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Mexico: Cashless Payments with Financial Exclusion

Categories : Cash ensures competition among payment instruments, Cash is the first step of financial inclusion, Cash is the most widely used payment instrument
May 3, 2021
Tags : Demand, Financial inclusion, Mexico, Unbanked, Usage
In Mexico, cashless payments' advocates have seized on the Covid-19 pandemic to nudge consumers away from cash. But they conveniently forget the exceptional levels of financial exclusion in the country.
Manuel A. Bautista-González

Ph.D. in U.S. History, Columbia University in the City of New York

Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford

This post is also available in: Spanish

The Cashless Payments Lobby in Mexico

Before the Covid-19 pandemic, incumbents in the banking and payments industry, regulators, and politicians welcomed the inexorable growth of cashless payments in Mexico. In 2019, the López Obrador administration briefly considered banning cash for gasoline purchases and highway tolls to crack down on tax evasion and money laundering.

Mexico’s 2019-2024 financial inclusion policy has endorsed digital payments to diminish the use of cash. The Ministry of Finance will promote digital payments in sectors such as health services and restaurants. Meanwhile, the central bank will encourage adopting Cobro Digital (CoDi, Digital Charging) in retail payments (Gobierno de México 2020: 87). Other initiatives include the Secretary of the Treasury’s recent proposal to launch banking accounts for Mexican workers in the United States, so that they can exchange their savings and remittances back home at convenient exchange rates through the government’s Welfare Bank.

During the Covid-19 pandemic, cash in the hands of the Mexican public rose a staggering 30.33% from March 2020 to March 2021. As a result, cashless payments’ advocates have raised their voices. For example, Carlos Serrano Herrera, the chief economist of BBVA Mexico, has voiced support for reducing the use of cash as it would curb “crime, tax evasion, corruption, and organized crime.”

IMCO and Mastercard Promote Cashless Payments to Increase Tax Revenues

In December 2020, the Mexican Institute for Competitivity (IMCO) and Mastercard endorsed the expansion of digital payments. IMCO and Mastercard argued that a reduction in the use of cash would increase federal tax revenues by MX$140 billion (US$6.94 billion) by facilitating the traceability of transactions and taxing the informal economy. Mastercard and Ernst & Young estimate the size of the informal economy at 19.2% of Mexico’s GDP.

Digital payments’ traceability “automatically promotes the transparency of flows, besides creating efficiencies and reducing cash management costs,” according to Laura Cruz, managing director of Mastercard Mexico. According to Luis Mauricio Torres Alcocer, researcher and chair of operations and economic analysis at IMCO, the government should grant fiscal exemptions, subsidise point-of-sale terminals, and make cashless payments to “suppliers, contractors, in payrolls and welfare programs.”

IMCO supports imposing caps to paying with cash, a somewhat paradoxical stance given that the organization does not endorse “forcing users or businesses to abandon banknotes and coins or renounce their privacy” (per Alcocer). A 2019 report by the Deutsche Bundesbank concluded that there is no evidence that restrictions on cash usage – such as eliminating high-denomination notes and the introduction of caps on payments made in cash – effectively limit the use of cash in the informal sector or illegal activities.

In January 2020, MasterCard CEO Ajay Banga recognised that cash would not and, more importantly, should not go away. “I think cashless, actually, is something we are not going to get to, and we probably shouldn’t.” Banga pointed out that people rely on cash because they are unbanked or underbanked, they are on the wrong side of the digital divide or lack a formal proof of identity. Mastercard recently launched its first “Digital Country Partnership” in Latin America with Panama’s Government Innovation Authority (AIG) to promote financial inclusion through digital payments.

In 2017, Less than a Third of the Mexican Population Made or Received Digital Payments

Advocates for digital payments tend to minimize the fact that most Mexicans are underserved by the country’s banking and financial sector and lack the necessary means and payment instruments for partaking in a cashless society. According to the World Bank Global Financial Inclusion database (2017), only 64.6% of Mexicans 15 years and older had a mobile phone; 45.4% had internet access; only 36.9% had a bank account. Regarding access to payment instruments, 24.6% of Mexicans 15 years and older had debit cards; a meager 9.5% had credit cards; only 31.7% made or received digital payments.

A majority of Mexicans are unbanked or underbanked. According to the country’s 2018 National Survey on Financial Inclusion: 31.7% of respondents (representing 25.05 million Mexicans) were unbanked or financially excluded, meaning that they had no banking product whatsoever, and 23.5% of those surveyed (18.61 million adults) were financially included but underbanked as they had only one financial product (INEGI, CNBV 2019: 9). According to Finbold and the British research firm Merchant Machine, Marrakesh, Vietnam, Egypt, the Philippines, and Mexico are the countries with the largest unbanked populations.

The Uneven Distribution of the Cash and Banking Infrastructure in Mexico

Financial infrastructure coverage is insufficient in Mexico, particularly in Chiapas, Oaxaca, and Guerrero, the poorest states in the country. According to the Financial Studies Foundation, in 2019, 76.6% of municipalities concentrating 98.2% of the country’s population had a point of access connecting Mexicans to financial services (Fundef 2019: 6-7, 10, 17). Economic powerhouse states such as Mexico City, the State of Mexico, Jalisco, and Nuevo León concentrate most ATMs and bank branches (see Graph 1).

Graph 1. Mexico: Geographic Distribution of ATMs (horizontal axis) and Bank Branches (vertical axis) Across States Mexico: Geographic Distribution of ATMs (horizontal axis) and Bank Branches (vertical axis) Across StatesSource: Fundef 2019: 17.

Know your Customer: Mexicans Prefer Cash in Retail Payments

Financial exclusion and the informal economy cannot explain Mexicans’ stable preference for cash in payments. Cash is widely used in the country due to the lack of adequate financial products on the supply side and Mexican’s preferences and habits on the demand side. Mexican regulators and banking and financial officers implement financial inclusion policies with supply-side solutions and products, thinking that demand will arrive eventually. However, demand for cash alternatives has not materialized in Mexico (Fundef 2019: 9; Fundef 2020: 22, 33, 36-37).

The majority of Mexicans prefer to use cash in most transactions, according to the 2018 National Survey on Financial Inclusion. This happened in categories including purchases of less than MX$500, equivalent to US$25.24 (94.9%), purchases of MX$500 or more (87.5%), household rent payments (89.8%), taxes or fines (92.3%), public utilities such as water and electricity (95.2%), private services such as telephone and internet (91.5%), and public transportation such as subway and bus rides (97.6%, see INEGI, CNBV 2019: 131-132, 135-139).

The collapse of the Mexican economy in 2020 during the Covid-19 pandemic (with a GDP contraction of 8.5%, the steepest fall since the Great Depression) will almost certainly aggravate financial exclusion. Advocates for digital payments endorse carrots and sticks from the federal government as the best way to diminish cash use in Mexico. However, making digital payments the axis of financial inclusion policies requires “careful evaluation and planning,” according to Irene Espinosa, member of the board of Banco de México.

This post is also available in: Spanish