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Mexico's fintech solution for the unbanked is 'great, but flawed'

With hopes of bringing more of its population into the banking sector, Mexico is in the midst of testing a new digital payment system called CoDi. But despite optimism for the idea itself, many are also skeptical whether it will achieve its goals in the current form.

One board member of startup association Fintech Mexico called it a "great idea" being "poorly implemented."

On the one hand, the concept of the free-to-use CoDi system is winning praise as an effort to address longstanding issues of financial informality in Mexico, where the vast majority of transactions are still in cash. According to the country's 2018 national financial inclusion survey, 87% of adults used cash for purchases above 500 pesos. The figure was 95% for smaller transactions.

On the other hand, some industry observers, particularly from the technology sector, are critical of government-imposed restrictions on the system, which relies upon QR code technology and the near-ubiquity of smartphones.

Banco de México, the Mexican central bank which is overseeing the effort, has pilot programs underway in three iterations: one targeting young people who receive state benefits; another testing the payment system in a midsize community of 150,000 people; and a third in a remote area with no existing banking services.

Banco Regional SA Institución de Banca Múltiple Banregio Grupo Financiero, Banco del Bajío SA Institución de Banca Múltiple, Banco Santander México SA, Grupo Financiero Citibanamex S.A. de C.V., Banca Mifel SA Institución de Banca Múltiple Grupo Financiero Mifel and Banco PagaTodo SA Institución de Banca Múltiple are all involved in testing, along with popular finance companies ASP Integra Opciones and Fincomún, Servicios Financieros Comunitarios SA de CV SFP.

The government estimates that by Sept. 30, 27 of Mexico's 51 operating banks will be using CoDi, and the central bank will require that lenders develop technology to offer CoDi to its clients.

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Still, there are potential hurdles to convincing the broader public to use it. CoDi will rely upon the central bank's interbank payment system, SPEI, to process electronic payments. The incorporation of that system means that users must have a Mexican bank account with an interbank code. This alone could stymie the program's ability to foster greater financial inclusion, some argue, as barely 40% of Mexican adults currently have a bank account.

For PwC Mexico analyst Luis Granat, there is also skepticism on whether small businesses will embrace the system.

"A big reason why people use so much cash here in Mexico is to avoid paying taxes," he said. "So, how do you convince them to join? I think CoDi will be a useful tool for payments that could help to increase bankization, but I think it's not going to be as attractive as the government thinks."

Granat also said the system has so far garnered a tepid response from the financial industry. "Some banks have joined, but in reality, they are few. We do not see much enthusiasm ... The push comes more from the side of the government and Banxico," he said.

Dissent from fintechs

While the use of QR codes and mobile phones has been successful in promoting financial transactions in other countries — many point to China, India and Kenya as prime examples — in most cases, those efforts originated from private technology companies. Even within Latin America, e-commerce giant MercadoLibre Inc. was behind the development of a QR payment system in Argentina, which helped pave the way for a broader rise in digital payments.

That Mexico's initiative is being driven by the government is fairly unique. And some fintech companies believe that the government missed a step in its attempt.

Alejandro Guízar, founder and CEO of Billpocket, called the central bank's design of CoDi "great but flawed," arguing that it erred by excluding some valuable players — including payment aggregator companies such as Billpocket — from the platform. Such aggregators, which enable mobile phones to serve as point-of-sale terminals, account for about a third of all card payments in Mexico, he noted.

"I believe that the logic, in a commercial sense, would have been including precisely the great catapults for this new means of payment," Guízar said. "We know we could be a triggering factor for the adoption of this."

The CEO stressed that the government still has time to rectify this ahead of CoDi's full launch.

Fintech Mexico, the startup association, claimed that the central bank ignored most of its analysis of the project, and expressed concern that a lack of incentives for market participants could prevent CoDi from meeting its core goal.

Others are more optimistic.

Adolfo González Olhovich, CEO of finance firm TMSourcing, argued that wide CoDi adoption will be swift, as people will recognize the benefits it will bring.

"Card fees are expensive. CoDi will lower these costs for many businesses and further encourage them to adopt the system," said González Olhovich, a former head of non-banking financial institution association Asofom.

As of June 25, US$1 was equivalent to 19.22 Mexican pesos.