Deep in the jungles of Mexico’s southern state of Chiapas, not far from the Guatemalan border, the roughly 10,000 inhabitants of the town of Nueva Palestina are completely cut off from the country’s financial system.
The nearest bank is more than 50 miles away. You can’t carry out transactions with a bank card. If you need to settle any bills, you have to pay in cash.
And the town is not alone in its financial isolation. Across Mexico around seven million people – or 6% of the country’s population – live at least 4.3 miles from the nearest point of financial infrastructure, such as bank branches, cash machines, agents or point-of-sale (PoS) terminals, according to a study by the country’s financial regulator, the Comisión Nacional Bancaria y de Valores (CNBV).
Financial inclusion has long been a problem in Mexico. Less than half of the population has a bank account. The credit-to-GDP ratio is around 34% – stubbornly low relative to comparable countries in Latin America.
In Colombia, for example, it is a little above 50%; in Brazil it is roughly 60%. Traditional commercial banks in Mexico have shied away from the riskier segments of the market. More than half of the population works in the informal economy. And inequality is rife, with around 40% of the population living in poverty.
This segment of the population has a very low income. They live day by day, they don’t have savings and they don’t have enough income to think about other financial products- Gabriela Soni, UBS Asesores Mexico
Mexico’s government is seeking to change all of that. President Andrés Manuel López Obrador, or Amlo as he is better known, has announced a series of social welfare programmes to reduce poverty by providing cash handouts to people in need of financial support. There is, however, one small snag with that plan: how do you distribute those benefits when much of the country is unbanked and lacks access to the financial infrastructure to collect the cash?
The solution is to start building more banks. In January, Amlo announced a plan to expand state-owned bank Banco del Bienestar by opening 2,700 new branches in underserved locations across Mexico by the end of next year.
The bank, which was previously known as the national savings bank Banfesi, was rebranded as Banco del Bienestar (roughly translated as the Welfare Bank) last year. Banfesi already had more than 500 branches.
The exact plans for the branch expansion remain sketchy – to meet that target would require building around 26 new branches every week.
Amlo, in one of his daily press conferences, initially hinted at drafting in the army to help with construction.
Bienestar officials declined to comment because the plans have yet to be finalized.
For now, the government is leaning on existing banks to help distribute the funds. Chief among these is Banco Azteca, the bank with the largest branch network in Mexico and therefore the broadest geographical reach.
Alejandro Valenzuela, Banco Azteca
“Mexico does not have the financial penetration that a country of its level of development should have,” says Alejandro Valenzuela, chief executive of Banco Azteca. “When you look at the map of Mexico we have more or less 2,500 municipalities, and of those Banco Azteca is present in more or less 800.”
Banco Azteca has carved out a niche for itself by providing small consumer loans to low-income customers through its 1,874-strong branch network, many of which are based inside the retail chain of its parent company Grupo Elektra.
Banco Azteca has been able to crack this market in part because it has taken the time to understand its customers.
When Valenzuela joined the bank from Banorte in 2015, he hired a social anthropologist to help him and his team learn more about how people from lower socioeconomic backgrounds manage their financial situation.
“We have too many ‘Mexicos’ in this country,” he says now. “When you divide between the ‘haves’ and ‘have-nots’, in the have-nots there are different levels, you go from extreme poverty to middle poverty to middle class. Also, the way they operate is very different, so if you don’t use a department of social anthropologists to assess the best way to help these people become bancarized, you’ll be wasting your time.”
That means Banco Azteca, and Valenzuela in particular, understand more than most the challenges of increasing financial inclusion in Mexico. And it is not just a question of access.
“The first challenge we need to work much more on is financial education, it’s very important to understand basic financial intermediation and the basics of the financial system,” says Valenzuela. “Second, we need to start showing them that the digital world is much better than the physical world, and for that we need to generate trust. But here we have an enemy – and the enemy is not only the lack of financial education but the huge informal economy.”
And tackling informality is not easy, particularly as many small businesses want to remain under the radar.
