Will correspondent banking increase financial access in Mexico? Three experts share their predictions.
BY LATIN AMERICA ADVISOR
Mexico recently approved legislation to allow financial services companies greater leeway to do business through so-called 'bank correspondents,' which enable banks to create alliances with commercial businesses to handle banking transactions at retail locations around the country. While the law aims to increase financial access for Mexico's unbanked population, estimated at 70 percent, it faced some opposition during the legislative process from traditional banks that feared correspondent banking might put them at a disadvantage in comparison to outfits like Banco Wal-Mart that already have a strong presence at commercial establishments. Can correspondent banking significantly expand financial access for Mexico's unbanked population? Which companies stand to lose or gain from the new regulations?
Vicente Corta, partner at White & Case LLP in Mexico City: Correspondent banking is certainly an expeditious and cost-efficient model to significantly expand financial access for Mexico's unbanked population. This model will allow both traditional and correspondent-oriented banks to increase their financial services offerings without incurring infrastructure and labor costs associated with the establishment of traditional bank offices, while also taking advantage of the existing client base of commercial correspondents. The new set of correspondent regulations tends to enhance effective competition conditions in the banking market and could lead to better quality services and could cut down transaction costs and commissions for the clients. However, the new regulations set forth limitations and restrictions with respect to the number of transactions that banks may perform through the correspondent model. Such restrictions and limitations seem to create entry barriers for new participants in the banking business and reduce access by unbanked population to the industry. Restrictions and limitations should be oriented to the business and moral qualifications of correspondents rather than to the number or volume of the transactions to be conducted by banks through this business model. To the extent that the new regulations can effectively create adequate competition conditions and reduce entry barriers to the market, correspondent-oriented banks will be able to exploit their business model and bring new clients to the financial services sector, traditional banks will have an opportunity to offer their more sophisticated products to the population that will now have a banking culture, and the currently unattended population will have access to competitive and cost-efficient financial services.
Tapen Sinha, the ING chair professor of risk management at the Instituto Tecnologico Autonomo de Mexico in Mexico City and professor in the University of Nottingham Business School in England: The law relating to 'bank correspondents' is supposed to inject more competition into the oligopolistic banking industry in Mexico. In Mexico, less than 30 percent of households have bank accounts. In comparison, the figure is more than 60 percent in Brazil. Unlike the Banco Popular do Brasil, the bank specifically targeting the low-income cash transacting public in Brazil, there is no such banking facility in Mexico. Four large banks in Mexico dominate the industry: BBVA Bancomer has 1,862 branches, Banamex 1,598, HSBC 1,251 and Santander 1,026 branches. The correspondent business comes with strings attached: 65 percent of a bank's operations for the first 18 months—and 50 percent thereafter can be of this nature. The law caps transaction amounts: cash withdrawals or checks cashed cannot exceed 1,500 'unidades de inversion' (UDIs), approximately 6,000 pesos (US$ 468), and deposits have a limit of 4,000 UDIs, 16,000 pesos (US$ 1,250). There are three large entities with great interest in this opportunity: Banco Wal-Mart, Banco Coppel and Banco Compartamos. These companies already have large retail outlets. For example, WalMex owns department stores (Suburbia), supermarkets (Wal-Mart and Superama) and warehouse chains (Bodega Aurrera and Sam's Club). It also owns Vips restaurants. In all, it has over 1,200 outlets. Thus, in one fell swoop, WalMex can become one large competitor in the banking sector. WalMex and others like it have a big advantage: they operate longer hours. And unlike bank ATMs that are out in the open, they have the advantage for being secure—a point very important in Mexico.
Antonio Ocaranza, corporate communications director for Wal-Mart de Mexico: Wal-Mart de Mexico has more than 3 million customers per day. More than 50 percent lack banking services. Part of our vision to improve the quality of life of Mexican families also involves having access to credit and banking services at an affordable cost. It's also convenient: customers of Banco Wal-Mart can go to the cashiers at Wal-Mart de Mexico stores to receive deposits, make withdrawals and pay services. Already, there are many financial services provided at our cashiers, from the cash-back option on payment of purchases, to tax collection or making payments for different services, such as utilities. As in the case of other countries where this mechanism has been implemented, this ready access to banking services through our in-store cashiers can have a positive effect on the unbanked population, since it provides a more convenient and easier way to access banking services and reduces the cost of money services by using existing infrastructure more efficiently.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.