Now, more than ever, fintechs and enablers of Mexico’s new digital financial infrastructure will have to work hard to bring forward services that Mexicans desperately need in the wake of COVID-19. Neobank Klar’s Stefan Moller, Mastercard’s Pablo Cuaron, and Galileo’s Tory Jackson look at what’s being done to dismantle the barrier created by financial exclusion.
Mexico has endured a litany of unflattering caricatures over the years. Despite boasting the fifteenth-largest economy in the world, measured by GDP, coverage of the country in the international media has tended towards the unsympathetic, focussing on kidnap, corruption and that wall.
So, it’s a welcome shift in emphasis for Mexico to now be trumpeted as the ‘must-watch’ nation for fintech in 2020, with plenty of positive press about its new regulatory structure. Billed as the most fertile territory within the LATAM market for both financial innovation and adoption, this may be Mexico’s best opportunity yet to catch up with booming Brazil.
That’s certainly the thinking behind its Fintech Law – created in 2019 and due to be fully instituted this year. An industry-wide overhaul of Mexico’s banking regulations, the new statute has been widely praised by industry players. Observers anticipate that 2020’s open banking legislation will go further than both Europe’s revised Payment Services Directive (PSD2) and the UK’s Open Banking regulations, helping to encourage collaboration in Mexico’s fledgling fintech space.
The Fintech Law has helped Klar, one of Mexico City’s most promising fintech startups, operate within a financial ecosystem of increasing trust and transparency. The neobank, which supports a five-minute digital account opening process with zero transaction fees, raised $57.5million in debt and equity seed funding in September 2019 – the largest fundraise of its kind in Mexican history.
According to Klar’s CEO, Stefan Moller, the legal framework provided by the 2019 law has been a huge boost for firms like his.
“Having a framework that allows new entrants into this space is very beneficial,” he says. “The Fintech Law allows entrants to get a foot in the door, and to do it with enough robustness that you are not putting anyone’s money at risk. With a gradual, more modular framework, we’re confident that there will be more innovation, given that players such as Klar are now stepping into the arena.”
Meanwhile, Mexico’s central bank, Banco de México (Banxico), has cast its sizeable sombrero into the ring by rolling out a standardised QR payment system of its own. Released as Código Digital (or CoDi) in October 2019, the technology is another sign that Mexico is takingits new role as regional fintech leader seriously, tilling the nation’s digital soil ready for a plentiful fintech harvest.
It’s gestures such as this that tempted Utah-based Galileo Financial Technologies (formerly Galileo Processing) to open offices in Mexico City back in February. Galileo’s application programming interfaces (APIs) are designed to support seamless third-party integration, plugging fintechs into a host of ready-made solutions to help get their products off the ground. Klar was revealed as Galileo’s first strategic partnership in Mexico, after a joint announcement released in April.
Tory Jackson, Galileo’s Country Manager in Mexico, also pays homage to Mexico’s efforts at financial modernisation: “The CoDi system allows for participants to be able to use QR codes to do inter-bank transfers, enabling them to send money from one bank account to the next,” he says. “Together with the Fintech Law, I think Mexico’s really done a lot to push financial inclusion, to get different tools into people’s hands.”
But even before the timely intervention of state-led legislation, which experts regard as world-leading as well as region-leading, Mexico was attracting global attention for fintech. One quarter of the MINT nations – the world’s most valuable emerging economies, composed of Mexico, Indonesia, Nigeria and Turkey – the country had already been earmarked by investors as having the right ingredients for exponential financial inclusion. Among those ingredients are demographic factors. Mexico’s median age is just 28, compared with 38 in the United States. With 41 per cent of the population aged between 25 and 54, neobanks are salivating over the country’s large, young, tech-savvy consumer base. Sixty-nine per cent of people regularly use the internet and social media and, of those, 72 per cent already use two or more fintech services, against a global average of 64 per cent, according to Statista.
Smartphone penetration is likewise cited as a reason behind Mexico’s high valuation in the eyes of investors preparing to boost LATAM’s financial infrastructure. In 2015, smartphone penetration in Mexico sat at 50 per cent; by 2017 that had risen to 60 per cent. According to data from GSMA, 76 per cent of Mexicans are forecast to own a smartphone by 2025.
“Smartphones and digital penetration do represent a huge opportunity for financial inclusion, but I think that this variable tends to be overemphasised,” he says. “If we want financial inclusion efforts to succeed in the market, we need to think beyond just smartphone penetration; the vision we have at Mastercard for financial inclusion is to bring access and then to drive usage.”
With its global experience and extensive work with fintechs, Mastercard should be considered a trustworthy judge in these matters. Having run an international series of development sessions with fintechs, Mastercard consolidated these into the Accelerate programme in October 2019. One component of Accelerate, labelled the Fintech Express, is designed to help startups like Klar to scale rapidly through local markets.
In April, Galileo became the first API software innovator to achieve Mastercard certification in Mexico; the firm also jumped aboard Mastercard’s Accelerate programme, which will help Mexico City’s newest fintech facilitator pioneer the development of the country’s digital financial infrastructure.
“As of last year, Mastercard started operating the domestic switching platform in Mexico,” Cuaron explains, “which brings global and international standards to the domestic ecosystem, opening the doors to players, such as Galileo and Klar, that are familiar with other operations elsewhere.
