Open banking is quickly revolutionizing global financial systems, including in Mexico where it has already started to reshape the country’s financial landscape. This concept, which implies the sharing of banking data between financial institutions and third parties, is driven by the core belief that individuals, rather than the financial entity, own their transaction data and therefore have the right to share it.

As explained by the Mexican Fintech Association’s Annual Report, Mexico has yet to leverage the wealth of information constantly being produced, with the finance industry only using 3% of the available data to make decisions. Simply put there is an unexploited landmine of data that could revolutionize financial services, not only in Mexico but around the world.

While Mexico was one of the pioneers of open banking legislation, with the Ley Fintech entering into force at roughly the same time as the United Kingdom’s open banking regulations in 2018, it has lagged behind in implementing secondary regulations laid out in the famed FinTech Law. The law requires financial entities to develop tools (in technical terms known as APIs) to facilitate the secure sharing of data with third parties. More specifically, the Ley Fintech refers to data generated by the financial entities, aggregate data related to the entities’ operations, and personal transactional data that can only be shared with the users’ consent. Thus far, only secondary regulations governing the sharing of data generated by financial entities have been published, preventing the country from experiencing the full benefits of open banking, while other countries charge ahead.

Despite the lack of clear regulation, several entrepreneurs are building the technology needed to unlock the power of the financial data being generated in Mexico. Those leading the way include Belvo a fintech that has built its own connections to prominent financial entities, and Finerio Connect, a fintech that offers white-label personalized financial products and services based on consumers’ data to banks – in October the latter secured US $6.5 million in venture capital funding to further develop its situs slot platform.

The transformative potential of open banking for Mexico’s small and medium-sized enterprises (SMEs) cannot be overstated. Currently, SMEs are estimated to receive less than 10% of private-sector financing, significantly restricting their growth opportunities. Open banking could play a key role in fixing this financing gap by allowing SMEs to share their financial data more efficiently with potential lenders. This, in turn, could have an important impact on the Mexican economy, given that over 95% of businesses in Mexico are considered micro, small, and medium-sized enterprises (MSMEs).

It could also automate some of Mexico’s notorious back-office operations, which according to Stripe, the majority of which are still performed manually by almost half of Mexican CFOs. This is something that the leading bank BBVA and fintech Syncfy are already addressing. It is also important to highlight that the most prominent open banking fintechs in the country have remained focused on business-to-business applications, leaving a big opportunity for consumer-focused applications situs slot.

Once the remaining secondary regulations are in place, which are anticipated to be finalized in 2024, or more likely in 2025 after Mexico’s Presidential elections have passed, open banking will transform the lives of millions of Mexicans. Looking further into the future, open banking will quickly be followed by open finance in which other entities such as insurance companies, retirement funds, mortgage companies, and other entities will share other financial data.

Belvo has previewed how this could impact consumers when earlier this year it launched a tool to allow consumers to share information from Mexico’s Social Security Institute (IMSS) via its platform to prove creditworthiness. The ultimate progression of open banking is expected to culminate in an open data ecosystem. In this scenario, data will be widely shared to guide decision-making across all societal layers, from individual choices to governmental policies.

While open banking in Mexico is still in its infancy, its potential to transform the financial landscape is immense. By improving the accessibility of banking data, it promises to unlock new opportunities for consumers and businesses, drive innovation, and foster a more inclusive financial environment. As Mexico navigates the complexities of implementing these changes, the focus should remain on ensuring that the benefits of open banking reach all sectors of society, rather than remaining isolated to the top of the pyramid, paving situs slot the way for a more connected and efficient financial future.

* Sara Hayden Van Velkinburgh is a senior analyst with the public relations division of Miranda Partners, where she works primarily with fintechs, investment funds, and startups. With a background in public policy and public affairs, she has analyzed Mexico’s regulatory framework and digital policy in Latin America as it applies to tech companies while at McLarty Associates and the Atlantic Council’s Adrienne Arsht Latin America Center. Twitter: @svanvelk 

Last month, the United States finally launched its first federally-backed real-time payments method, FedNow. While you might still be learning what a real-time payment is, or this might even be your first time hearing about FedNow, you might be more surprised to know that Mexico has had a real-time payment solution since 2004. Put simply, real-time payments (RTPs) are payments that are initiated and settled instantaneously, 24/7, regardless of bank hours, holidays, and weekends, providing instant liquidity. In the United States, several private-sector solutions, such as Zelle and Venmo, offer a very similar user experience.

In Mexico, while the Central Bank has offered a real-time payment system known as SPEI for nearly 2 decades, its transaction volume remains marginal, representing only 2.8 percent of all payments over 500 pesos (approximately US $20) in 2021. In September, Mexico will link its real-time payment system to consumers’ phone numbers for the first time launching Dinero Móvil (DiMo), introducing near-frictionless instant transfers into Mexico’s financial system. Although many have hailed it as the “PIX of Mexico” –the Brazilian real-time payment method launched in 2019 and today the country’s most popular payment method—  this optimism is misplaced.