“People like to deal in cash because they like the anonymity; it helps them do a lot of things where they don’t want to be monitored,” Valenzuela says. “They know as soon as you go digital, even though it has a lot of advantages, they are being monitored somewhere.
“When we have spoken to traders in the local informal markets in Mexico and asked them why they don’t want to use a PoS terminal or why they don’t want to use an ATM, one of the main reasons is because they don’t want the taxman to find out how much money they make.”
Another drag on financial inclusion is the fact that many informal businesses are reluctant to borrow from traditional banks.
“Banks always tell us they’re willing to lend, but sometimes they find themselves offering a loan to a small company,” says Felipe Carvallo, vice-president and senior credit officer at Moody’s in Mexico City. “The small company prefers not to deal with them because they get their financing from their suppliers and they don’t want to disrupt that commercial relationship even if the banks are offering lower rates.”
But Mexico’s biggest banks, which are well known for their caution, are unlikely to be in any hurry to penetrate riskier parts of the market.
Alfredo Calvo, a director and sector lead for financial institutions ratings at S&P Global in Mexico City, says: “If you look at the profitability levels for the banking system as a whole, it is quite strong – and that is just from focusing on high credit-quality customers, so there is no incentive to go after lower-income customers.”
Azteca’s return on equity was 10% in the 12 months to December 2019, short of the system average of 15.5% but close to Citibanamex (12.7%), HSBC (11.4%) and Scotiabank (9.6%), according to CNBV data.
Valenzuela says that while high transaction costs might deter large commercial banks from entering this low-income market, they also lack the necessary resources to understand the credit risks involved and to ensure the loans are actually repaid. Banco Azteca, for example, has a large fleet of motorbike-riding debt collectors to pursue late payments.
“If you don’t have the capacity to go and physically collect the loans and you think it is enough to chase repayments through phone calls or emails, then you won’t get paid back,” says Valenzuela. “You need to go and actually knock at the door of the client and remind them they owe the institution money. So, you have huge transaction costs; most of the larger banks are not willing or they don’t have the patience to do it.”
A further challenge for improving financial inclusion is the country’s high levels of poverty. Around 2.2% of Mexicans were living on less than $2 a day in 2016, according to World Bank data.
Gabriela Soni, UBS Asesores Mexico
“The problem is this segment of the population has a very low income,” says Gabriela Soni, chief investment officer at UBS Asesores Mexico. “They live day by day, they don’t have savings and they don’t have enough income to think about other financial products, such as insurance or loans. It’s not a problem with supply that the private sector doesn’t want to go to these places, it’s more of a demand problem that the population is so poor in these rural areas that they don’t think about having access to other kinds of products.”
Valenzuela says Banco Azteca has helped disburse government funds to more than three million people so far, giving the bank an opportunity to further study the financial habits of those on the margins of society.
“They just come for the cash,” he says. “Our hope over time is to bancarize them and hopefully open up an account with us. But when you look at the poverty these people live under, they use the cash pretty much immediately; they don’t want to leave any balance in the bank.”
This sets up a potential clash with another government objective – to reduce the use of cash in society. Ninety-five per cent of purchases under Ps500 ($27) are made with cash, according to Mexico’s statistics agency INEGI. In a bid to tackle this, Mexico’s central bank last September launched Cobro Digital (CoDi), a digital payments platform that allows users to make instant transfers via a smartphone and a quick response (QR) code.
More importantly, it makes it cheaper for businesses to accept non-cash payments compared with traditional card transactions via PoS terminals, which can be expensive for small businesses to process – on average representing around 2% of the transaction value, according to Moody’s.
There is one catch: users need a bank account for CoDi to work. The intention is that informal businesses will be incentivized to open accounts, therefore boosting financial inclusion. So far, uptake has been slow, says Alejandro Tapia, senior director for Latin American financial institutions at Fitch Ratings.
“CoDi is a positive step for the country, but the benefit is going to be in the long term,” he says.
Pushing digital payments and investing in technology has helped improve financial inclusion in other Latin American countries, notably Colombia, which had a similar level of credit penetration to Mexico a decade ago, says Calvo at S&P.
