Re-directing Mexico’s Financial Public Policy

Evolution of the Digital Financial Services

Back in 2023 we wrote that a continued consolidation process would persist within the Mexican digital financial ecosystem. It is precisely what has happened. But it not only has consolidated, it continues to show constant growth. According to a recent report by the Inter-American Development Bank and Finnovista,1 Mexico persists as the second largest FinTech market in Latin America, accounting for 773 FinTechs by the end of 2023. This represents an increase of 18.9% compared to the 650 FinTechs identified in 2022.

However, in spite of the fact that digital financial services promise to reach further territories and a resistant population, serving the unbanked persists as a pending public policy issue in Mexico. In addition, competition conditions in the Mexican financial market can be a constraint to expand and consolidate operations and new business models.

Mexico’s financial regulation is not designed to apply to the digital world. New entrants in the Mexican market need to adjust their models to an already existing (and usually outdated) regulation. As well, as a result of adjusting business models to an entity-based framework (with a closed catalog of activities), many entities are forced to request new licenses and migrate their business to different frameworks in order to survive. This is slowing innovation, disabling access to a full range of products and services and closing the possibility for similar activities to be subject to different regulations.

Competition Conditions in Mexico

The Federal Competition Authority (“COFECE”), as a part of its mandate, is committed to guarantee competition in key sectors that benefit the population, one of which is the financial sector. Healthy competition amongst financial institutions, either traditional or disruptive, old or new, is necessary to obtain efficiency, lower prices, broader product offering, foster innovation and expand welfare. In short, a competitive financial sector directly impacts a country’s economic growth and competitiveness.

In this regard, in October 2024 COFECE published a study on competition and free market access in digital financial services.2 There, COFECE confirmed that Mexico has a significant backlog compared to other Latin American countries in terms of access to basic financial services, even though the number of financial companies is expanding in the country. For example, still approximately half of the adult population does not have a bank account, 9 out of 10 people do not have a credit card and 1 out of 5 Mexicans only uses cash and has no access to other forms of payment solutions. According to the study, an important cause of this backlog are the competition conditions in the Mexican financial sector. Although digital financial services have benefited consumers in recent years, structural, behavioural, and regulatory barriers to entry and expansion persist, preventing the population from benefiting from technological innovation in financial services.

Structural barriers

Part of the problem, according to COFECE, is that Mexican financial regulation is an entity-based regulation. This is, it constrains a combination of activities at the level of entities. Each of the financial institutions (either a traditional bank, a rural bank (Sofipo), a credit of microfinance company (Sofom), an e-money institution (IFPE), a crowdfunding institution (IFCs), or any other) has a closed permitted catalog of activities and they are restricted to perform accordingly.

In addition to the above, each entity has its capital requirements and regulatory burden, and have their applicable provisions scattered in numerous laws, regulations and norms which creates entry and expansion barriers. Other disadvantages, for example, are restrictions on strategic activities that constitute a key advantage for certain entities (banks may offer payroll accounts but Sofipos may not). This fact has been the reason why many smaller institutions (Sofipos or IPFEs) have to migrate and seek a banking license (such is the case of Nu or Mercado Pago). COFECE suggests, for example, that payroll portability be expanded to several financial institutions, thereby granting more options for consumers to choose where to receive salary payments.

As well, new entrants and even consumers may get confused when faced with different legal structures that may offer similar financial services. Companies are also forced to migrate to different financial licenses when the current one is not enough for the evolution of its operations, usually coming with increased regulatory burdens.

Behavioural barriers

Consumers in countries where financial platforms are gaining presence are leaving their traditional banks to try out new business models which offer flexibility, simpler interfaces, personalised products and security. This phenomenon is not happening in Mexico where the reality is that already banked users are trying out new solutions and services while still having accounts in their primary (incumbent) banks. While FinTechs and traditional financial institutions are focusing on customers with bank accounts, targeting the unbanked population is still a major debt.

Regulatory barriers

Other issues come with the heterogeneity and inconsistency in updating all financial regulation. For instance, it is supposed that a banking license, that allows for the greatest number of activities, comes with the most rigorous regulation. However, in some aspects, such as regulation regarding digital agents or contingency plans, banking regulation is less onerous than Sofipo’s or IFPE’s, which are institutions that allow less activities and, therefore, supposedly generate less risk. This violates the entity-based regulation, which states that the greater the combination of activities, the stricter the regulation should be, without any justification in terms of risk.

The foregoing is aggravated in digital financial services considering the time it takes for a license to be obtained. For example, getting a banking license and being able to start operations can take up to 3 years. For digital and innovative business models, 3 years can kill the business. This represents a competitive advantage for traditional banks who can adjust their models and reach the necessary technological milestones to catch up while the entrants are waiting for authorisations, thus creating an important regulatory barrier for the entry of new business models to the Mexican financial system, aggravating the highly concentrated market.

It is a fact that policy makers have been issuing secondary regulations to adapt to the digital reality. Nevertheless, this regulation is not applicable to all entities. The way it has been working in Mexico is that the new regulation first is applicable to banks and, months or years later, relevant adjustments to the other entities’ regulation come. This clearly creates a barrier to efficiency in the ecosystem.

COFECE’s proposals

The development of the financial system must be favoured with greater participation and more incentives for competition. A highly concentrated sector represents a barrier to financial inclusion. Just to illustrate, in Mexico the five largest banks have control of about 80% of the banking system total assets, a percentage that has not changed significantly in the last 5 years, reflecting on fewer options and higher costs.

To ensure a broader reach of digital financial services, COFECE proposed several recommendations to boost competition and foster financial inclusion in the country. Following are some of the recommendations:

A structural modification of the Mexican financial regulation to move toward a scheme that combines activity-based and entity-based frameworks.

