The Mexican Fintech Revolution – ¿Qué onda in Open Banking?
Mexico has joined an elite group of nations, being amongst the first to pass open banking regulations. Specifically designed to open up its financial services and technology sector, the so-called ‘Fintech Law’ appears to have taken notes from PSD2, UK Open Banking, Singapore’s ‘organic’ approach, and others – and balances these against Mexico’s unique context and aims.
ACI’s Lu Zurawski, one of the industry's foremost open payments experts, and Sonia Gomez, a Latin America payments authority, discuss this balancing act; including the drivers, the regulation and the potential benefits.
What is the new Mexican Fintech Law?
Lu Zurawski: Essentially Mexico has regulated that any banking provider must open up to provide fair access to data, if they want to secure or retain their banking license. This is a relatively aggressive approach that has echoes of PSD2 and UK Open Banking, compared to the more suggestive approach favored by Singapore’s regulator. What’s great is that the focus is very much on driving valuable digital engagements with the customer, rather than trying to monetize the base open APIs included in PSD2.
Mexico seems a world apart from Europe and the UK. What drove them to adopt a similar approach?
LZ: It may look worlds apart, but consider the original aims of the UK Open Banking regulations. The UK might seem very digitally inclusive today, but even five years ago it wasn’t such a level playing field. A large part of UK Open Banking was about forcing the industry to meet the needs of the underbanked; those who weren’t offered fair access to financial services. Fair access might have been around literal access via channels that met their specific needs, but consider that many of those with the lowest incomes were only able to access credit or loans through the most expensive means. The rise of the new, digital-only banks has been accompanied by a rise in fair access micro-credit for those at that end of the spectrum.
Sonia Gomez: This kind of financial inclusion is central to the Mexican Fintech Law. Mexico has a large population who are underbanked or completely unbanked. Then it also has exclusion zones based on lack of mobile internet coverage. The question of inclusion is broader than financial; it’s about digital inclusion for fair access to services. The Mexican government wants to drive competition with a view to creating new customer propositions, which attracts new users to the digital space. This could have socio-economic benefits beyond new, low-cost banking and payments services. A more evenly digitized population could be offered other governmental services via digital channels, reducing costs for the operator and freeing up resources to reinvest in the people.
LZ: The UK also designed its legislation to tackle its banking oligarchy, and Mexico has a similar challenge with lack of competition. The UK’s Big Four controlled not only most of the market, but also the central infrastructure. There’s a common misconception that the ‘fair access’ part of open banking refers only to fintechs accessing customer data, but that’s only a small part of the equation. For new players to bring new customer propositions to market, they need fair access to the infrastructure. Look at Transferwise, the first non-bank to gain access to the UK Faster Payments scheme. Previous sponsor-based models didn’t do enough to meet this need for fair access, but this was overcome by the Payments Service Regulator (PSR) working with the Bank of England (BoE) to offer settlement accounts to non-banks, in combination with direct access to the scheme.
SG: Integrating third parties into the Mexican payments ecosystem is a big driver, because it’s going to really support their aim of driving inclusion at the national level.
Does ‘third-parties’ just mean fintechs?
SG: In much of Latin America, we have the concept of Corresponsales Bancarios, or ‘non-financial correspondents.’ These tend to take the form of a local business that operates as channel access to some basic financial services. These stores provide some payment services; bill payment, providing ‘cashback,’ etc. The new regulation could help formalize some of these businesses or organizations, which provide much-needed services in communities with low digital adoption, into new kinds of challenger community banks.
LZ: Open banking is just a small part of the wider open data discussion. Mexico is ahead of the curve here, having hosted the Open Government Partnership Global Summit in 2015. Open is about supporting people in understanding their own data to make informed decisions. That decision might be about banking services, or utilities providers, healthcare or insurance plans. A challenger community ‘bank’ could be exactly the sort of place to aggregate open data services into a friendly-face, which supports the consumer in accessing and understanding their data. Education will be critical to the success of open banking and open data.
SG: Leveraging these non-financial correspondent operators, whom the local community already trust, would be highly effective in the Mexican context, where there is unfortunately a history of corruption that breeds mistrust amongst many of these communities.
LZ: There’s also a huge opportunity for foreign banks to capitalize on a fast-growing market. If they invest to meet PSD2 open banking requirements, then they can also look to take advantage of the new Mexican environment, ahead of the competition. They might be giants in their home markets, but here they – along with smaller start up entities – have the most to gain. Effectively, limitations on market share by incumbents have been lifted, and the winners will be those who can add value to the customer.
What kind of open banking, payments and data services could the Fintech Law enable in Mexico?
LZ: The first step is for the industry to look at success stories, but the model to emulate is not the UK or Europe, or even China, where high smartphone usage (even if low levels of digitalization) was a common feature. India is a much more comparable environment, with a large digital ‘gap’ and plenty of feature phones in circulation and where the government looked to bring telcos into the payments ecosystem. Licensed telco-oriented financial services providers are well positioned to understand the front-end use cases, and can partner with payment providers in delivering those new propositions. It requires partnerships to monitor, understand and combat the new risks. The Indian approach to mobile payments was fairly gentle and organic (unlike demonetization) and has been very successful.
