Mexican market experiences a boom, attracts Brazilian firms’ investments
06/24/2024
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Nubank’s Cristina Junqueira — Foto: Carol Carquejeiro/Valor
Brazilian fintechs—and even traditional banks—are betting on expanding operations to Mexico. Latin America’s second-largest economy is an obvious destination given its market size, but there are other factors behind the bet.
Mexico has benefited from the U.S. strategy of nearshoring (relocating production chains closer to consumer markets); the country’s financial sector’s regulatory agenda is gaining strength; and it has a largely unbanked population, which translates into a huge growth potential. At the same time, the use of cash remains very strong, for cultural reasons—which can be a hindrance, but also opens up opportunities.
Brazilian digital bank Nubank, which filed for a banking license in Mexico last year, has highlighted the country among its priorities for 2024. Argentina-based Mercado Pago—with its largest operation in Brazil—applied for a banking license in May and cited the Mexican market as an important front for growth. Among Brazilian traditional banks, Bradesco already had a card operation in the country and decided to expand it in 2022, with the acquisition of a Mexican finance company, which was approved in February this year.
According to a study carried out by innovation firm Finnovista in partnership with Visa, at the end of 2023, 773 local fintechs were operating in Mexico, compared to 394 in 2019. The report also indicates that there are another 217 foreign fintechs, most of which are from the U.S., Chile, Colombia, and Argentina. The most representative segments of activity among local financial startups are loans, payments and remittances of funds, and technology for financial institutions. Around 60% of fintechs in Mexico have products and services aimed at the business-to-business (B2B) market.
Another survey, carried out by Bank of America based on data from Sensor Tower, revealed that Mexico has approximately 19 million active neobank users, representing some 15% of the population. The level is similar to what Brazil had in 2018. The percentage in Brazil rose to around 80% in 2021 and has stabilized since then.
Although the Brazilian and Mexican scenarios share some similarities, BofA analysts point out that there are also relevant differences. In Mexico, the adoption of fintechs is growing at a slower pace and there is a higher level of concentration compared to the Brazilian market. According to these data, Mercado Pago and Nubank combined represent around 60% of users. Next are PayPal, Spin, and Hey Banco.
Mexico represents an “almost perfect opportunity” for Brazilian fintechs and banks that seek to take operations abroad, said Daniela Dutra, leader of banking solutions at Capgemini. The country boasts characteristics such as relative economic stability, low banking access, and more recent opening of the financial system, which also means little global competition. At the same time, the level of credit compared to GDP is almost half that seen in Brazil.
Despite the opportunities Mexico brings to foreign companies, there are also challenges, including understanding consumer behavior. “The level of financial education is low and, due to the poor access to banking services, many people have no credit history, which makes credit granting more difficult. There is also poor information regarding fraud,” Ms. Dutra points out.
In an interview with Valor, Cristina Junqueira, co-founder and head of growth at Nubank, points out that Mexico has a GDP per capita approximately 30% higher than that of Brazil and a low rate of financial inclusion, which the bank sees as a transformation potential. Nubank has invested more than $1.4 billion in Mexico and boasts a 7 million customer base. “Mexico is our top priority for this year. We aim to continue expanding our customer base and significantly contribute to financial inclusion in Mexico.”
She points out that some 82% of the Latin American population still uses cash as the top payment method, a huge difference from the Brazilian market, highly digitized with the instant-payment system Pix. On the other hand, smartphone adoption in the region is expected to grow to 93% in 2030, from 79% in 2022. “Despite its particularities, connectivity opens up a huge potential. And that’s where innovations such as instant-payment systems and open banking emerge, with the potential to shift the financial scenario in Mexico.”
In an interview with Valor this month, Mercado Pago senior vice-president André Chaves argued that the firm has a solid starting point in Mexico given its experience in e-commerce. As the level of banking access is low, being able to see consumer behavior beyond banking is a differentiator, he explained. Mr. Chaves added that banks’ biggest competitor in Mexico is cash, so there is room for the expansion of many rivals. “There is large ‘open water’ [to explore]; therefore I think the two [banks] can grow at very accelerated rates without bothering each other. That said, I want to be the one with the most growth,” he said about Nubank.