“We’re bringing truly global capabilities, investment muscle and innovation to the market just as it’s opening the door to a number of new players.”
While Mastercard, Klar and Galileo all have valid reasons to feel optimistic, Mexicans won’t be reaching for the maracas just yet. Even before the COVID-19 lockdown, Mexico had been posting fairly unexceptional economic figures, with millions of Mexicans struggling on or beneath the poverty line. Since the lockdown, the outlook for a large proportion of them has become almost intolerably worse. That’s according to a sobering report from Oxfam Mexico, which recently claimed that, as a result of the coronavirus crisis, three million businesses and 28 million workers would be at risk of financial ruin without urgent state intervention. Over a third of those at-risk workers already lived in poverty, and a further 16 million have no access to social security benefits. With Mexico’s lockdown easing, the world will be watching as LATAM’s second-largest market attempts to rebuild and regenerate.
From the perspective of Mexico’s fintech scene, though, the financial vulnerability of Mexico’s 126 million citizens is, in part, due to the country’s previous poor efforts at financial inclusion. Mexico’s population is largely unbanked or underbanked, with pockets of financial services infrastructure existing only in the country’s largest cities. There are whole provinces of the country that cope without a bank branch or ATM.
As a result, 44 per cent of the adult population of Mexico own no financial products, and only 15 per cent have access to a credit card. And when you look at SMEs, which account for 90 per cent of Mexican businesses, only a third have access to loans from the country’s banks. Perhaps the most shocking statistic is the difficulty Mexicans have in accessing credit: middle-class consumers in Mexico see only three per cent of their credit applications approved.
Clearly, financial inclusion should be a priority in Mexico, which trails Brazil in most metrics concerning access to financial services. And, for Stefan Moller and Klar, that’s precisely the motivation for entering the Mexican market at this time.
“The business that we’re trying to build seems in some way validated by the crisis,” Moller says. “During the crisis, the business continues to operate, and the demand continues to grow – now more than ever. These have been some of our most successful weeks, in terms of consumer traction; it just highlights that digital-only models are the future.”
Moller’s being modest. Since the beginning of the pandemic, Klar has in fact tripled its customer base, as Mexicans scramble for alternative payment methods and sources of credit. Galileo’s Jackson has likewise observed a growing hunger for digital payment methods.
“COVID-19 has made adoption accelerate faster,” he says. “Where cash has really dominated Mexican payments for a long time, this really provides a unique opportunity to push the market to adopt new types of products.”
Perhaps predictably, Mexico’s incumbent banks have thus far been slow to service the changing needs of their customers, displaying the same hostility towards change – and towards upstart fintechs – that characterised the early fintech wave in mature markets. For one of the most populous countries in the world, Mexico is serviced by an incredibly small number of banks – around 40 or 50, compared to the thousands of FIs that serve Americans across Mexico’s northern border.
Cuaron says Mastercard has registered a strategic split between incumbents and fintechs in Mexico; one that it is keen to address.
“At Mastercard, it always comes back to: how do we make the most out of both worlds? How do we make both players talk to each other, and get the most out of each other?” he says.
For long-time followers of the global fintech revolution, the end of the conflict Cuaron highlights is clear: collaboration will win the day. For now, though, the nodes of Mexico’s financial ecosystem will have to work hard to form new relationships that support services Mexicans will desperately need in the wake of the coronavirus crisis.
Happily, as Jackson points out, Mexico can benefit from the accumulated wisdom of markets such as the US and the EU
– as well as Galileo’s own experience in connecting with FIs across different markets.
“Mexico is in a great position, because it’s really able to learn a lot from more mature markets,” says Jackson.
“I do feel like there’s been a bit of a wall in Mexico, as far as inclusion goes – and I think that wall is really starting to come down. The general population is becoming more and more aware, and that’s driving more innovation, that’s driving more people to find the best products. People in Mexico need them, even if they don’t know that they do yet.”
Moller agrees: “Klar is trying to make a difference, trying to differentiate the value proposition in a way that is substantially better,” he says. “For example, offering credit to those that don’t have it right now, which is part of what Klar is trying to do; offering tangibly better financial products to them. All this will help shift consumer behaviour, as well.”
In 2019, Mexico enjoyed a record year, both in terms of fundraising deals and in dollars raised in seed rounds. As well as Klar’s record-breaking raise, the home-grown payments startup Clip secured a $20million investment from Japan’s SoftBank Group in May 2019. In September of the same year, Goldman Sachs provided Mexican business loan provider Konfio with $100million in credit, enabling the firm to lend to thousands of small and medium-sized Mexican businesses. Mexico’s fintech network stands 273-strong at the time of writing, and looks set to grow impressively in 2020 in spite of the economic impacts of COVID-19.
With Mastercard and Galileo supporting fledgling firms such as Klar, we’re already seeing the creation of a rich, diverse and interconnected ecosystem of digital financial services emerge from Mexico City and into the LATAM region as a whole.
Moller sums up the mood best.
“At Klar, we’re starting from scratch but, in a strange way, we almost feel we have a head start – even though we’re only a year old,” he says. “Because I think, going forward, it really is digital-only or nothing.”