SG: Delivering new digital propositions via non-smartphones is a proven channel in Latin America. Colombia’s DaviPlata from Davivienda had a hugely successful pilot and has been extended to include government disbursements and social media payments integrated into a smartphone-app to meet the evolving needs of the population. DaviPlata was also successfully leveraged in partnership with Corresponsales No Financieros. In my opinion, the next step in financial and digital inclusion is to incorporate fair micro-loans and micro-credit into these propositions. Latin American struggles with ”gota a gota,”, or loan sharks, because many people cannot access credit via reputable financial services providers. This can often be linked to historical violence and upheaval, resulting in large numbers of internally displaced people, who suffer a break in their credit history, or interruptions to their history as a whole. They struggle to access all kinds of services via mainstream providers, so they turn to informal (and sometimes illegal) providers in desperation. Fintechs that can find ways to aggregate their fragmented history and link it to a micro-loan proposition, delivered via context-appropriate channels, would really meet the needs of the local population.
LZ: And this speaks directly to fair access! There are plenty of examples around the world where individuals are unfairly disadvantaged when it comes to accessing credit or loans. In the UK, the government ran its Rent Recognition Challenge to tackle exactly this issue. Early stage success for Bud, a new AISP (Account Information Service Providers) and PISP (Payment Initiation Service Providers) under PSD2, is gaining fair access to account information to create fair mortgage access for consumers.
What will be most crucial to the success of the Fintech Law in meeting its inclusivity aims?
SG: Education of the people in order to build trust in both the existing institutions and these new service providers, and education of the service providers to ensure they understand the Mexican context and bring new offerings that meet the needs of the people.
LZ: I’d also say education. This is one of the less successful elements of the UK Open Banking project. There has been too much focus on systems, infrastructure and regulation, but too little on customer education. This is necessary to shut down conspiracy theorists and ‘big brother’ rumors. The issue in the UK has been that noone can agree who should be responsible for delivery of these education programmes. But the success of the investment relies on consumer adoption, and that relies on education of the population. As the Mexican Fintech Law evolves beyond the initial framework, I believe they should regulate the involvement of participants in such educational initiatives.
Discover more about the global shift to open payments. Watch the video with Lu Zurawski: “APIs and the Rise of Open Banking”
Related Blog Posts
Payments and Fraud: The Paradox Twins
Digital commerce through web and mobile is where merchants predominantly experience shopper growth today. This has become a hugely important domain for their focus. It offers a means for international growth, new market penetration and a way to engage with shopper-hungry Millennials in their culture. Merchants frequently adopt a Digital-First, eCommerce-First or Mobile-First strategy to ensure full corporate buy-in to this strategy.
Knowing New Customers – And How Shared Data Helps in Fighting Fraud
As the eCommerce industry continues its rapid growth, the lines between physical and digital shopping are becoming increasingly blurred. These changes are creating a number of challenges for merchants, not least around customer visibility and fraud prevention.
Adding a Global Payments Layer for Future Growth
Digitization has changed the payments industry completely and irrevocably. Cash payments are in full retreat, as more people pay digitally – with more than 1.6 billion people now shopping online. The digital customer expects an extremely fast and convenient payment experience, with high security standards, and immediate availability of payments information.
Let’s Get Phygital: eCommerce Is Coming To A Store Near You
While payments vendors continue to pitch and strategize with a focus on omnichannel, the omnichannel story has already moved on.
Make no mistake – omnichannel remains important and the best vendors have solutions that provide a single cloud payments service capable of delivering a single view of the customer across stores and digital channels. And the best retailers utilize these solutions to deliver efficient cross-channel shopping experiences. Meanwhile, many other retailers get by (though seldom rise to the top) with a siloed approach.
Around The World: Taking Stock of Global eCommerce in 2019
As I head to #NRF2019 in New York City next week, I’m excited to see how some of the biggest retailers and merchants see the industry evolving over the coming year. What trends they think are going to shape 2019, and which of 2018’s buzzwords can be put to bed.
Fraudsters Don’t Wait for Peak, So Neither Should You: 2019 Fraud Strategy Starts Now!
In existence for barely two decades, eCommerce has transformed not only the way we shop, but also how retailers plan and execute their marketing strategies around the peak shopping season. Now that we’re deep into this period, retailers will have prepared for changes in buyer behaviors, relaxed their strategies to be within the limits of manageable review rate, and most important of all, put strategies in place for increased fraud attempts.
The Power Behind Payments – Is It Time for the ‘Slow Fintech’ Movement?
According to a freshly-minted piece of research from the Dutch central bank, choosing card payments over cash is not only convenient, it’s also good for the environment. The study considers everything from the origin of cotton that goes into the production of (Euro) banknotes and the environmental impact of armored vehicles to transport cash, through to the energy usage of POS card payment terminals in standby mode.
‘Soup To Nuts’ – A Multi-Layered Fraud Menu for the Holiday Season
The holiday shopping season is well underway, with Black Friday now behind us and many retailers around the world braced for higher levels of eCommerce fraud, from Cyber Monday all the way though until Christmas.
The ‘Internet of Things’ is the Game-Changing Next Step for Telcos… But What Are They Missing?
As I travel to meet new telcos and attend an array of trade shows around the globe, one discussion that comes up again and again is how the telco industry can gear up for the world of IoT. And it’s not just a topic that telcos are “a bit” interested in – the sector believes that IoT will drive the fourth industrial revolution, likening it in importance to the discovery of steam power.
The Challenge of Catering to the Anything, Anywhere, Anytime Retail Shopper
Ten years ago, retail eCommerce was a fairly simple provision; most retailers’ websites offered a small range of products with long lead times, local delivery and postal returns. Payments were mostly completed by card in the local currency, and the online customer experience was less than slick.