The lack of a widespread banking services infrastructure in Mexico creates a problem for poor, rural Mexicans who need and/or want access to traditional banking services
by Vidur Ahlowlia, Ahmed Aljabreen & Ben Andryisck
As a Managing General Partner for The Simple Group (TSG), Alex Chung focuses on acting as a funding and technology partner for lending institutions in Mexico/Latin America that serve the poor. Though TSG is primarily known for its algorithmic learning and microfinance loan management platform known as Automa, Alex has spent much of his recent time and efforts in Mexico focusing on identifying and developing payments solutions.
The lack of a widespread banking services infrastructure in Mexico creates a problem for poor, rural Mexicans who need and/or want access to traditional banking services. In his presentation, Alex cited that only 41% of Mexicans have a bank account as proof that traditional banks are failing to serve many Mexicans. He elaborated on this statistic by pointing out that for many of the 41% of Mexicans with bank accounts, many only used their accounts as a way to receive pay from their employers, which they then immediately convert to cash.
A more specific issue that the lack of banking infrastructure in Mexico is creating for the poor is the inability to pay back loans. Much of the poor without bank accounts do limited banking activities in non-bank entities like farmacias. While the increasing access to microfinance loans has enabled many to obtain credit, the inability of these non-bank entities activity to accept loan repayments creates a major problem for many Mexicans now in debt. In order to address this problem, Alex and The Simple Group have developed a new mobile platform that enables loan repayment via smartphone.
By creating a smartphone-based platform that allows lenders to work with Mexican borrowers both develop repayment plans and facilitate the actual payments process, Alex and The Simple Group are hoping to fill a significant gap in the effort to provide banking services to poor and often rural Mexicans. Of course, this solution relies on the ability of these same people to access cheap smartphones and data. Luckily, while only 41% of Mexicans have a bank account, over 80% own smartphones. Thanks to recent declines in the costs of Windows 10 mobile OS smartphones and the data that they use, access to the internet and mobile applications has expanded greatly. As a result, The Simple Group can reach millions of Mexicans in need of banking services simply by creating and distributing its loan repayment platform.
Nevertheless, The Simple Group still faces several challenges to successfully deploying its strategy in Mexico. A “grey” regulatory environment makes decision-making difficult as it is not always clear what the Mexican government will and will not allow a payments platform to do. This lack of clarity is made more difficult by the importance of having a powerful network in order to make any changes in regulations or obtain regulatory clearance for various activities. From a more business-focused perspective, Mexico simply does not have the educated workforce that someplace like San Francisco, where The Simple Group is located, can provide. This lack of available talent and generally different working cultures can make finding the right people and getting things done quickly a problem for an investor and entrepreneur in Mexico. Also, a lack of VC and Angel investor funding in Mexico makes growing a small business very tough.
The lack of a strong VC and Angel investor network in Mexico is detrimental to the growth of startups in Mexico since traditional banks only offer loans to businesses that they deem low-risk. On the positive side, there are a number of players who are instrumental in changing that environment for the better. One of the players is Keuski, an online lending company in Mexico that offers real-time, micro loans to Mexican consumers who would not have access to such loans otherwise. It is worth noting that 85% of Mexican consumers do not have access to formal credit. Keuski has recently closed a US$35 million round of equity and debt funding, which can grow to US$10 million in total.
As mentioned above, TSG is also another player that is currently helping consumers have access to loans to grow their businesses. TSG’s proprietary algorithm, Automa, helps provide loans to many consumers who make less than USD$4 a day to watch them work, build, and thrive in their communities. The algorithm employs data centers, algorithms, and industry research to allow TSG identify market trends and understand customers. Additionally, Automa has a holistic view by automatically providing parameters to understand loan metrics, retrieve credit reports, and cross-reference with historical data points. To minimize overhead, the algorithm automatically executes a transaction if a loan fits TSG’s profile.
The increase in access to loans through technology is opening opportunities for people who would otherwise not have access to such funding. Additionally, as many emerging markets depend on the entrepreneurial mindset of people, it is very difficult to grow a business without access to proper financing, by having technology enabling and facilitating new types of loans, many emerging markets including Mexico, can look forward to a bright future.
One of the most thought-provoking points of discussion during the presentation was about who is going to win in Emerging Markets – whether it will be the established players or a start up with local expertise on the matter. From an MBA graduate’s perspective, Alex argued that it makes most sense to work for an already established firm. The definition of “established” could be looked at from two different ways – one, a firm that has massive international presence and can leverage its experience of working in developed economies and the second, a firm which is focused on providing local services, but has a majority share in the local market that it plays in.
The benefit of working with an established international company is that the company has sufficient resources and experience to make a significant impact in a new market and even ride out any major competition from local players in the first few years, if required. An international company can also leverage its brand name to develop strategic relationships with local players and is much more likely to get assurances through high-level lobbying with the government authorities. An example of this in Mexico is the Santander Group that has established itself as one of the few successful private financial institutions in the highly regularized banking industry in the country. An example of a local player making it big would be Carlos Slim’s Telmex, which accounts for >40% of Mexico’s Telecom market and has the advantage of deep market presence and entrenched relationships to help it stave off competition from other firms such as Telefonica. As an MBA graduate, one would want to have the best possible platform to leverage their skills and make maximum impact in a new geography. Also, the impact that such firms have goes beyond just the particular industry that they operate in and actually end up affecting the entire economic ecosystem of a country. Being a part of such firms would definitely have an advantage over working with a start up with limited resources.
However, Alex also mentioned certain advantages that unique start-up firms may possess in Emerging Markets such as Mexico. One of the biggest advantages is that innovative ideas such as cash transfer through a mobile based banking system is something which will be unique to Emerging Markets due to the dichotomy of the low banking penetration rates and the high smartphone usage by the population at large. Working with a start-up will present opportunities to an MBA graduate to be a part of interesting projects which may not be as successful in developed countries. Also, if someone has experience of working with start-ups in a developed country, they can leverage the knowledge and skill acquired over the years to overcome similar threats and challenges which they might face in countries such as Mexico. Also, in case someone has deep relationships with resource lenders and key authority figures, it may make them less likely to face significant red-tape related roadblocks. In all, there is no one size fits all approach and an extensive study needs to be carried out by each individual to match their objectives with that of the desired company.