concluded ‘isn’t an option, but a necessity for survival’.
On Mexicans’ propensity to use cash over cards and digital payment methods, the data couldn’t be starker. The PYMNTS report found that for every dollar spent on cards in Mexico, $3.68 is spent in cash, compared to only $1.25 in Brazil, or $0.41 in the United States. That makes Mexico’s use of cash, per capita, an astounding 793 per cent higher than in the US.
The reasons behind this gaping payments anomaly are multiple, and self-reinforcing. In 2016, the National Statistics Institute found that 58 per cent of Mexico’s workforce is employed informally – characterised by cash-in-hand, uncontracted labour. Only 14 per cent of Mexicans receive their income through a direct deposit into their bank account.
Meanwhile, payments infrastructure in Mexico is poor, lagging conspicuously behind that of regional rival Brazil. Despite their cash habit, Mexicans have access to only 38 ATMs per 100,000 people, while in Brazil it‘s 85 – more than twice the amount. More telling, Brazil has four times more point of sale (POS) terminals, per capita, than Mexico, and significantly more commercial bank branches, too.
What this data reveals is a significant lack of financial inclusion in Mexico: a population both unbanked and underbanked, with little option but to pay in cash and be paid in cash. No wonder Mexico is regarded as a cactus thorn in the side of e-commerce companies and digital service providers eager to trade with consumers in the world’s eleventh-largest market.
And yet, for ambitious fintech firms, Mexico’s dearth of digital or plastic payments represents not an empty plate, but a blank slate: a mouth-watering opportunity to build new domestic technologies to support a new generation of consumer exchange.
One such company, Utah-based Galileo Financial Technologies (formerly Galileo Processing), announced the opening of new offices in Mexico City in February, and will be one of the first US fintech firms to attempt to develop a financially inclusive fintech ecosystem in the country. With 20 years’ experience in payments solutions, Galileo is well-placed to do so.
The firm’s open application programming interfaces (APIs) facilitate the simple development of third-party products and services, empowering innovation in financial functionalities that range from account setup and deposits to real-time payments, card-to-card transfers and superior fraud detection tools. In developing new fintech products, Galileo provides the ingredients and the recipes, and their clients – which include UK-based Monzo, TransferWise, Revolut and Paysafe doing business in the US – improvise on top, adding a sprinkle of their brands’ flavours to finish.
The big news for Galileo, of course, was its planned $1.2billion acquisition by San Francisco-based SoFi in April this year. SoFi, valued at $4.8billion as of May 2019, specialises in refinancing, although it runs an impressive suite of loan and trading functions for clients, as well as a checking and debit card through SoFi Money, already powered by Galileo.
There’s no doubt that Galileo appeared a wise acquisition to SoFi CEO Anthony Noto. According to Crunchbase News, Galileo’s annual recurring revenues doubled in March 2020 to $100million, driven by a comparable doubling in the firm’s annualised payments volume, from $26billion in September 2019 to $53billion in March 2020. Joined with SoFi, Galileo’s ongoing expansion into Latin America is likely to receive a boost, beginning with its establishment in Mexico City.
The man leading Galileo’s charge in the region is Tory Jackson, its country manager in Mexico and Galileo’s business development lead for the LATAM region. He’s certainly ready to take his seat at the table, just as the starters are served in Mexico’s multi-course financial banquet.
“Mexico’s very famous for street food: the tacos, and the tlacoyos, the quesadillas – everything that we all know and love,” he says. “But oftentimes, you can only buy those with cash. So, I think there are so many different solutions that need to be developed in Mexico, and needs to be fulfilled. That’s what makes it so exciting: there’s a lot of room and opportunity for companies to grow, which is unique.”
The timing of Galileo’s move into this new and exciting territory – just as COVID-19 was beginning to reach pandemic scale – may appear unfortunate, but, in a long-term sense, it’s likely the lockdown will peak interest in alternatives to cash with a speed that fintech firms and government incentives could never have achieved alone.
Nevertheless, the Mexican government has proactively brought through legislation to enable a fintech boom in the country, busily laying the table for the main course to come. In 2018, the country’s landmark Fintech Law was instituted, providing the legal framework and regulatory certainty for firms like Galileo and its partners to flourish.
The ongoing legislation isn’t just region-leading; a recent Deloitte report placed Mexico City alongside the likes of London, Singapore and Luxembourg as a global leader in fintech regulation. As a result, Mexico leads the LATAM region by number of fintech startups, with 394 new companies as of May 2019.
“It’s been great to see how fast Mexico has really adapted, from a regulatory perspective, to be able to accommodate new products and solutions,” Jackson says. “They’ve taken different learnings from abroad in more mature markets as a pathway for new players, such as Galileo, to come in and offer a platform like ours to help domestic players.”
As Mexico City’s fledgling fintech scene develops, with Galileo’s platform as a valuable resource for creativity, it’s worth giving a taste of Latin America’s ‘hybrid’ payment systems. After launching in Mexico in 2015, Amazon adapted to local market conditions by selling gift cards, purchased for cash, at Oxxo – one of Mexico’s largest retailers. Other e-commerce providers, like Linio, followed suit, while Walmart began allowing payments for items bought online in its stores, too. Mexico’s online shoppers are likely now to see a ‘pay at Oxxo’ checkout option after filling their baskets.
There remain, of course, obstacles to the work Galileo aims to do in creating a hub of collaborative fintech innovation. One of those is the attitude of incumbent banks in the region, who dismiss or distrust fintechs.
“Here in Mexico, there are fewer banks than in the US; there are 50-odd, and all of them essentially operate under the same guidelines and offer the same products and services to their clients,” he says.
“The banks aren’t used to companies like Galileo, that can come in and provide some of those back-end services – so that’s the first challenge. We need to facilitate that shift in mindset, in some of the legacy providers, to become that central hub for collaboration.”
This is where Galileo’s experience comes into play, having been through that same cycle of scepticism, followed by collaboration, in North America. Jackson expects Galileo’s existing relationships, and the lessons from them, to contribute to a speedy growth of financially inclusive innovation emanating from Mexico City.
A case in point, Galileo’s partnership with fintech-friendly Mastercard, has proven a valuable asset for ease of penetration into the LATAM market. Mastercard is one of three dominant local providers to settle transactions there.
“Utilising our longstanding partnership to easily plug into this market was important,” Jackson confirms. And Galileo has wasted no time. One of its first domestic partners, Mexico City startup Klar, has been dubbed ‘the Chime of Mexico’ and, despite being founded only 10 months ago, has huge ambitions to democratise banking services in the country. In September 2019, it raised an astonishing $57.5million in debt and equity seed funding – one of the largest seed rounds inside Mexico.
“If you look at the landscape of fintechs here in Mexico and those that are seeking to be the neobank for the unbanked or underbanked, Klar is extremely promising,” says Jackson. “They’ll be our first live use case in Mexico. We’re viewing Mexico as the first domino in a broader approach to Latin America,” he continues. “That’s because of the market size, the opportunity and proximity to the US.”
There are appetising opportunities in Brazil, Chile and Argentina. For now, though, it’s time to watch a country famished by cash domination indulge in an unlimited buffet of fintech services.