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COVID spurs greater fintech use in Mexico, but financial inclusion lags

Financial technology companies in Mexico are seeing rapid growth of new clients during the coronavirus outbreak, though experts note the trend is having little impact on the country's massive unbanked population.

On average, new account openings for digital wallets and neobanks are up 30%, while transactions, including bill payments and money transfers, have soared by an estimated 80%, according to Fintech México, an association for firms in the industry.

"We are seeing a radical change in consumption methods, and the growth [in fintech users] has been quite pronounced," the association's general director, Luis Silva de la Torre, told S&P Global Market Intelligence.

However, the growth in fintech adoption is occurring primarily among younger individuals who already have a financial account, de la Torre noted.

Mexico's unbanked population, which totals an estimated 42 million, continues to deal mainly with cash. Banco de México data shows that the amount of physical bills and coins in circulation rose by 11.1% between Feb. 21 and May 29, compared to a 0.01% increase in the same period last year.

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The lack of progress on financial inclusion in Mexico comes even as some other emerging markets have shown substantial growth during the pandemic, as lockdown measures have limited physical cash transactions.

But unlike some other emerging market countries, Mexico continues to distribute much of its emergency aid and loans in cash , and the government is not formally collaborating with fintech to change that.

"We have not made significant progress at our meetings with the CNBV," said de la Torre, referring to the country's banking and securities regulator. Authorizations for new companies to begin fintech operations, he confirmed, have been on hold for more than two months.

For the time being, Mexico's fintech firms continue to work on winning over more of the banked population that have, until recently, shied away from digital banking. There are some signs of success.

MercadoLibre Inc.'s Mercado Pago, which launched a virtual wallet in Mexico in 2017, saw active users jump 55% in the first four months of the year, hitting 1.7 million at the end of April.

Nu Pagamentos SA's Nubank, meanwhile, has received 100,000 requests for its credit cards in Mexico since March, while Hey Banco, Regional SAB de CV's neobank, said that its new accounts have shot to 30,000 per month during the pandemic from 2,000 last year.

In conversations with S&P Global Market Intelligence, executives from those firms stressed that usage on their products are also growing sharply. Nubank country manager Emilio González highlighted that 60% of client transactions are now conducted online, compared to 40% prior to the pandemic. At Mercado Pago, bill payments have skyrocketed 85% since the start of the pandemic.

"Those are people who previously went and paid them in cash," Mercado Pago CEO Osvaldo Giménez noted.

And while the growth has mainly been among already banked consumers, executives noted their products do not require a previous account. Nubank is also offering cards to people without credit histories.

Hey Banco CEO Manuel Rivero Zambrano pointed to the simplicity to sign up at his firm compared to the "extremely tedious signup process" for traditional banks' digital apps.

Lasting adoption?

The question remains, however, on whether consumers who have shifted to digital banking during the pandemic will continue to use such products after lockdowns and social distancing measures are eased.

Mercado Pago's Giménez admitted that some may indeed return to the informal economy and cash payments, but "not many," he asserted. "Once you realize you can pay for something in two minutes on your phone, you'll never again go to a convenience store to queue up for 20 minutes to do so."

Nubank's González echoed that sentiment, pointing to a study showing that card usage has risen, despite a decrease in transaction value amounts.

But in order for wider adoption to take hold in Mexico — including among the unbanked population — executives argued that the country will have to re-evaluate its approach to fintech regulation.

"If you want to regulate fintechs in the same way as existing financial institutions, you will end up the same as now, with more than half of Mexicans without a bank account," Giménez warned. "That's the trade-off you have to look at: How safe do you want to be [versus] how many people you want to enter the system."