(Agradecemos a Apremy por realizar la traducción en español .)
61% of Mexicans over the age of 15 don’t have a bank account.
That means 53 million Mexican adults lack access to basic financial services. That’s double the population of Texas, or six times the population of Mexico City.
If you were in this position and sought even a small loan under $7,000 Mexican pesos (about $425 USD) to attend school, address medical emergencies, or get a small business off the ground, you could face interest rates well above 100%. Many low-wealth individuals don’t trust financial institutions, so they are forced to take a risk and hide cash under the mattress or seek out often predatory alternative financial options.
Truth be told, the banking world just doesn’t quite know how it can address this market demand. So how can these people access the services they need?
How Village Capital Took A Good Hard Look At Financial Inclusion
Village Capital (VilCap) finds, trains, and funds early-stage ventures addressing global challenges. In collaboration with PayPal, Village Capital is canvassing the Mexican landscape for entrepreneurs addressing these large-scale challenges in financial inclusion.
But before finding these entrepreneurs, we needed to clearly understand something: what are the underlying problems that the un- and under-banked in Mexico really face?
In order to answer this question, we convened 20 experts in financial inclusion and financial technology in Mexico to join us for a Financial Inclusion Roundtable led by VilCap’s global Director of Financial Technology, Bidisha Bhattacharyya. This summit brought together leaders from across the industry like Rubens Pasquale (PayPal), Gabriela Zapata Alvarez (financial inclusion consultant for organizations like CGAP, Gates Foundation, Accion), Geoffrey Fichte Pena (HSBC), and Eduardo Mapes (Northgate Capital).
People don’t see the upside in being involved in the system; they want to be off the radar.
-Jonathan Lewy, Managing Partner of Investomex
Each participant chimed in with what they saw as the #1 challenge facing the country’s un- and under-banked, painting a picture of the challenges facing low-wealth populations. Jonathan Lewy, Managing Partner of Investomex, noted, “People don’t see the upside in being involved in the system; they want to be off the radar.” Grant Taylor, founder of VilCap portfolio company Quotanda, noted that until financial services can accept electronic signatures, technology-based innovation will remain limited. Culture, regulation, and stagnation all stand in the way of change that 53 million Mexicans need.
After examining the problem from various viewpoints, Village Capital and the Roundtable attendees diagnosed three primary concerns, and pinpointed their respective possible solutions that we hope Mexican entrepreneurs can provide.
One-quarter of rejections for credit card requests in the country are due toproblems with the Credit Bureau. Simply stated: Credit scoring is outdated. Innovations in credit services outpace the traditional credit scoring methods. Mexicans largely depend on cash transactions, limiting the data that traditional credit bureaus can use to determine credit worthiness. Regulations force banks to use traditional credit scoring methods and banks have little to no incentive to lend to “risky” populations (read: “low-wealth”). Making matters worse, Mexicans lacking bank accounts and financial services often don’t know where to start to maintain their credit score in the green (they’re not alone; over 42% of Americans don’t know either).
- Adapt the US and Nordic models of credit scoring to Mexico’s needs
- Implement alternative risk scoring
- Improve user experience to help consumers understand the system
In Mexico, there are no standards to verify one’s identity. The closest parallel to the US’s social security number or India’s electronic Know-Your-Customer (eKYC) is a government-distributed voter ID card, only for those at least 18 years old. The databases that manage the information on these cards are fragmented, unstandardized, and difficult to access. This makes it extremely difficult for financial service providers to track users, share information, and deliver an overall smoother and safer experience for consumers.
- Authenticate through behavior analysis — e.g., phone transactions, payments history, biometric data (after all, iPhones can now scan fingerprints and have high resolution cameras)
- Encourage the Mexican government make public the voter ID database
- Create an alternative database with private information encrypted through “hashes” to make the anonymized data available
- Use blockchain technology to lower the burden of traditional banks’ verification needs
Even though new technologies have been deployed in the country, it’s not in the hands of those who need it. And why? Weak connectivity and few points of service. Though 90% of offline payments are routed through 13,000 OXXO convenience stores in Mexico, even OXXO doesn’t reach many rural communities. Internet access is also restricted to more-developed areas, only reaching 41% of the total population. 10% of the population–that’s 12 million Mexicans–doesn’t even have cell phones, and as such is completely excluded from mobile finance.