In addition to several barriers to mass adoption, DiMo might prove to be more detrimental than beneficial.

Who benefits from DiMo? 

As essentially a slightly more refined version of SPEI, banks are expected to charge for DiMo transfers as they would charge for a traditional SPEI transfer. While some banks have decided to assume the cost for participation in the SPEI system (at the end of the day moving money is never free) others have decided to pass this fee along to their customers, charging between 3 and 8 pesos, less than US 50 cents per transaction. As has been predicted in the case of the United States’ RTP FedNow, in the short run banks could lose some revenue in transfer fees, but, ideally, DiMo will slowly increase the volume of transactions and reduce cash costs for banks, thereby increasing bank profits in the long run.

Should DiMo be successful in increasing the use of real-time payments, it could also bring important benefits to consumers and merchants alike, providing instant liquidity to vendors, allowing gig workers to get paid immediately, providing a more secure way to move money to vulnerable consumers, and reducing certain types of fraud associated with other payment options, among other benefits. However, these benefits are characteristic of any RTP, and beyond further facilitating transfers, DiMo’s additional value-add is unclear.

The likelihood of adoption

DiMo’s adoption faces various challenges, with one significant hurdle being the overwhelming preference among Mexicans for prepaid SIM card options, chosen by approximately 82.1 percent of mobile phone users, equivalent to roughly 77 million people. As Isaac Phillips, the founder of the telecommunications startup Siglo, pointed out, with prepaid options, SIM card rotation is common, leading to frequent changes in phone numbers. This poses challenges in staying connected and secure authentication, not to mention using it for payments.

Additionally, the Mexican government has framed DiMo as a way to reduce cash and increase financial inclusion. This approach completely ignores the root causes of why more than half of Mexico’s adult population remains unbanked: Mexico’s economy is powered by a massive informal economy; there is a culturally embedded distrust of banks; and savings remain low, among many other reasons. Moreover, the current system of SPEI transfers, which requires the sender to have the unique bank account ID of the recipient (CLABE) and their full name, is a minor inconvenience and unlikely to be the real reason why digital transfers have yet to take off.

This said, one thing working in DiMo’s favor is that many banks are expected to offer the payment method from the start. According to the Governor of the Bank of Mexico, Victoria Rodríguez, four banks, which include two of Mexico’s largest banks BBVA and Santander, have developed the necessary infrastructure to offer the service. Combined, Santander and BBVA represent 37.13 percent of the banked population. Importantly, an additional 16 banks are currently in the process of building the necessary infrastructure to implement the technology. The fintech Sistema de Transferencias y Pagos (STP) will also provide the financial infrastructure so that mom-and-pop shops will be able to associate a phone number with a bank account and receive payments from consumers. It will also likely serve as the intermediary for many other fintechs as it has done for traditional SPEI transfers.

The unforeseen downside of frictionless RTP 

Adoption challenges aside, it is unclear if Mexican authorities are prepared to assume the responsibility of frictionless real-time payments. Removing what little friction remains in Mexico’s real-time payments, DiMo will likely lead to a spike in fraud, which is already a major problem in the country. In a global survey conducted by Surfshark, Mexico ranked 9^th for cybercrime, the highest-ranked country among all Latin American countries.

Adding the problem, if DiMo does convince some of Mexico’s unbanked population to open bank accounts, we can expect their awareness of digital fraud to be very low. This was observed with Brazil’s RTP payment rail PIX, which also sought to decrease the use of cash among Brazil’s informal workers. In the year following the instant payment method’s roll-out, social engineering hacks, including phishing scams, reached a record high causing 2.5 billion reais (approximately US $513 million) in damages; with 70 percent of all phishing attacks targeting PIX users. Moreover, amid a spike in kidnappings, the Brazilian government re-introduced a bit of friction into digital payments, including limiting transfers at night. In the US, Zelle has also been plagued by scams causing more than US $213.8 million in damages over 18 months.

Ultimately, it might be wiser for Mexican authorities to focus on the underlying reasons driving the persistent preference for cash, instead of introducing a new payment method that risks further eroding consumer trust in the financial system.

* Sara Hayden Van Velkinburgh is a senior analyst with the public relations division of Miranda Partners, where she works primarily with fintechs, investment funds, and startups. With a background in public policy and public affairs, she has analyzed Mexico’s regulatory framework and digital policy in Latin America as it applies to tech companies while at McLarty Associates and the Atlantic Council’s Adrienne Arsht Latin America Center. Twitter: @svanvelk 

Across the board, non-bank lenders in Mexico are being penalized by rating agencies and investors alike, as some of the biggest names announce restructurings and defaults. One sector that has been particularly hard hit is Sociedades Financieras de Objeto Múltiple (SOFOMES), specialized lenders in Mexico focusing on lower and middle-income earners and small and medium-sized enterprises (SMEs) not served by Mexico’s banking sector, providing the equivalent of over US $58 billion in loans to 20 million people.