But Mexico is unlikely to mirror that success using technology alone. One obstacle is language. Mexico has a large indigenous population, each with its own local dialect. In Nueva Palestina, for instance, only around half of inhabitants speak Spanish.
“The characteristics of the country make it more difficult to penetrate low-income segments of the population with technology because you face the challenge of having several languages,” says Calvo. “So it’s not as easy to bring more people into the financial system through technology as it might be in other countries.”
In Mexico we have a lot of security issues, people are afraid [of being robbed], so we explain that their money is safe and taken care of- Alejandro Valenzuela, Banco Azteca
The lack of digital infrastructure in many rural parts of the country also makes it harder for people to abandon cash for bank accounts given the lack of PoS terminals and cash machines.
“In a big metropolis like Mexico City it is quite easy to cash in and cash out of digital money,” says Valenzuela, “but in the parts of Mexico which are far away from the epicentres of economic development it’s very difficult to cash in or cash out of digital money.
“That’s why the government’s disbursements have to be in cash. If they received digital money, the capacity to use it is very difficult – that is why there is a lot of resistance to move away from cash.”
Despite that backdrop, Valenzuela has managed to grow Azteca’s deposits by 67% to Ps146 billion since taking over as chief executive at the start of 2015.
Part of that is down to convincing people who have never had a bank account before that their money is more secure in a bank than stuffed under a mattress.
“In Mexico we have a lot of security issues, people are afraid [of being robbed], so we explain that their money is safe and taken care of,” says Valenzuela.
The second reason Azteca has been successful at attracting new customers is that, unlike most other banks, it doesn’t charge any fees for looking after their money.
“Many people are worried that when they deposit 100 pesos, in six months’ time maybe that has shrunk to 92, so they decide there is no way they are going to keep their money in a bank,” he says. “We don’t charge them any commission on their balance, so we’re trying to generate trust that their money is both secure and whatever you deposit you get back.”
That will be a challenge Banco del Bienestar will also need to overcome as it seeks to expand its branch network across the country and attract customers who have never set foot inside a bank before.
Another challenge Bienestar is likely to bump up against is a lack of telecommunications infrastructure in the more remote parts of the country, says Soni.
“In order to have a bank branch, you need internet access, and roughly 500 municipalities in Mexico still don’t have internet,” she says. “So first they have to invest in telecoms if they want to bring bank branches to these communities.”
Locating suitable land might also prove tricky. One of the goals behind the proposal is to reduce the distance people in rural settlements need to travel to collect their benefits. To do that, they need to find government-owned land in areas that most of the recipients in a particular neighbourhood can walk to within one and a half hours, says Rodrigo Cuevas, an associate director for financial institutions ratings at S&P Global.
“It sounds quite challenging to do this within two years,” he says.
But while the pace of the expansion plans might be ambitious, Amlo’s vision of having a Bienestar branch in every municipality in Mexico is fairly commonly repeated across much of Latin America.
In Chile, for example, state-owned Banco del Estado de Chile has a presence in almost every town, either as a full branch or through a network of contact points in local shops.
“In Chile it’s normal to go to a small town and expect there to be a BancoEstado,” says Carvallo at Moody’s. “Peruvians expect that with Banco de la Nacion, and Brazilians also expect to find a Banco do Brasil somewhere, but in Mexico people know if they are going outside a big town, then you need to take a lot of cash – you won’t find a bank.”
What impact Bienestar’s proposed expansion will have on the wider banking system largely hinges on what services the bank will offer beyond disbursing government benefits.
Those plans also remain unclear, but some market watchers think Bienestar could one day poach customers away from Mexico’s biggest commercial banks.
“If Amlo executes this as he’s planning and is able to create a really big bank with great services and no fees attached, that’s what everyone is looking for, regardless if you are rich or poor,” says Andrés Nieto, a partner at law firm Von Wobeser y Sierra in Mexico City. “But we have to see if it’s going to work – it’s a great idea, it just depends whether it can be executed.”