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With nearly 400 active fintech startups providing payment solutions, consumer lending and financial management, Mexico has become a fast-growing fintech hotbed.
Mexico’s largely unbanked population, the 44% lacking access to formal financial products, created opportunities for a new wave of fintech startups to step up and promote financial inclusion. In 2018 alone, around 100 new fintechs were founded, representing 52% of the overall growth in the space.
But while Mexico’s fintech leaders are solving financial problems for the masses, they still face challenges of their own. A recent central bank report highlights that only one-third of SMEs in Mexico have access to bank financing.
Many startups struggle to make online business payments and lack access to financial services, a challenge intrinsic to many developing economies.
Let’s take a deep dive into fintech in the tenth most populated country and the financial hurdles opposing entrepreneurial growth.
A report by Deloitte highlights four factors that determine the success of a fintech hub: access to talent, availability of capital, conducive regulatory environment and demand for digital financial products. Mexico checks all four.
Many Mexican startups are founded by former executives who garnered expertise from corporate giants including IBM and Google, bringing valuable experience to the fintech space.
Between 2015 and 2016, the investment in the fintech space tripled and exceeded $570 million US in 2017. Mexico has attracted key investment players, including Japan’s Softbank Group and Goldman Sachs.
One of the first countries to implement legislation addressing the fintech sector, Mexico’s ‘fintech law’ offers comprehensive regulation for digital fintech products like cryptocurrencies, crowdsourcing and digital payments. The law also introduces a formal process to operate new fintech firms and helps bring more people in the formal economy to reduce the amount of cash in circulation and cut down money laundering and corruption.
Between 2017 and 2019, the fintech adoption rate in Mexico rose from 36% to 72%, as many startups rose up to the challenge of addressing gaps in the traditional banking model, serving the underbanked and improving access for financial services.
Over half of Mexico’s population suffer from poor access to financial services and still use informal savings mechanisms, according to a World Bank report. A National Survey for Financial Inclusion conducted in 2015, revealed that debit and credit card usage are very low, while 92% of adults still prefer cash for their purchases.
B2C startups that focus on SME and consumer financial inclusion now account for over 76% of total fintech startups in Mexico, payment and remittances make up 20% of fintechs, while peer-to-peer or consumer lending and enterprise financial management account for 14% and 13% respectively of the total market share.
Nearly half of all SMEs in Mexico don’t have access to formal credit and financial services. Despite accounting for 99.8% of its total number of enterprises, Mexico’s SMEs only get 11% of total bank credit for businesses, including loans, overdrafts and credit cards. Many entrepreneurs struggle to qualify for business loans, credit cards, and debit cards.
According to Norbert Schneider, Mexico’s Principal Investment Officer at the International Finance Corporation, the credit extended to the private sector in Mexico is about half of what would be expected for the country’s level of income and the financial services penetration remains low.
For Business Finance Manager, Arturo Bautista, opening a bank account for his ecommerce startup, Rigs, was a daunting process that required lots of documentation and multiple bank visits, especially in the first few years of being in business.
But the most recurring banking challenge for Bautista is fulfilling cross-border payments.
“Whenever we want to pay for services like Zapier or Shopify, the cards from the traditional banks are continuously declined,” he said.
As a workaround, Bautista and his team use their personal credit cards to make online purchases, which makes expense reporting every month a time-consuming hassle.
“When we make those payments with our personal credit cards, we have to settle and fix lots of financial bank statements and taxes. That becomes a complete mess.”
In the case of Mexican insurance startup, Arca, despite being in the business for seven years and generating revenue, getting a credit card from the bank was an impossible task.
“Every time we tried to get a card there was a different excuse. We ended up paying for an American Express corporate credit card, which is extremely expensive and the credit limit is very low because we don’t have credit history,” Arca Director of Operations, Javier Gironella, said, adding that using an Amex card is particularly challenging when doing online payments like Google Adwords, which doesn’t accept it as a payment method.
Failing to receive a credit card for their startup, Arca co-founders have been using debit cards which are highly susceptible to online fraud in Mexico.
“There is no way to stop that bleeding from our company bank account if there is fraud. There is no protection from the bank in case of fraudulent transactions,” Arca co-founder and President, Juan Gironella Garcia said.
Banks in Mexico have complex regulations and use traditional credit scoring methods, which complicates the due diligence process, especially for startups and SMEs.
One quarter of credit card rejection requests in Mexico are tied to outdated credit scoring and problems with the credit bureau. Credit bureaus use limited data to determine credit worthiness, which complicates the underwriting process for startup founders.
Credit growth in Mexico is impaled by the size of the informal economy. According to Mexico's Census Bureau (INEGI), 60% of the country’s workforce are employed in the informal sector, meaning that many companies lack the necessary credit history, accounting information or assets needed to secure a bank loan.
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