Today, the financial services offered by banks benefit from the emerging trends of mobile apps. These apps even drive the emergence of new players in the value chain, including technologies with mechanisms to simplify online sales payments, crowdfunding, or raising capital. That implies a higher levels of financial-service adaptation, meaning financial inclusion with social or market purposes.
Technological advances allow organizations to increase their flexibility and to decide which services may be provided by a third party. In other words, banking institutions can decide to focus on what they consider essential, indispensable, or strategic, and entrust activities such as design, management, and sales to companies that are not part of the financial system.
The strong relationship between finance and technology simplifies access and the permeability of economic services, and digital transactions. These changes have been disruptive for banking institutions, becoming a catalyst to banking and non-banking access levels, promoting value generation and enabling the participation of new technological intermediaries.
This new reality will be fundamental to Mexico’s National Policy of Financial Inclusion, which is developing a comprehensive financial system based on six key points:
- Development of knowledge for the effective and responsible use of the financial system
- Use of technological innovations for financial inclusion
- Development of financial infrastructure in untapped areas
- Greater access and use of formal financial services among the neglected and excluded population
- Generating ore confidence in the financial system through consumer protection mechanisms
- New data generation and measurements to assess financial inclusion efforts.
Regarding financial inclusion, the challenge for Mexico is to exceed the current figures. In 2012, 56% of the population had access to some type of credit, savings, or insurance product; in 2015, this figure increased to 68%. A survey revealed that 84% of individuals with an account have a debit card, but 61% prefer to pay in cash instead of using a card—29% out of habit and 23% for a lack of trust.
According to the Treasury Department, financial education and inclusion sustain the social development of the country and help include people with fewer resources in the benefits of the market economy. It is necessary to consolidate the objectives of financial reform to create an inclusive system with a greater penetration capacity in order to offer better products and services to the entire population.
Technology, a disruptive factor
The path to simplification involves several unresolved challenges based on the existing relationship between finance and technology (Fintech). This industry draws on offering digital client services while financial institutions manufacture banking services, which represents an unprecedented innovation. A third party works with the client through a debit or credit card, without necessarily obtaining, lending, or protecting the values of the established relationship with a bank: the third party provides only the technological application between clients and the bank.
As a benefit, bank users receive the convenience of multiple consolidated financial products through a single player that will try to be more transparent and less expensive. They can offer a combination of products that can come from different financial institutions, banking or non-banking.
From a regulatory point of view, new players find it easier to operate because the implementation costs are absorbed by banking financial institutions. It is simpler to create these new companies, because they do not have to comply with legal and leadership-experience requirements, or even the legal mandatory capitalization levels to address the liquidity of the institutions.
Along with the heightened development of mobile apps, the economic pressure of the competition is also rising. This forces banks to innovate and to continue offering attractive services for clients so they can maintain their profitability levels by providing these same services as competiting institution.
Most innovations are proposed by new players, which allows banks to focus on their strategic activities and transfer the responsibility of the new technological proposals to Fintechs. Banks consider these companies part of the value chain and have started to invest more human and economic resources in opening and adjusting processes to improve their current offerings. One example is that some financial groups have chosen to create database-code-testing environments for independent programmers who aren’t employees to propose changes to digital platforms, in effect building an unlimited international cooperation environment.
Limitations in Mexico
Mexico is a developing country, which implies a limited context for banks from a cultural and societal point of view. The Mexican lifestyle limits the implementation of a series of banking activities due to external obstacles, such as a lack of Internet access to make transactions, limited mobile-device capabilities, and economic informality, among others.
According to the World Economic Forum study “Global Information Technology Report 2015: ICTs for Inclusive Growth,” factors such as connectivity levels and access to devices, an increase in mobile broadband Internet subscriptions, and the importance of ICTs (information and communication technologies) in the government vision, Mexico places 82nd out of 143 countries. Regionally, Chile is the leader in Latin America, in 38th place, Colombia is 64th, and Brazil is 69th.
Due to its close relationship with technology, the scope of banking services depends on social progress; therefore, Mexican citizens will be able to leverage the tools offered by banking institutions and attain financial inclusion as they obtain better mobile devices with access to the Internet.
A new scenario: Connected factors
The new disruptive players cannot be ignored and must be dealt with soon. Twenty of the largest banks in the world have lost a fourth of their combined market value which, according to FactSet data, totals approximately US $465 billion.
How does this scenario affect Mexico? Five of the seven largest banks in Mexico are foreign and are part of some of the main global franchises, contributing significantly to their profits.
Everything is related to the analysis of the banks’ market value loss, since the devaluation of bank shares makes employees increasingly concerned, and compensation packages including — shares options or restricted values — are suddenly less attractive, impacting their structure and performance. In the specific case of Mexico, the National Policy of Financial Inclusion must be led to a safe harbor, since its purpose is to achieve an inclusive financial system capable of offering people opportunities and of fighting informality and illegality. (In 2014, the National Institute of Statistics and Geography’s preliminary figures showed that the share of the informal economy accounted for 23.7% of GDP).
It implies a considerable effort, since the group of factors that are currently determining bank value loss—such as the Chinese economy, U.S. interest rates, oil prices, and the Brexit—will continue building market pressure, as well as other issues, and given the share of foreign banks in Mexico, it could affect the long-term goals of the country.