Personal financial transfers made by foreign migrants – known as remittances – are common for countries with high levels of economic migration. Yet, in many cases the transfers occur outside the banking system. This keeps remittance recipients from accessing safe financial services, such as savings, credit, or insurance, that improve their economic condition.
Mexico is a case in point. The US-Mexico remittance corridor is the largest in the world, and has been growing at a fast rate. Every year, more than 10 million Mexican immigrants in the US send billions of dollars back to their country. Remittances from the US to Mexico grew by 12.9% in 2022 to reach a record $55.9 billion, roughly double the level registered less than a decade ago. With monthly transfers averaging about $390, remittances add up to a major financial flow, rivaling both foreign aid and foreign direct investment in Mexico.
Nonetheless, Mexico continues to have one of the lowest levels of financial inclusion among upper-middle income countries, with only 49% of Mexican consumers using a bank account. Foreign remittances could potentially promote financial inclusion by increasing demand for formal financial services and generating interest in financial education and literacy. But there are barriers that prevent remittance recipients from taking advantage of formal financial services. These include low income, mistrust in banks, banking cost structure, and regulatory constraints — barriers that new government-sponsored digital solutions in Mexico could help overcome.
Low Demand by Remittance Recipients
Financial inclusion means access to and use of safe and affordable financial services for all consumers. Competition, regulation, and education are essential to achieving this goal. According to a 2012 statement by Mexico’s National Banking and Securities Commission, government regulation, the guarantee of consumer protection schemes, and the promotion of financial education “would improve the financial abilities of all segments of the population.” Financial inclusion is considered a key factor in achieving several of the 2030 Sustainable Development Goals (SDGs), such as eliminating extreme poverty and promoting economic opportunity.
At present, however, remittance recipients in Mexico prefer informal mechanisms over banking institutions when they get and manage their funds. This prevents Mexico’s formal financial sector from becoming a key beneficiary of the constant expansion of US-Mexico remittances. Indeed, over three-quarters of US remittances are still received in Mexico through non-banking institutions.
One reason is a lingering level of mistrust in financial institutions, possibly due to the banking system collapse in the late 1990s that directly affected millions of Mexicans. Remittances are also often used for everyday expenses. As such, they are not seen by recipients as a surplus that can be saved and later used as a down payment on a credit-financed purchase or investment, such as a home or business. Finally, many recipients are not in the labor force or work in informal settings, particularly in rural areas, and for those reasons are less inclined to have a bank account.
Banking Constraints to Financial Inclusion
In the early 2000s several major US banks launched low-fee transfer services for the US-Mexico remittance market that up to that point had been dominated by money transfer operators (MTOs) such as Western Union and MoneyGram. The US Federal Reserve and Banco de Mexico also set up a direct transfer ACH system around that time called Directo a Mexico that any US bank and credit union could operate on behalf of its clients. And the Mexican Consumer Protection Agency (PROFECO) published a comparison tool for remittance fee, in an effort to help stimulate competition in the remittance market.
This shift by banks towards low-cost remittance services was intended to tap into the growing remittance flows to Mexico and draw immigrants sending remittances in as regular bank clients. Partnerships with Mexican banks on the receiving end would in theory increasingly channel remittances into the banking system.
If these changes were partially realized — to a greater extent on the US side — by 2013 a tightening of US regulatory requirements for banks serving foreign clients caused many of the US banks to exit the US-Mexico remittance market. In 2016, the government of Mexico adopted a National Policy for Financial Inclusion (PNIF). The new policy addressed remittance flows in several dimensions: i) promoting the opening of bank accounts by migrants and their relatives who receive remittances; ii) further reducing the cost of sending and receiving remittances; iii) simplifying identification requirements through the use of consular cards, and iv) financial education programs offered in Mexican consulates in the US. Despite these valuable efforts, financial inclusion in Mexico remained one of the lowest in Latin America.
Promising Potential in Digital Finance
Could digitalization reduce the costs of banking low-income customers? Mexico appears to be sufficiently advanced in digital infrastructure development to make digital banking a viable alternative to conventional banking. In 2018 the Government of Mexico adopted the Law to Regulate Financial Technology Institutions, also known at the Fintech Law. Fintech firms have the advantage of being able to offer users minimum fees or even free transfers through their apps. On the downside, requiring a bank account to access digital payments platforms limits the Fintech market to the already financially included, while the requirement to own a smartphone excludes at least a quarter of the population.
A new government-sponsored digital option for US-based remittance senders, however, overcomes some of these limitations. The government agency Financiera para el Bienestar (Finabien), in collaboration with the banking app Broxel, allows Mexican immigrants in the US who are sending money to open dollar bank accounts with Mexican identification. Their recipients in Mexico can open a digital bank account in pesos. Users also receive bank debit cards that can be used to make purchases without fees. This entirely digital system precludes the need to live close to a bank branch, making it particularly beneficial for remittance recipients living in rural areas. Remittances from the US can contribute to financial inclusion in Mexico, but they are not sufficient by themselves. Well-designed policies leveraging cost-effective digital technology hold the promise of making formal financial services accessible to remittance recipients and non-recipients alike. Facilitating access to safe and affordable financial services for all consumers could enhance the positive impact of remittances on the economic and social development of Mexico.
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