About the initiative
The World Bank Group (WBG) has decided to offer resources and technical assistance to countries that join its commitment to expanding financial inclusion by implementing digital payment infrastructure.
This initiative is based on M-Pesa's experience in Kenya, a mobile money transaction service, and United Payment Interface (UPI) in India, a system created to enable interoperability between banks via smartphone without entering bank account details.
To achieve its objective, the WBG has hired international analysts to determine which digital payment scheme is adequate to address each country’s unique conditions and needs. The main source of information for such evaluation is the stakeholders’ participation.
Mexico is one of the countries that seek to join this initiative. Below are some of the factors to consider in this regard and the position of two of the most important stakeholders.
Mexico’s socioeconomic context
- Mexico is a federal republic with more than 125 million inhabitants.
- Like India and Kenya, Mexico faces extensive poverty problems. 41.9% of its population is in a situation of poverty (CONEVAL, 2018) and widespread corruption.
- “Mexico is among the world’s 15 largest economies in the world and the second-largest economy in Latin America. The country has strong macroeconomic institutions, and it is open to trade.” (WBG, 2020)
- “Over the last three decades, Mexico has underperformed in terms of growth, inclusion, and poverty reduction compared to similar countries.” (WBG, 2020)
- In Mexico, there are 80.6 million internet users. 76.6% of the urban population is an internet user. In rural areas, the user population is located at 47.7 percent. (IFT, National Survey on the Availability and Use of Information Technologies in Homes, 2020)
- 75.1% (86.5 million) of the population are users of mobile technology. 9 out of 10 cell phone users have a smartphone. (IFT, National Survey on the Availability and Use of Information Technologies in Homes, 2020)
- Approximately 51% of people with cell phone access have an account at a bank or financial institution. 78% of them do not have access to mobile banking, pointing out they prefer other means (ATM,
internet, etc.). (INEGI, National Survey of Financial Inclusion “ENIF,” 2018) - Cash is the predominant means of payment. Nationwide, 87% of Mexicans use it to make purchases over 500 pesos (25 USD). And more than 90% of the services are paid in cash (housing rent, taxes or fines, public services, private services, public transportation). (INEGI, National Survey of Financial Inclusion “ENIF,” 2018)
- 68% (54 million) of Mexican adults have at least one financial product. 47% (37.3 million) have a debit card associated with an account bank and 6.5 million adults receive some kind of government support through this means. While around 34% of Mexicans (26.9 million) have a credit card. (INEGI, National Survey of Financial Inclusion “ENIF,” 2018)
- “Thirty-seven percent of Mexican adults without an account say that lack of trust in financial institutions is a factor; the same proportion report that they do not have an account because they do not need one” (Navis et al., 2020).
Stakeholders‘ involvement
Banking sector letter
To: The World Bank
From: Mexico’s banking sector representative
Date: November 23, 2020
Re: Payments infrastructure
Under the representation of Agustin Carstens, the Mexican banking sector writes this letter to support UPI’s implementation here in Mexico.
UPI is a standard that enables interoperability between banks, allowing account holders to send and receive money from their smartphones without entering account details. Through UPI, users can link their saving accounts, make merchant payments, pay bills, and send remittances outside the country.
First of all, it must be considered that the implementation of a payment scheme such as UPI’s is feasible in Mexico since its legal framework only allows banking institutions to regulate the digital payment infrastructure.
Considering the Mexican context, the solution is to use the technology already in the hands of the population: smartphones. The banking sector acknowledges this factor and recognizes the need to create synergy between the potential use of smartphones and a large-capacity payment system such as that of the Central Bank.
In this sense, considering the experience of a scheme such as UPI becomes relevant since the banking sector is now committed to promoting a standard service with access to all the public that have a bank account for payment services and transfers. This would avoid the creation of monopolies or oligopolies since the transactions would be carried out in any financial institution. Thus, the competition between institutions would not be in the price but the service's quality. Moreover, transactions could be free since it would be a public service provided by the Central Bank through the Interbank Electronic Payment System (SPEI). (Mejía, 2019)
The search for improving the banking service quality can generate positive incentives for adopting effective financial inclusion measures. Especially if we consider that “how people perceive banks influence financial inclusion” and, unfortunately, bank failures of the recent past in the Mexican case may affect this perception. (Navis et al., 2020)
This quality-based competition will allow the successful implementation of the digital payment scheme and expanding financial inclusion by reconciling Mexicans with the banking system. Thus avoiding failures such as implementing M-Pesa in South Africa due to lack of trust in the service.
Furthermore, unlike MNOs, as the banking sector, we have the experience, the means, and the legal capacity to develop and distribute financial services to our users. This scheme would help generate financial history in sectors of the population that currently do not have access to the financial system and, therefore, contribute to financial inclusion.
Sincerely,
Agustin Carstens
Consumer advocacy group letter
To: The World Bank
From: Mexico’s representative from Domestic Workers group
Date: November 23, 2020
Re: Payments infrastructure
Under the representation of Gloria Hernandez, the Mexican Domestic Workers group writes this letter to support expanding financial inclusion by implementing digital payment infrastructure. From our perspective, the future payment scheme must consider combining some characteristics of M-Pesa and UPI.
Despite having the necessary telephone coverage conditions, Mexico has not included more people into the formal financial system through mobile payments. We applaud the initiative and commitment of Mexico. However, first, we must acknowledge the complexity of the problem.
Policymakers must understand the socioeconomic context and why the financial gap exists. In the Mexican case, the financial gap is can be explained by multiple factors that go from physical infrastructure matters to lack of trust in banks. Nevertheless, from where we stand, low incomes and a large informal economy should top the list for prioritizing their approach and explaining why digital payment methods are still not a reliable alternative to replace cash.
In Mexico, there are no incentives to abandon cash and migrate to more efficient payment mechanisms. The main financial products are granted to a very small segment of the population. In our experience, despite the fact that our work is a formal occupation, it belongs to the informal economy since our employers continue to pay us in cash with the intention of evading fiscal and employer obligations. Hence, not having a “formal” job or “fixed income” excludes us from the possibility of accessing a financial product and its benefits.
Even some of our colleagues, as well as a considerable segment of the Mexican population, have a very low income and live day by day. This means they don’t have savings nor enough income to be interested in financial products and digital payments.
As the banking sector has highlighted, the basis of the payment scheme implemented in the country should consider UPI’s experience. It is impossible to consider M-Pesa as the basis because Mobile network operators (MNO) in Mexico have not expanded their financial services coverage due to legal barriers.
In addition to the use of MNO, it will be interesting to explore the expansion of financial services through financial technology (fintech) companies. In 2018, the Federal Congress enacted the Fintech Law, which is designed to promote innovation and define rules so that fintech can operate and offer services. Although it is a promising situation, there are still guidelines that could reduce their financial inclusion impact. For instance, the need to have a bank account to access a mobile payment platform limits the market potential to people who already have access to this financial product.
The payment scheme, mainly through fintech companies, should consider some M-Pesa’s characteristics that we believe essential for the adoption of a policy that offers everyday solutions to the general population: simplicity and presence/proximity to people.
At the same time, Mexico has to invest in telecoms to bring digital payment to remote parts of the country. It is desirable that the government make it clear that this mechanism is not used for collection purposes, since, it could discourage its use.
Sincerely,
Gloria Hernandez
Note: This post is submitted as Assignment 5 for the course DPI-662 at HKS.
