Mexico is still underdeveloped in consumer lending, especially financial cards.
BY IVAN FRANCO
Mexico was between the most affected countries by the global economic crisis. With a decrease of 6.5 percent in GDP and a similar drop on private consumption, the country also suffered a decline in overall consumer finance operations in 2009. Total value of consumer finance transactions in the country decreased by 2.4 percent in constant terms in 2009 (cash and credit). Such a drop was driven mainly by cash transactions as the Mexican economy is 68 percent cash-based. In addition, value transactions of financial cards fell 1.1 percent in the same year. The total number of cards in circulation grew just 2 percent in 2009, a slowdown compared to the double-digit growth rates experienced during the 2004-08 period. This was a direct consequence of the global economic recession after the financial shock in late 2008. Since then, consumer finance operations in Mexico started to stagger due in part to the reluctance of local banks and financial institutions to facilitate credit. The lending situation in Mexico was similar to the risk adverse scenario that permeated in all developed and emerging economies after the financial distress. For example, consumer gross lending which is comprised mainly of mortgages fell 20 percent in 2009 in constant value terms. This is just a macro indicator of the situation that prevailed in the country where funds and liquidity vanished from the economy.
AN UNDERDEVELOPED SYSTEM
Apart from the negative financial and economic scenario experienced during the crisis, Mexico is still underdeveloped when it comes to consumer lending and banking operations, particularly financial cards. The average per capita of financial cards in circulation in Latin America remained at 1.5 cards in 2009, whereas in Mexico the number was nearly three times lower, with just 0.6 cards per inhabitant. Such a lack of development is attributed to the high costs of borrowing in the country and the relatively poor competitive environment which is comprised of only a few large banks and financial institutions. It is estimated that only four banks held 86 percent of the market for credit card value transactions in Mexico in 2009. The situation led to high lending fees and once again, a low per capita amount for gross lending. For example, Mexico’s per capita gross lending for cards only reached US$166 in 2009, whereas the average for Latin America was US$439 during the same year.
Leading banks, which are local subsidiaries of multinational corporations, profit in Mexico from high commissions in credit card lending, arguing that the high risk of non-payment force them to charge elevated fees that by the end of the day discourage the use of credit cards. According to CONDUSEF (National Commission for the Protection of Users of Financial Services), annual credit card commissions in percentage terms range between 21percent and 88 percent, depending on the bank.
Overall, the relative lack of use of credit cards is attributable to two fundamental reasons:
On the one hand, the high proportion of informality in the economy discourages banks to lend money. A large portion of Mexicans do work in informal activities and another portion is migrating every year to the United States, with only a small percent of them having any credit history. Of the more than 43 million locally occupied workers, only 15 million are registered in the social security system. The remaining 28 million are not necessarily informal, but a majority of them may be considered a risky segment of potential consumers for lending.
On the other hand, there is an abundance of low-populated and remote rural areas in the country, making it difficult for banks to provide financial services there. Approximately 8 million work in rural areas where there is very little record keeping. Setting up banking infrastructure, such as branches and ATM’s is simply impossible to banks when looking to maximize profits. Moreover, some of these rural areas are net suppliers of migrant workers, making it even harder for banks to undertake an effective screening strategy for collection. For these reasons, captive consumers of financial cards, particularly credit cards, face high costs for borrowing, which affects the virtuosity of the lending system, limiting further development.
In short, the culture of credit is poor, in both parts, financial institutions and consumers. This situation has led to an enormous gap in lending, which has been overcome, to some extent, with the appearance of several new financial institutions.
NEW LENDING ALTERMNATIVES
A considerable number of emerging financial institutions are appearing in the market, some of them are considered more negative than positive, taking advantage of peoples’ need for credit, since they profit on stratospheric fees for small amounts of credit. These are the well-known casas de empeño. But not everything is bad news. Some other companies like retailers are filling the gap and rapidly entering into the financial system providing credit to consumers. Wal-Mart de Mexico and Almacenes Coppel are good examples of business diversification; these retailers started with banking operations (accounts and credit) with the opening of branches within their outlets a few years ago. They target the low-income population and do not seem to be much concerned about the high risks for lending to this consumer segment. It is likely that their previous experience in lending store cards provided them with a full set of knowledge of the market and niche segment. For example, Almacenes Coppel is quite developed in terms of store cards issuing and operation, with more than 80 percent of total retail sales credit. This retailer has an effective payment collection system, consisting on a squad of 8,000 employees visiting every client when necessary. Bancoppel, which acts as bank, provides financial services, and consumer lending being the most important. Such a business model is also followed by Grupo Elektra and Famsa, which also participate in the retailing arena. However, the problem of high costs for lending still continues for the reasons discussed earlier.
CASH-BASED ECONOMY CONTINUES
Continuing with our argument that Mexico is a cash-based economy compared to Latin America, we should say that the availability of debit cards is also below regional levels. Per capita number of debit cards reached just 0.14 cards for Mexico, whereas, Latin America registered 0.6 cards in 2009. Again, this is a direct consequence of the lack of banking infrastructure in rural and even semi-rural communities. According to the National Statistics Institute, only 53 percent of total occupied workers are considered fully urban, limiting the potential market for debit card holders.
In this context, it is important to bring out the issue of remittances from migrants. Remittances range around US$25 billion per year and it is known that the use of banks by migrants and their families is quite poor. According to the Central Bank the majority of that cash is sent via money orders, leaving small room for banks to take off some of those funds to inject into the financial system.
Indeed, consumer finance in Mexico was greatly affected by the global financial stress in 2009, however, just temporarily. It is expected that banks will continue to be cautious with consumer credit in 2010, with a notable recovery starting 2011. Thereafter, the increasing availability and consolidation of newer financial institutions and banks, like Banco Wal-Mart and Bancoppel, will help the market to reach 5 percent CAGR growth in the period 2010-2015 in terms of constant value transactions. However, the structural problems limiting further development of banking penetration will likely remain.
In terms of the competitive environment, although the market will continue to be led by few banks, at least, more lower-income consumers will be able to participate in financial operations and leave behind its cash-based culture. In this context, it is not entirely justifiable the argument that banks associate high risks for lending with high fees and rates. Moreover, these practices distort the efficiency of a market and would constraint further development. A change in the consumer finance market favoring the penetration of banking services within consumers should be accompanied by bigger efforts from authorities to promote competition amongst banks as to reduce the high cost of borrowing and to strengthen the financial culture among lower-income consumers.
Ivan Franco is a research analyst at Euromonitor International. This article was written for Latin Business Chronicle.
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