The creation of a process where consumers can fully and easily transfer their bank account from one institution to another.

The possibility for Sofipos to offer payroll portability.

More transparency and availability of information to consumers on financial institutions and the services they offer so that consumers can easily compare.

Create the framework for digital correspondents (or agents) in all entities, because until now it is only regulated for banks.

COFECE insists that these recommendations be taken into consideration by policy makers like the Central Bank, the Ministry of Finance and the National Banking and Securities Commission.

Given that to-be financial entities are still facing lengthy and costly authorisation processes and legal frameworks that inhibit the proper deployment of innovative models, no clear progress to serve unbanked population has been noticed. This is, serving the unbanked population persists as a pending public policy issue in Mexico.

The opportunity to accelerate financial inclusion in Mexico is at an unbeatable moment. Achieving it depends on designing and implementing a strong public policy agenda that fosters competition in the financial sector, facilitates digitalisation and evens the playing field for new and existing participants. However, although necessary, COFECE’s agenda for a structural transformation of the sector is a strong progress in the area, but sadly it is not enough.

To illustrate the above, Brazilian Nu entered the Mexican market in 2019, just four years later it is the fifth largest credit card issuer in the country. Nu entered the market as a non-regulated microfinance company -only loans-, then acquired a Sofipo licence -deposit taking and loans- and early on 2024 announced the application for a banking license -deposit taking, loans, investments, payroll accounts, etc-. Mercado Pago, the financial subsidiary of Argentinian e-commerce giant, Mercado Libre, which has operated in Mexico as an e-money institution, is also seeking for a banking license claiming that the purpose is to have a broader capacity to offer a greater variety of services. Ualá and Kapital are two other FinTechs that have purchased banking licenses from ABC and Autofin, respectively. UK’s Revolut was earlier in 2024 authorised to become a bank, although there are still processes to go through in order to start operations in the country. Finally, faced with the pressure being generated by financial technology companies, traditional banks have also accelerated their digital transformation: OpenPay, Bineo, Openbak, Hey and Billú, the digital banks of BBVA, Banorte, Santander, Banregio and Afirme respectively, obtained new banking licenses.

COFECE’s Transformation: from an Autonomous Organism to its Incorporation to the Public Administration

In November 2024, the Federal Congress approved a constitutional reform that eliminates seven autonomous constitutional organisms, including COFECE. Aimed at cutting public spending by centralising the state apparatus, the Federal Congress, controlled by the ruling party Morena and its allies, passed the bill presented by former President López Obrador, backed by the current administration of President Claudia Sheinbaum. Particularly the COFECE will be replaced by a new competition authority, assuring technical and operational independence, but transformed as a decentralised agency of the Ministry of Economy (of the Executive Branch). This new competition authority will also inherit the Federal Telecommunications Institute existing powers in competition matters, consolidating the competition powers in one single authority.

It is a fact that over the last three decades, Mexico has undergone a remarkable evolution in the application of competition policy. Since the creation of COFECE in 2013, the institution has been essential to monitor competition, avoid high costs for consumers, assure the lack of barriers to entry for new businesses, prevent abuse of power in deterioration of small participants and avoid mergers among dominant players. As a note to the above, in early 2024 COFECE was awarded by the World Bank and the International Competition Network for its commitment to promote competition and free market access in priority sectors for the population including the financial sector.

Even though the current administration has suggested that the new competition authority will operate independently, mainly in terms of complying with the US-Mexico-Canada Free Trade Agreement (USMCA) as chapter 21 provides that “each party shall maintain a national competition authority responsible for the enforcement of its national competition laws”, the autonomy of this agency has been widely questioned. The constitutional reform centralises COFECE’s activities and powers under the control of the Executive Branch. As a result, it is likely that the new competition authority will align with the ruling party’s public policy agenda (President Claudia Sheinbaum and MORENA).

With the above, a new era of competition policy in Mexico has begun. It is crucial that the new competition authority continues the legacy of COFECE, as independently as it possibly can. Public policy should ensure the protection of consumers but also the promotion of competitive markets to strategically position the country. Hopefully COFECE’s recommendations in the digital financial sector will be adopted as a priority and purpose of the current administration.

Financial Public Policy Moving Forward

Just in late 2023, the Ministry of Finance launched the first FinTech week, an event that recognised the growth and opportunities of the sector. The intent of the Ministry was to consolidate Mexico as a financial hub for innovation, sustainability, and collective well-being. At the event, regulators called to activate the Financial Innovation Group, a mechanism established in the Fintech Law enacted in 2018, with the purpose of creating a bridge between the public and private sectors to learn about innovations in financial technology and analyse the development of regulation.

Continuity within the Ministry of Finance has ensured that within the agenda initiatives such as strengthening the FinTech ecosystem, ensuring the stability of the financial system and safeguarding the security of users are still a priority.

Late 2024, the Ministry of Finance announced that a second FinTech Week will be held along with new meetings of the Financial Innovation Group. In this event, a proposal Public Policy for the Development of the Digital Finance Ecosystem will be presented, which will be elaborated by the Financial Innovation Group, which has been declared in permanent session.

This clearly demonstrates the importance that the current administration is granting the sector, aiming for improving the regulation. However, it is crucial that these events and meetings take into account competition in the financial sector.

With the competition authority being part of the Federal Public Administration an opportunity arises to continue the legacy and actions of COFECE towards a more competitive, inclusive, transparent and efficient financial sector in the country. A recent study3 states that in 10 years 90% of the Mexican population can benefit from full access to financial services if a public policy focused on financial inclusion is implemented. The way to be taken is crystal clear.