Breaking out of Branches: Continuing evolution of the Mexican banking sector

June 3, 2009    

Paying bills and buying goods—at one retail location—could become commonplace in Mexico. Ideally, those in the poorest segments of the population will open bank accounts, make deposits, and send and receive money at these locations. In 2008, Mexico joined an increasing number of countries that permit and regulate systems known as correspondent or branchless banking. However, in Mexico, a continuing debate over certain regulatory details could temper outreach to clients.

Banks in Mexico have been using agents in a limited way for years, and the underlying regulatory framework has changed significantly over time. Until 1993, banks used agents known as comisionistas to deliver a variety of services and were regulated by the National Banking and Securities Commission (CNBV). From 1993 until early 2008, the practice of using comisionistas was officially prohibited. However, loopholes existed, and these agents continued to provide some limited services based on broad norms of the general commercial legislation.

At the beginning of 2008 only 30 percent of the adult population had access to formal financial services, despite a decade of economic stability. A wave of companies thus began to enter Mexico’s retail banking market and to target the lower income segment of the population by focusing on alternative channels and creating cost-efficient and scalable models.

These new market entrants helped to catalyze the most recent banking regulatory reforms in February 2008. CNBV was once again given ample regulatory and supervisory powers over the system and, importantly, holds banks fully responsible for the acts of their agents. In December 2008, transactional limits at the agents were imposed by CNBV through revisions of the governing document—the Basic Banking Circular. Specifically, a bank can receive deposits only through its agents up to the equivalent of 25 percent of the bank’s average monthly deposits in the last 12 months. CNBV may allow increases in this limit by request if it is convinced that the bank has adequate liquidity risk mitigation procedures to deal with larger amounts of cash being handled by agents.

The Mexican Congress began debating this 25 percent cap in March 2009. Established players in the market are proponents of the cap. They argue that, as regulated banks, they were required to invest in capital-intensive branches and qualified personnel and that the cap on low-overhead outlets is necessary to ensure fair competition between all providers—old and new.

Opponents to this cap recognize these business-environment concerns, but advocate the correspondent banking model precisely because of its cost-efficient nature. They insist that using an agent’s existing physical and staff networks would limit investment costs and thus final costs to the client. They argue that this model would allow for the most rapid expansion of banking services to the greatest number of new low-income clients.

This March, CGAP published “Notes on Branchless Banking Policy and Regulation in Mexico.” The diagnostic thoroughly analyzes the policy and regulatory environment for branchless banking in Mexico, emphasizes the benefits of reform, and advises on alternatives that could increase access to financial services by the poorest segments of the population.

To what degree can banking break out of the branches in Mexico and reach the greatest number of low-income individuals? As CGAP’s diagnostic states, the final provision of the 25 percent cap has the potential to limitation development of agent business. The ongoing debate in the Mexican congress is therefore important to the future of financial service expansion in Mexico.