In 2005 Washington Mutual Inc., a savings bank holding company and the former owner of what was then known as Washington Mutual Bank (WaMu) before its collapse in 2008, retained the consulting services of me and my colleagues at Global Tactics to evaluate the opportunity to expand to Mexico. During the preceding ten years, WaMu had grown through a series of acquisitions. These acquisitions broadened the bank's presence in California and Texas where a large number of Mexican-American customers or Mexicans working in the United States, the latter of which were remitting millions of dollars to their families in Mexico. While WaMu was generating revenue from remittance fees, the bank's executive managers speculated there may be an opportunity to offer a broader range of financial services in Mexico.
Mexico's gross domestic product (GDP) per capita grew from US$7,718 in 1995 to US$9,161 in 2004, according to the World Bank. Taking advantage of the country's growing wealth, WaMu's executives saw an opportunity to provide services it could offer to customers in Mexico such as personal checking and savings accounts, mortgage loans, and credit to small and medium-size enterprises (SMEs).
As part of our consulting assignment, my colleagues and I made a few trips to Mexico to better understand the country's banking sector. We quickly found that the sector was dominated by a few, but large financial institutions that catered mainly to wealthy Mexicans. And while the country's GDP was growing, a large proportion of personal wealth was held by the few.
What is more, many Mexicans possessed a high level of distrust of banks. This distrust led to a large number of Mexicans to conduct most transactions in cash. Even a large majority of home purchases were transacted in cash. These factors, coupled with the bloated bureaucracy of a seemingly endless number of rules imposed by the Mexican government, led WaMu's executive team not to proceed with its plan to expand into America's southern neighbor.
Fifteen years later, The Economist published an article saying that "[f]or most Mexicans online shopping goes like this: people order their goods on Amazon or Mercado Libre, an Argentine ecommerce site that is Latin America's biggest, but pay in cash at a convenience store. That is no surprise given only 37% of Mexicans over 15 years old have a bank account, according to the World Bank. Some 86% of all payments in Mexico are in cash."
The article further explains that "Mexico is an anomaly both in Latin America and among emerging-economy peers such as Kenya and India. In those places 54%, 82% and 80% of people are banked respectively, despite Mexico being richer. Its GDP per person is close to $20,400, around three to four times higher than in Kenya and India.
"This shortfall is not just inconvenient. Counting cash adds to business costs, and those without accounts have little access to credit, slowing consumption and investment. The good news is that the country is improving financial inclusion, says Pablo Saavedra, who heads the World Bank's Mexico program. Only 27% of Mexicans had an account in 2011, but the pandemic has made the issue 'even more urgent,' he says."
Based on my experience providing strategic consulting services to WaMu, which presented me with the opportunity to learn about Mexico's banking sector, I appreciate the article's findings:
There are several reasons why so few Mexicans have access to financial services. Banks are generally conservative. Condusef, the financial watchdog, says bank fees in Mexico are high, with 30% of banks' income coming from commissions. In rural areas, branches can be hard to reach. Furthermore, banks tend not to be interested in the less well-off: only a fifth of the poorest 20% of Mexicans have accounts. Surveys show many Mexicans do not trust banks. Meanwhile, almost 60% work in the informal sector, where they may receive an inconsistent income, in cash. The lack of access affects some more than others—the poor, rural, women and indigenous people.
Successive Mexican governments have tried to improve access to financial institutions. In 2018, a law was introduced to regulate the fintech industry, which is now booming. Under Andrés Manuel López Obrador (known as AMLO) CoDi, a digital payment system using QR codes and contactless payments was introduced in 2019 while financial literacy was included in the school curriculum in September 2020 (currently schooling is via television during the pandemic). Much still needs to be done to hit the government's goal of 65% of Mexicans having an account by 2024.
The article concludes by noting: "The current low level of financial inclusion is likely to hamper Mexico's economic recovery from covid-19, which has been muted by a failure to control the pandemic. For example, small and medium businesses provide 95% of Mexico's private-sector employment but only 13% have access to formal credit. Under such circumstances 'it is very hard to see how you have a strong recovery,' says Mr Saavedra."
With a population of almost 130 million and the second largest economy in Latin America behind Brazil, I have long been an optimist about the investment and business opportunities in Mexico (a topic of which is the focus of my post, "Mexico's Growing Mobile Economy"). Political leadership, however, has not implemented the necessary reforms to stimulate sustainable economic growth. Requiring financial institutions to promote transparency, which will help build public trust, is a start. And reducing red tape that prevents new entrants to challenge incumbents will lead to the deployment of innovative financial services benefiting individuals and SMEs alike.
What are your thoughts about doing business in Mexico? Do you have any recommendations on how Mexican authorities can strengthen its financial services sector?
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.