Banks that want to serve low-income customers often find that the costs of opening traditional bank accounts through traditional channels are just too high. The rules for opening new deposit accounts often entail a number of requirements that poor people find hard to meet (i.e., different forms of identification, proof of address, source of income) and providers find too costly to handle (i.e., handling paper-based forms, conducting a personal interview).
Because of this, the notion of “simplified” bank accounts can be very powerful for financial inclusion. Accounts that are capped in balance, and have restrictions on the cumulative value of transactions, and/or channels to access funds, can lead to lower risk for money laundering, therefore enable products that are simpler to access. Numerous countries have set rules enabling “simplified accounts” specifically targeting low income and excluded segments. Some have been more successful than others, particularly those that do not mandate free transactions by providers, that can be opened remotely, and that require forms of ID that are easily accessible.
In August 2011 Mexico approved a tiered scheme for opening deposit accounts at credit institutions (see previous CGAP post here). This scheme implements risk-based account opening requirements for low-value accounts. The innovation here is that it incorporated several “levels” of simplified accounts – requirements increase progressively as restrictions on transactions and channels are eased.
In addition to simplifying account opening, authorities wanted to achieve two other goals: (1) formalize and bring into closer oversight the issuance of prepaid cards, particularly “open” ones which allowed usage across a number of businesses affiliated with the issuer; and (2) define different ways in which cell phones could be used across different types of accounts. The final scheme has four levels – three low-risk accounts, and the traditional current account. Below is a chart that summarizes the characteristics of this scheme, but a more thorough discussion of this and other risk-based regulation in Mexico can be found in the Global Partnership for Financial Inclusion (GPFI) paper “Mexico’s engagement with the standard setting bodies and the implications for financial inclusion.”
Two years later, what has been the impact of this? We can safely say three things:
- It has led to a reorganization of different products in the market around a single scheme based on deposit accounts, giving visibility to products that were previously not considered deposit accounts;
- It has provided more flexibility for commercial banks who participate in the distribution of government payments; and
- It has enabled new products, many designed around payment instruments, which would not have been possible without this regulation.
A more detailed picture follows.
- 9.1 million accounts were opened in the two years that followed the publication of the scheme:
- 50% of which were Level 1 accounts;
- 23% were Level 2 accounts; and
- 4% were Level 3
- 2.9 million prepaid cards that were previously operated by commercial banks for government programs were converted into Level 1 accounts when the scheme came into place, bringing the total to approximately 12 million “simplified” accounts in commercial banks to date.
- The four largest commercial banks drove most of the growth in levels 1, 2 and 3. The types of products that use these lower-risk accounts are as follows:
- Level 1 accounts: Mostly consist of government programs being paid through debit cards. These were previously paid through prepaid cards, operated by banks but not considered deposit accounts.
- Level 2 accounts: Most come from two products directly linked to financial inclusion strategies by the two largest banks:
- BBVA Bancomer launched “Cuenta Express”, a card-based simplified account offered through correspondents and convenience stores, oriented to provide a payments and savings solution to low income customers
- Banamex and Telcel (MNO) launched “Transfer Banamex”, a mobile account offering a convenient person-to-person transfer service that can be opened directly through the phone.
- Level 3 accounts: Banco Santander operates a payments-oriented bank account linked to a debit card.
Overall, from the market perspective, the outcome was positive. From the regulatory perspective, the scheme has yet to pass an evaluation by GAFISUD, the FATF-Style Regional Body (FSRB) for Latin America, which at some point will review how this scheme complies with the current AML/CFT requirements established by FATF. What brings a positive prospect to this evaluation is the fact that after these years, there seem to be enough data available to show the positive response from the market, and hopefully, additional information can quantitatively demonstrate adequate control of potential risks.
------- The author is part of the Technology and Business Model Innovation Team and the manager for Latin America at CGAP. The author is grateful to Martha Casanova and Gabriela Zapata, CGAP consultants, for their contribution to this post.
excelent post. 1st time I saw the benefits of the simplified approach in a quantified manner. great subside for other markets.
Excellent post. I think it is going to be very interesting, as you mention, how the GAFISUD is going to assess the Mexican scheme agains the FTAFT standards. I don't believe the assessment is going to be a negative one; in fact, the Mexican regulation with this proportional approach is mentioned by the FATF itself in their updated paper on AML/CFT and financial inclusion. Let's see what happen!
Great article and the evidence is important factor in the assessment.
These is an excellent article, it shows the reality about the urgent needs in México´s new banking strategy