Leaders in Emerging Markets: Exploring Mexico’s future in finance and technology
By Catherine Wei ’19 (Dyson); Frances Ling, MPS ’19 (Johnson);
and Lois Liu, MBA exchange student
In NBA 5260: Leaders in Emerging Markets taught by Professor Lourdes Casanova, Mr. Jose Vidal Alcala-Burgos traveled to Johnson to discuss the data science challenges and opportunities in Mexico’s financial technology sector in regards to his own company, Kueski.
Setting the stage: Mexico
Mexico is the one of the leading countries in Latin America with more than 130 million citizens, making it the 11th most populous nation in the world. Over the past seven decades, the population has been growing at an annual rate of 3 percent. Roughly 78 percent of people live in urban areas, while 21 percent of people live in rural areas. Currently, Mexico’s economy relies heavily on trade, with exports and imports contributing to 78 percent of their GDP. Mexican companies often struggle with margin, as the majority of them are smaller players compared to those in highly developed nations of United States and China. Labor and taxation regulations also threaten the growth of these budding businesses. In the third quarter of 2018, the Mexican economy experienced a 2.6 percent GDP growth rate YoY, the strongest since the start of 2017. One of the most notable trade agreements that Mexico has is The North American Free Trade Agreement (NAFTA) now known as the United States-Mexico-Canada Agreement (USMCA), which was established in 1994 to unite the United States, Mexico, and Canada and allow $1.2 trillion in trade.
Poverty has been a major concern of Mexico and its government. There are about 40 percent of people who live in poverty, primarily due to the debate over the minimum wage. The Organization for Economic Co-operation and Development (OCED) reported that 7 out of 10 Mexicans are living in poverty, leading to the formation of the Prospera program which is aimed at supporting these citizens with educational services and employment opportunities. There is hope in the growing middle class of Mexico. An INEGI study reported that the middle class consists of 39.2 percent of the country’s total population, equivalent to 44 million people. This segment of the country has been experiencing moderate growth in income and higher purchasing behavior in consumer goods and luxury goods.
Financial services in Mexico
Financial services plays an important role in Mexico’s economy. Mexico has one of Latin America’s most developed banking systems, consisting of a central bank and six types of banking institutions: public development banks, public credit institutions, private commercial banks, private investment banks, savings and loan associations, and mortgage banks. Other components of the financial system include securities market institutions, development trust funds, insurance companies, credit unions, factoring companies, mutual funds, and bonded warehouses.
Following the 1994-peso crisis, banks in Mexico have been very cautious in their lending, preferring to provide loans only to their most sound customers. However, banks are now beginning to implement programs for lending to a wider range of companies, although at relatively high rates. In general, small-and medium-enterprises (SMEs) have trouble accessing credit. According to a first quarter 2018 Bank of Mexico (BANXICO) survey of established companies, their main sources of financing were suppliers (76.7 percent), commercial banks (31.2 percent), other companies and/or their own headquarters (15.5 percent), foreign banks (5.8 percent), development banks (5.8 percent), and debt issuance (2.6 percent).
The Mexican government has enacted several incentives to encourage more private lending. In January 2014, President Enrique Peña Nieto announced a set of financial reforms to redefine the mission of development banks, promote private financing, and encourage financing with lower rates. The four goals of the financial reform are to:
- promote lending through the development banks;
- expand credit from private financial institutions;
- increase competition in the financial sector; and
- ensure the security of the Mexican financial system.
Mexico’s investment in technology
One of the lucrative opportunities and growing sectors of Mexico has been technology, which Mr. Jose Vidal Alcala-Burgos presented on. The city of Guadalajara has become an innovation hub for IBM, Oracle, and Intel, employing 25,000 people and receiving more than $120 million in investments. Furthermore, a new agreement called Alliance 4.0 was supported by the Ministry of Economy and companies such as Hewlett Packard and PepsiCo to encourage digital systems amount Mexico’s small and medium sized enterprises. A survey by Gartner also revealed that 73 percent of Mexican firms plan to invest in big data operations as a growth strategy. The market opportunity for data and technology in Mexico is rapidly growing to stay competitive with foreign leaders.
The fintech industry in Mexico
Mexico’s financial technology sector is growing rapidly, and has become the second largest in Latin America after Brazil. Currently, there are over 334 fintech startups in Mexico, ranging from micro-lenders like Kueski to mobile phone credit card reader providers. The most prominent sector is payments that accounts for 23 percent of the companies and lending that accounts for 22 percent. The three most common technologies used by Mexican fintech startups are: big data and analytics (25 percent), APIs and open pllatforms (17 percent), and mobile and applications (15%). Most of these startups originate in Mexico City, but have been expanding both within Mexico as well as internationally in the Latin American region.
There is strong potential in the fintech industry especially because of limitations with traditional banking. For one thing, there are only about fourteen bank branches per 100,000 Mexican residents, and inefficient transportation makes it both inconvenient and time consuming for individuals to get to a bank. Many people are unsatisfied with their traditional banking services, or have not had any access to banking at all. New Mexican fintech startups are thus targeting the 61 percent of Mexican adults who do not have a bank account, and it is estimated that the traditional banking sector has the risk of losing up to $4.7 trillion of revenue due to fintech startups.
In addition, a recently approved bill in March to regulate the fintech industry in Mexico will further increase the competitiveness of fintech startups against traditional banks. The law regulates crowdfunding, cryptocurrencies, e-money entities to provide assurance and better awareness for the public regarding these fintech developments. The law also permits open banks and sharing of data by financial institutions through public application programming interfaces (API). This will enable smaller startups to obtain client information from larger banks with authorization. The increasing internet and technology penetration in Mexico also provides greater opportunities for fintech companies to access their target markets. Overall, the current environment provides great potential for the fintech industry in Mexico.
About the authors
Catherine Wei ’19 (Dyson)
Catherine Wei is a senior in the Dyson School of Applied Economics and Management at Cornell University concentrating in in marketing and entrepreneurship. Her professional experience has included marketing for both technology and food industries, along with international experience in Ireland and South Africa. On campus, she is a member of Forté Campus at Cornell, Class Councils, and a tour guide for the Office of Visitor Relations.
Frances Ling, MPS – Accounting ’19
Frances Ling is a student in the MPS in Management – Accounting Specialization program. She graduated in May 2018 from the Dyson School of Applied Economics and Management with a concentration in accounting and plans to pursue a career in auditing. Before graduating, she hopes to accomplish everything on the list of 161 Things Every Cornellian Should Do. She also loves exploring all of Ithaca’s natural beauties and fishing at local lakes.
Lois Liu, IESE Business School exchange student
Lois Liu is an exchange student at Johnson and a second-year MBA candidate at the IESE Business School in Barcelona, Spain. Prior to the MBA, she worked as a consultant at PwC in Hong Kong. Lois has lived in Asia, Europe, and America. She enjoys traveling and learning about the cultures of the different countries. She is aspired to pursue an international business career after graduation.