The most recent SOFOM to declare bankruptcy was UNIFIN, the country’s largest non-banking financial institution, which announced it would enter a restructuring process under Mexico’s bankruptcy laws in January 2023. Meanwhile, the country’s largest payroll lender, Crédito Real, is going through an ugly liquidation process and AlphaCredit, one of the country’s largest SOFOMES, has yet to emerge from a restructuring process that began at the end of 2021.  

The vacuum that these non-bank lenders have left is not insignificant: UNIFIN accounted for 30 to 40% of lending to SMEs, Crédito Real had over 450,000 payroll clients, primarily government employees, and AlphaCredit had issued over 620,000 loans serving more than 375,000 clients.

With the sector in such bad shape, the real question is who will fill the vacuum and how will they avoid the pitfalls that plagued these industry leaders?

Technically speaking, per Mexican law, anyone can offer credit. One of the most likely candidates, however, is fintechs, loosely defined as fast-growing companies that leverage technology to disrupt the financial services sector. 

Many are offering products specifically designed to help those without credit history establish one, including YoCripto and Nu which are offering self-guaranteed credit lines so users can create their own history. Others are using data from untraditional sources to determine credit worthiness, going beyond data provided by credit bureaus. For example, open finance platform Belvo has partnered with Mexico’s social security system to provide another data point to help lenders evaluate loan applications. And even others are pioneering new models, such as Yotepresto, a people-to-people loan platform where users can ask for loans and decide to invest in their peers. 

In Mexico, the percentage of the adult population with formal credit is only 33% of the population as of 2021, according to figures from Mexico’s statistical agency, making personal loans an attractive area of opportunity for many.

Likewise, there is also a major financing gap for the country’s SMEs of nearly US $165 billion, which fintechs like Konfío and Fairplay are also rising to fill. While more than 95% of the country’s businesses are classified as small and medium-sized enterprises, it is estimated that SMEs receive only 9.4% of all loans from the traditional banking sector and only 17.9% of all business-related credit lines. 

These fintechs, having identified these business opportunities, are extending loans to segments of the population that have been overlooked by traditional banks, just like the SOFOMES before them. To make this bet profitable, however, they charge higher interest rates in exchange for a greater likelihood that their borrowers will default: Finnovista estimates that fintech’s nonperforming loan (NPL) ratio is 11% with an annual interest rate of 39%. For comparison’s sake, a traditional bank’s portfolio has an NPL ratio of around 2.1%.

Although this may seem like easy money, these new actors must be careful to avoid falling into the same pitfalls that led to the demise of AlphaCredit, UNIFIN, and Crédito Real. Especially because in Mexico, fintechs can be incorporated under several legal structures, including being registered as a SOFOM, as is the case with AlphaCredit which is considered a startup, fintech, and SOFOM. 

As a rule of thumb, fintechs in the lending sector must be particularly cautious of acquiring too much debt (be it venture debt or a traditional credit line from a bank or multilateral institution), especially as interest rates remain high, resulting in an increased cost of capital. When interest rates were lower it was much easier to make a profit, even with a portion of non-performing loans in the portfolio. But, in today’s environment, fintechs should carefully moderate their non-performing loan portfolio and focus on debt collection. 

Similarly, they should be cautious of growing too fast. As the darling of international investors, AlphaCredit quickly grew, raising US $183 million in venture capital and entering the Colombian market. However, when the pandemic caused new loan origination to slow and collection to decline, the company found itself in a difficult position. UNIFIN also made a similar mistake. Although it did not experience the same explosive growth, by the time of its downfall, it not only offered personal and business loans, but it had also acquired 15 ships, 37 real estate and commercial plots, and a semi-submersible oil rig called Frida, deviating significantly from its area of expertise. 

According to figures from the World Bank, Mexico’s private sector lending in terms of GDP is only 36.4%, well behind the regional average of 57.2% and well behind Chile, Panama, and Brazil, which limits the country’s long-term growth potential. Sadly, the multiple defaults and bankruptcy has made it much harder for SOFOMES and other specialized lenders to raise capital as investors lose faith in lenders to create a sustainable business model that generates consistent returns. 

That said, despite the challenges, lending fintechs still account for more than 20% of Mexico’s fintech ecosystem and the sector is considered one of the fastest-growing segments. However, if these fintechs are going to succeed where others have failed, they must not only leverage technology and venture capital; they must learn from past mistakes and pave the way for sustainable, long-term growth.

* Sara Hayden Van Velkinburgh is a senior analyst with the public relations division of Miranda Partners, where she works primarily with fintechs, investment funds, and startups. With a background in public policy and public affairs, she has analyzed Mexico’s regulatory framework and digital policy in Latin America as it applies to tech companies while at McLarty Associates and the Atlantic Council’s Adrienne Arsht Latin America Center. Twitter: @svanvelk