Latin American countries are some of the most vulnerable to the economic pressures of COVID-19, which is exacerbating issues of economic instability and a huge informal workforce. In Mexico alone, the economy is forecast to contract as much as 12 percent in 2020 because of the pandemic.
But prior to the virus, Mexico was considered to be one of the leading countries in Latin America for fintech innovation, regulation, and international investment. Since 2016, Mexico’s fintech startup scene has seen an annual growth of 23 percent, with 60 percent of new startups receiving funding, according to the Report on Fintech in Latin America 2020.
David Dorr is Co-Founder and Managing Principal of Dorr Asset Management, a specialist multi-family office that focuses on global macro investing and Co-Founder of Coro Global Inc, a Miami-based fintech company focused on creating a new financial system where gold can be used as money in everyday transactions. Here, he explains how COVID-19 accelerating Mexico’s journey towards being Latin America’s fintech hub.
Faced with the unprecedented impact of COVID-19, Mexico is now finding ways to harness the new conditions and reach its full fintech potential. Unlike other Latin American nations, Mexico has established a clear pathway for fintech development and is poised to facilitate the likely move to digital banking in the wake of the virus. The fallout from the pandemic could actually accelerate Mexico’s journey towards being the fintech hub of Latin America, because of the following dynamics.
Moving away from traditional banks
Financial aid from the Mexican government has been limited for small business owners who are struggling due to falling sales during lockdown. Workers in the informal sector are most in need of support. In response, fintech companies like Konfío are bridging the gap in accessing financial services by offering modest loans to everyday people. In only seven minutes, loan requests can be approved with no collateral.
These digital loans have considerably lower interest rates compared to that of official banks, and can also be spread out over longer repayments, helping with cash flow throughout the pandemic. Since COVID-19 struck, Konfío’s website has seen a 20 percent uptick in traffic, suggesting fintech is being viewed as a viable alternative to traditional banking. Even before COVID-19, Konfío’s revenue soared from $629,000 to $12 million between 2015 to 2018.
While consumer lending has the second-highest market share in Mexico’s domestic fintech sphere, the largest share is dedicated to payments and remittances. Considering that 63 percent of the Mexican population rely on cash for all payments – and that trust in traditional banking systems is low – the lockdown is highlighting the importance of having transparent digital channels to buy goods, pay bills, and transfer money. Especially as skepticism surfaces around the cleanliness of cash in the pandemic, and in-person bank visits are restricted, the adoption of fintech solutions is set to speed up.
Remittances increasingly profitable
Remittances are crucial to the Mexican economy, being one of its largest sources of foreign income. Despite the fact that remittances are expected to decline globally with the economic downturn, in Mexico they reached a record high of $4.02 billion in May.
Fintech has played a significant role in enabling Mexicans living overseas to send money back to their country at a lower cost. At the moment, services like Western Union take, on average, an eight percent commission of each remittance they process. Alternatively, fintechs like Remitly and Xoom are cheaper and also offer more favorable exchange rates to users.
Because of COVID-19, there are a number of opportunities for fintechs in Mexico to expand. As the unemployment rate verges on 10.7 percent, the livelihood of people in poorer communities is under threat. These groups are relying more heavily on remittances sent from families in foreign countries. At the same time, the value of the Mexican peso has fallen substantially compared to the US dollar, and Mexicans living in the United States are taking advantage of the currency fluctuation. As people in Mexico receive more pesos for the same amount of USD, fintech solutions are getting money to those most in need, in a matter of hours.
The benefits of the ongoing currency exchange also apply to other assets that have maintained or risen in value during the crisis. Gold, for instance, has slowly climbed up in price, peaking at $1,769 per ounce in the second week of April – the highest point in almost seven years. There is scope for well-positioned fintech companies to develop platforms where assets beyond fiat currencies can be sent as remittances. Such startups could also redefine the use of remittances as long-term investments. Currently, roughly 60 percent of remittances are spent on food, clothing, and debt payments, rather than savings and improved financial security.
The groundwork has already been laid
Regulation, funding, and specialized programs have created an ideal landscape for fintech in Mexico. Although many countries in Latin America have fintech regulation, the majority lack an integral framework. Mexico, however, has drafted the 2018 Fintech Law (due to come into effect this year) – one of the most comprehensive regulatory frameworks in all of Latin America. The legislation provides a process for new fintech models, plus gives a regulatory sandbox for licensed and non-licensed companies alike. Following suit, Chile is now pending its first broad fintech regulatory proposal.
Financial giant Mastercard has also taken an active role in supporting Mexico’s fintech efforts. The Mastercard Fintech Express Program is empowering Mexican fintechs to go to market faster and meet the rising customer demand for fintech services. The accelerator program offers support and assistance for startups in the field, who can later become licensed as a Mastercard issuer and integrate with the wider Mastercard network.
In April 2020, Mexican fintech Klar partnered with API software integrator Galileo, which achieved Mastercard status through the program. Because of this connection, Klar is now able to build its financial products faster and scale on an international level.
Speaking about Mexico’s fintech capabilities, Pablo Cuaron, Director for New Payment Flows at Mastercard Mexico, noted how “Mexico has solidified its position as Latin America’s fintech leader with the government’s recent enactment of pioneering legislation promoting technological innovation.”
Mexico’s framework for fintechs is all the more valuable as COVID-19 spurs concerns about the future of the Mexican economy, which will encourage people to turn to fintech for sustainable solutions. The fact that in 2019 Mexico was the country with the highest growth in electronic payments in retail stores, shows that citizens are quick to embrace technology that can make payment processes faster and more secure.
Like other countries, Mexico will have to struggle with the long-term effects of COVID-19. Yet in the fintech sphere, Mexico has the advantage of being more familiar and better prepared for continual market growth than its neighbours. If Mexico can continue its commitment to furthering fintech, and applying the industry to its economic recovery, it could very swiftly be Latin America’s next fintech hub.