Daniel Berman, head of sales at Capgemini Brazil, said the Mexican financial segment was slower to adopt innovation and fintechs struggle more to access funds than in Brazil. According to Finnovista data, the second main challenge reported by Mexican neobanks is accessing funds. The first challenge is scaling and internationalizing operations.
The regulatory framework for fintechs in Mexico, implemented in 2018, is seen as an important step for the segment, although there are points requiring attention, according to Brunno Morette, a partner in corporate law and acquisitions at Cascione Advogados law firm. “There are still few allowed activities and a lack of specific regulations,” he pointed out. However, the Central Bank of Mexico (Banxico) and the National Banking and Securities Commission (CNBV) are following the subject closely and innovations are expected ahead.
Mr. Morette also notes that, given the size of Brazil, it is natural that companies focus first on the domestic market before seeking expansion. However, in the case of neobanks, the logic is different. “For fintechs, internationalization is easier and faster. And they will usually look first at neighboring or regional countries.”
Payments and banking platform Dock is among the Brazilian companies eying the Mexican market. In 2021, the company acquired Mexico-based Cacao, focused on card processing solutions. Providing financial services for companies, Dock is present in 11 countries in Latin America and has around 40 clients in Mexico, which represents 10% of the total. “We always had the vision that this is a market with many opportunities. We have been following the regulatory steps since its early movements,” said Anderson Olivares, Dock’s general manager for Latin America, based in Mexico.
Mr. Olivares says there is synergy between the company’s operations in Brazil and Mexico and a lot can be replicated. He points out that the big difference is the regulatory moment of each of the countries. In Brazil, one of the ways in which Dock operates is by sharing its banking license with other companies, the so-called banking-as-a-service (BaaS) model. In Mexico, this format is not yet recognized by regulatory bodies and, therefore, each client needs to have a license. On the other hand, fintechs can share its relationship with card brands to issue credit cards. “The central bank’s agenda is also advancing to increase competition in Mexico,” he adds.
While the Mexican market is new for fintechs, the scenario is different for conventional banks. The market is dominated by foreign players, such as Citi, BBVA, Santander, and HSBC. Still, the favorable moment has boosted the interest of some participants. Bradesco has had a credit card operation in the country since 2010, and two years ago it announced the acquisition of a popular financial institution (SOFIPO), which is similar to a license for operating a finance company in Brazil. At the time, it had some 3 million customers and said its goal was to double this base and increase its portfolio by fourfold in five years.
Alexandre Monteiro, the head of Bradescard Mexico, said the bank expected a faster approval for the deal but had to develop new systems, instead of scaling what it found at the SOFIPO. “The goals we mentioned at the time were based on digital accounts. We continue aiming to grow a lot. We are developing new platforms to compete with the main players and want to offer a world-class customer journey.” He says the current base has 3.2 million credit cards and the credit portfolio grew 15% in the last 12 months, well above inflation, of 4.5%.
He says the Mexican banking system today is similar to what Brazil had five to 10 years ago but expects this difference to shrink. “Mexico started a few laps behind [Brazil] but that gap tends to reduce over time. There is an ongoing cultural change, young people are opening digital accounts as they don’t want to have to go to a [physical] branch,” he said. The executive is based in Guadalajara, where Bradescard is headquartered.
Carolina Fera, vice president of financial services at the local fintech Clip, a card acquirer, is also attentive to the ongoing transformation of the Mexican banking system. Ms. Fera, who is Brazilian, was hired by Clip to help expand the offer, which includes accounts for small businesses. “General Atlantic was increasing investments in Mexico and looked for executives in Brazil, which is the most advanced market in Latin America. That’s how I came to Mexico. I think Brazilian advances have influenced regulation in the entire region,” she said.
However, she points out that Mexican instant systems CoDi (Cobro Digital, for payments), launched in 2019, and DiMo (Dinero Móvil, for transfers), launched in 2023, could be improved to accelerate its adoption, as happened with Pix in Brazil. “Nearly 70% of transactions in the Mexican market are still in cash. These systems aren’t as user-friendly as Pix, as they allow only one type of key to be registered.” She points out that facilitating use with the help of technology is important but the local reality also needs to be observed. “Wanting a fully digital model could be a risk. You can’t go straight from zero to 100%. Human relationships and in-person service are still very important here [in Mexico].”
*Por Por Mariana Ribeiro, Álvaro Campos — São Paulo
Source: Valor International