- Install intelligent ATMs that can provide various services and convert old phone lines into payment platforms
- Create local communities that accept bitcoin as a valued currency
- Adapt regulation to enable services to replicate Africa’s mPesa model in Mexico
So What Next? Find the Entrepreneurs.
After analyzing these three fundamental challenges, alongside others discussed during the Roundtable, the Village Capital team, in consultation with PayPal, finalized its 2016 program problem statement to describe the financial inclusion challenges that we believe entrepreneurs are best positioned to address. This problem statement will guide our efforts to find, train, and invest in the best entrepreneurs in the region improving financial inclusion for Mexicans who need it most. The 2016 edition will build on Village Capital’s award-winning curriculum, plus updated sessions with support of Accion Venture Lab’s deep experience in FinTech investments in Mexico. The program will also result in an opportunity for two ventures to receive $75,000 USD each in coinvestment from VilCap Investments and Pomona Impact.
Here’s what we developed:
Access to bank accounts in Mexico has grown to 39%, representing an impressive 10% increase since 2010. While the progress is promising, 53 million Mexicans still lack the access to financial services to support their families and small and medium businesses (SMBs), as well as to protect from financial shocks. Although many national and international financial institutions are exploring ways to serve this unbanked segment, they’re stifled by the cost of service, poor infrastructure, inability to validate user identity, outdated regulations and credit scoring methods, low competition, and lack of incentives to change.
To address these challenges, Village Capital and its partners seek financial technology entrepreneurs with market-based solutions that:
- Develop user-friendly products and services that align with needs of under-banked individuals and SMBs in the Mexican context;
- Innovate credit scoring models to enable affordable access to finance;
- Reliably authenticate user identity, such as through blockchain, biometrics, behavioral data, and open networks;
- Increase financial literacy and provide incentives for cash-centric consumers to adopt traditional and digital financial services; and
- Improve distribution channel infrastructure, enabling financial institutions to affordably and efficiently serve rural and urban un- and under-banked populations.
We thank the 20 great minds at the Roundtable for welcoming Village Capital to Mexico for a second generation of entrepreneur training throughVillage Capital FinTech: Mexico 2016. With the support of PayPal, this intensive, three-month program will support selected entrepreneurs with anaward-winning program curriculum; introduce the entrepreneurs to potential customers, partners, and investors; and provide them opportunities for investment capital.
In the meantime, if you know a great early-stage venture addressing the challenge of accessing financial services in Mexico, we’d love to hear from you. Reach out to Associate Ben Younkman at [email protected].
Do you see other challenges and solutions to access to finance in Mexico? We’d love to hear your thoughts in the comments below!
Thank you to the Financial Inclusion Roundtable participants: Agustín Aramburu, AXA; Alejandro Guízar, Billpocket; Eduardo Mapes, Northgate Capital; Eric Perez-Grovas, Jaguar Investments; Gabriela Zapata, CGAP, Metlife Foundation; Geoffrey Fichte, HSBC; Grant Taylor, Quotanda; Hector Cardenas, Conekta; Hernán Garza, MasterCard; Jackie Hyland, Accion Venture Lab; Jonathan Lewy, Investomex; Jorge Ortiz, Carpo Capital & FinTech México A.C.; José Rodríguez, Bitso; Juan Carlos de Alba García, SWIFT Mexico; Luis Roberto Perez, Credilikeme; Martha Casanova, CGAP/IFC; Rafael de Haro, VARIV Capital; Rubens Pasquale, PayPal; Camilo Velasquez Restrepo, Bancolombia; and Tyler Clark, Pomona Impact.
Thank you to the Village Capital team for your support: Bidisha Bhattacharyya, Ben Younkman, and Dustin Shay.