The Mexican payment space is growing rapidly, but it’s a country where cash still accounts for some 85 percent of all transactions. It’s communities are cursed with large pockets of extreme poverty and banks are viewed with high suspicion.
Although, at a glance, this land seems an ill fit for payment facilitators to flourish, it’s a market ripe for growth. And it’s businesses that are overwhelmingly paying employees with debit cards that could be the key.
“In Mexico, cash is still king, by far,” said Ignacio Hidalgo, the director of consulting for a Mexican PF called Marketing Ideas and Technology (MIT, pronounced mēt). Hidalgo said the current environment is simply far more conducive to cash than payment cards or mobile money.
Mexican consumers “do not have access to bank services. We have a lot of little towns up in the hills where the banks have no operations at all,” Hidalgo said. “These are very poor people. The level of extreme poverty in Mexico is still way too high. These are people who are struggling every day to have access to food.”
Hidalgo said this poverty level—where families have to survive on the equivalent of $15/month U.S. dollars—impacts about 12-15 percent of Mexican residents. “Rural area in many cases do not have access to electricity. Of course they do not have access to the Web. They’re relying on some crop like corn to make tortillas, maybe they have two, three or four chickens. That’s all they have. Living and working mainly in the filth out of the cities, they are not worried about having banking services.”
But it’s precisely in these horrid conditions where payment facilitators like MIT can make a difference in people’s lives, as well as the lives of the local merchants who supply them their necessities.
That’s because another reality in Mexico is fear of traditional banks. A lot of small merchants don’t want to accept payment cards because they are afraid that it will be used by taxation officials to charge them more money.
In the U.S., the smaller merchants that resist payment cards do so because they want to avoid paying interchange fees, but not so in Mexico. “In Mexico, (the fear) is much more on the taxation side than on interchange. In Mexico, many sales made in cash are not informed to the Mexican IRS,” Hidalgo said.
Mexico’s Central Bank has sharply pushed down interchange rates. “Thirty years ago, it was around 5-6 percent. Today, it’s below 1.75 percent,” Hidalgo said.
With those rates, why is there so much Mexican merchant bank resistance? Merchants saw the banks as extremely difficult to work with.
Today, many Mexican merchants want to accept plastic or digital payments—especially in the cities—but not with banks. They need a friendly intermediary. Enter MIT.
Merchants “didn’t want to sign a contract with the bank. The bank was setting some very hard conditions for them,” Hidalgo said. “You have to pay this kind of commission if you don’t reach minimum levels of revenue per month. They insisted on only renting terminals and (merchants) have to pay for several other services. With MIT, it’s just buy the POS terminal and give us a percentage of what they sell. (The MIT fee) is a little higher than the banks, but there’s no other commission.”
With such a high dependence on cash, why is the market strong for alternative payments? The answer lies with companies that paying their workers via debit card deposits. “In a country with 120 million residents, we have about 28-30 million credit card accounts and about 85 million debit cards. That’s the way they are getting paid salary,” Hidalgo said. “Right now, many many people go immediately to ATMs and take the cash out.”
When MIT started its PF services about six years ago, they found in the cites “a lot of professionals—doctors, dentists, architects, lawyers—performing their activities on a private basis. (Their customers) wanted to use payment cards as some didn’t want to carry cash,” Hidalgo said. “That’s why the PF business is growing.”
Another expert on the Mexican payments scene—Guillermo Escobar, VP/market development for MasterCard Mexico & Mexico Latin America—agrees with Hidalgo’s perspective, but sees several other factors that distinguish the Mexican payments environments from others, especially it’s U.S. neighbor.
“When you compare the Mexico acceptance footprint, we’re lagging, both in the region and far behind the U.S.,” Escobar said. Although issuance “has been steadily growing for the last several years,” a key difference is that “most of the acquirers are owned by the banks and they frankly have bigger fish to fry.”
The challenge—which is also the opportunity—is that the widespread use of cash has fueled a “lack of merchant acceptance across all industries, even with Mexico City,” Escobar said.
In urban areas, Escobar is anticipating a lot of merchants and consumers skipping past plastic and going digital.
“Mobile payment is happening. I expect to see a big change this year in terms of both issuers and acquirers getting the terminals ready. The penetration of smartphones (in the cities) is a lot higher than bank accounts,” Escobar said. “We’re seeing penetrations around 80 percent. This will be a big base of NFC-enabled phones. Conditions are ripe for a big push in contactless and NFC.”
Escobar echoed Hidalgo’s concerns about how Mexican banks have historically treated merchants. “The traditional model was very dependent on fees charged to the merchant whether there was a transaction or not,” Escobar said. “Now with the coming of payment facilitators, we’re seeing merchants who have no reason to not accept electronic payments, even at a higher interchange rate.”
Part of the reason for this is that, in Mexico, the bank-owned acquirers “have to compete for resources within their bank, between loans, payroll, mortgages, whatever,” Escobar said. “The acquirers still make some money, but they are not willing to take the risk. That now goes to payment facilitators.”
Also, he said, although it “depends on the business model of each bank,” Escobar said that the Mexican regulatory environment means that “banks are not as flexible (as payment facilitators) to pursue new (kinds of) businesses.”
Another important factor in the Mexican payment space is a very pro-business government. “Here we have a real alignment between private industry and the government,” Escobar said.