The Next Wallet Wave
It’s the end of wave season in Beach Break Zicatela, one of the best surfing spots in the world. Famed waves forming powerful barrels hit a beach just in front of Puerto Escondido, a small fishing town in the state of Oaxaca. The best surfers, usually local residents, have started gliding the ocean before they could ride a bike. For them, catching the right wave is part of a craft you develop for decades. They understand how the sun hits the water and reveals its shape from afar. They know almost instinctively when a good set of waves is coming and get in position to ride the hell out of them.
For me it’s sort of like time slows down. You become hyper-aware of a lot of different things — the way the wave is breaking, timing, putting yourself in the right part of the barrel. It takes all of your mental capacity to do it just right. — Kelly Stater, pro surfer
Much like local Puerto Escondido surfers, entrepreneurs in Mexico are trying to catch a different kind, no less exhilarating, waves. Indeed, the waves of adoption of mobile-only financial services by consumers are the biggest fintech trend in tech.
International investors like Andreessen Horowitz and Goldman Sachs are pouring money into what some see as the biggest fintech opportunity in Mexico: challenger banks — bundles of financial services for consumers. Think Monzo, Revolut, Chime, Paytm or Chinese giant Ant financial for Mexico.
While Banks are still figuring out how to connect their own retail mobile apps to the internal banking backbone, a software Frankenstein, they’re giving space for startups to take advantage of a unique moment. It’s not that they don’t serve most of the potential customer, they do. Banks just serve them poorly. User-centric and asset-light tech challengers are gaining traction and preparing for an all-out assault of financial services.
Fertile land for fintech
In March 2018, the Mexican congress approved the first comprehensive fintech law in Latin American joining a small group of countries around the world with innovation-friendly rules of the game. By September 2019 deadline for applications to become a regulated fintech, the CNBV, Mexican financial services regulator, received 85 applications of which 60 referred to wallet models. This means that the regulatory risk, one of fintech’s biggest uncertainty, for investors and potential acquirers can be significantly reduced.
A country better known for avocados and walls than its financial system, Mexico has one of the fastest instant government-supported money wire systems in the world: SPEI. Starting this year, the new government has teamed up with Mexican banks to build a mobile-first layer. It is deploying CoDI across the country, a new QR code-based project leveraging SPEI network. Did I mention both are commission-free?
The Mexican credit bureaus, Buro de Credito and Circulo de Credito, launched decades ago are as sophisticated and broadly used as the American credit scores. It lowers the barrier for a startup to access consumer creditworthiness and add additional data pools to create powerful credit scoring algorithm.
While pitching his latest fintech startup to a big bank, Oliver Samwer famously argued banks were fast becoming the plumbers of the financial industry, therefore essential but inconsequential. The financial pipes, valves and, tanks managed by financial institutions, and government entities work well in Mexico. Technology companies have the choice to connect to any number of local, international banks and government infrastructure.
Banking the underbanked
While much of the talk about developing economies is about banking the unbanked, I believe the biggest opportunity lies with consumers already linked to the financial services. Smartphone adoption and debit card penetration are actually pretty high, higher than 60% according to INEGI and the World Bank. It covers all the middle class and the emerging middle class. However, credit card access remains abysmal compared to other Latin American countries.
Despite access to banks, transactions above 25 dollars are still 90% cash-based according to the Mexican statistics agency, INEGI, often driven by the informal economy. A typical blue-collar worker gets paid on a debit card every two weeks and goes directly to an ATM or the bank branch to cash her total balance. As the penetration of e-commerce and digital services has grown, this huge consumer base still uses cash to pre-pay their phones, subscribe to Netflix and Spotify and Uber. Every time digital money transforms into physical cash and vice versa, retailers and banks bite several percentages points off hard-earned money.
These fees have skyrocketed as digital adoption continues and banks educate clients to move their financial activities online, and with good results. According to EY’s Consumer adoption index, Mexico’s consumer adoption of fintech is one of the highest in the world with 70% of fintech adoption, higher than most rich economies studied. The consumer seems ready to move to digital money.
Time to re-bundle
Over the past ten years, fintech companies have won market share by focusing on a single financial need, unbundling banking services such as lending, payment gateways, wealth management, and insurance. Today, a new global trend calls for providing more services to a captive client base to enhance unit economics and retention. What differentiates wallets is the entry point: crypto exchange like Bitso, mobile top-ups like UnDosTres, lending like Zinobe or asset management like Fintual.
Connecting to consumer’s financial daily life creates daily interactions, building one of the strongest relationships of consumers and companies. Non-financial services industry players such as Apple and Grab are quickly seizing on the opportunity to expand to financial services. In Mexico, eCommerce giant Mercado Libre and mobile telecom operator Weex are both leading the challenger bank race by offering ambitious wallet products. Micro-mobility leader Grin acquired earlier this year Flinto, a Mexican wallet to expand to a super app strategy with a wallet at its core. These companies have a broad consumer base with frequent interaction and most importantly a brand people love unlike, you guessed it,… banks.
Some industry observers argue there are too many dollars and players chasing the same opportunity. I disagree. Yes, most will not scale to become good VC investments but the diversity of well-financed initiatives all but assures the Mexican financial services industry will have successful independent Neobanks. Timing and positioning in the consumer adoption wave will matter as much as strong execution.
If banks and financial institutions keep underinvesting in entrepreneurial innovation, the next wave of challenger banks maybe even bigger. Beyond consumers, hundreds of thousands of SMEs are underbanked, lacking access to credit, insurance, and essential financial services.
Beyond the hype, the challenger bank trend in Mexico may be even stronger than people think. Formidable teams are ready to seize the opportunity.
I don’t need easy. I just need possible.
― Bethany Hamilton, pro surfer