April 15, 2022

Fintech: A Bright Spot in Mexico’s Road to Financial Inclusion

Notes from the Field: Mexico

By Armando Simón

As the second largest economy in Latin America, Mexico has been successful at growing and integrating its economy with global markets, yet it lags behind its peers when it comes to financial inclusion and poverty reduction. According to the Center for Global Development, at 36.9%, Mexico’s level of financial inclusion is about 20 percentage points lower than for other countries at comparable levels of per capita income.1 The financial access gaps by gender, region, and urban-rural setting are also significantly larger in the country than in the Latin America and Caribbean Region and OECD countries.2

A banking sector that is not especially interested in or incentivized to serve the needs of lower income customers is one of the factors that contribute to Mexico’s low financial inclusion levels.

Increasing Near-term Financial Stress

Today, many Mexican Non-Bank Financial Institutions (NBFIs) find themselves at a crossroads. At the macro level, the liquidity oasis that emerged during the pre-pandemic years is drying up. Lenders are now forced to look at more creative sources of funding, such as crowdfunding, private debt placements, and mezzanine debt, among others. While we have seen cycles like this before, the rise of fintech lenders and alternative distribution models is a secular trend that is just starting in Mexico and across Latin America more broadly.

Mexico’s capital markets are currently only open to well-known issuers with large offerings. Funding from international lenders has declined and is stagnating, in part due to recent defaults (Credito Real, AlphaCredit), which exacerbated concerns from the international community about the lack of regulation, credibility of rating agencies and audit firms, opaque risk classification metrics, and reliance on refinancing to understate the true severity of non-performing loans. Moreover, domestic Development Finance Institutions (DFIs) are believed to be holding back from engaging with private lenders due to political considerations. 

While Mexico received massive funding from the likes of Softbank, Morgan Stanley, and Goldman Sachs just several years ago, the country is now going through a liquidity crisis. Excess funding resulted in a weakening of portfolio quality as aggressive growth was prioritized above all else. Debt cliffs are now a major concern as credit facilities that were used to extend loans to weak end borrowers are coming due, and it is unclear if they will be successfully refinanced. Throughout this market cycle, MicroVest has maintained a disciplined due diligence and risk management process and we are fortunate to have avoided much of this market turmoil.

Fintech: A Bright Spot in Mexico’s Road to Financial Inclusion

Despite medium-term liquidity issues, Mexico continues to lead the way for fintech in Latin America. The sector has emerged as an important alternative source of funding, providing fresh access to credit, insurance, and remittances. In Mexico, most internet users have a smartphone before they have a bank account.3

Mexico’s regulatory authority (Comisión Nacional Bancaria y de Valores – CNBV) established a prudent regulatory framework and continues to work on granting licenses to fintechs with a viable business model and sound internal policies and procedures. In 2021, Mexican fintech companies grew 16%4 as its ecosystem became more mature and active. (In 2020, Mexico’s fintech companies had a failure rate of just 4.5% compared to 11.3% in 2019.)

The growth of fintech players will be critical to bridging the financing gap for Mexican MSMEs and lowering the cost to serve communities that have historically been underserved or completely unbanked. During our trip, the MicroVest team visited prospective portfolio companies operating in the student lending and payroll loans segments—niche players that are paving the way in providing credit to market segments that have been historically overlooked by many of the larger, traditional banks. We were pleased to see that the pandemic catalyzed much-needed investment in digital platforms for some of the leading financial services providers in the country. Unlike microfinance and SME financial institutions, these institutions seemed to have survived the worst part of the economic contraction caused by the pandemic and are now exhibiting positive trends in terms of asset quality and portfolio growth.

Optimism for Growth and Inclusion

Turbulent times create considerable opportunities for well-managed players that are able to rise to the occasion and capture market share. At MicroVest, we believe that the winners will be those financial institutions that possess not only strong management teams but also adequate solvency, ample liquidity, and access to alternative funding sources, which could include multilateral financial institutions, bond markets and holding companies with well-capitalized shareholders. 

Mexico remains one of the largest and deepest markets in the region with abundant opportunities to expand financial access for the unbanked and to support its post-COVID-19 recovery. Our focus on deepening our relationships with responsible microfinance and SME financial institutions that are customer and community-centric will move the needle toward educating the community and effectively contributing to closing the financial inclusion gap.

FOOTNOTES

1https://www.cgdev.org/publication/puzzle-financial-inclusion-mexico-closeable-gap 2https://www.worldbank.org/en/results/2021/04/09/expanding-financial-access-for-mexico-s-poor-and-supporting-economic-sustainability 3Advance.ai:https://f.hubspotusercontent10.net/hubfs/5877117/Marketing%20Content/Reports/Mexico%20Fintech%20Report%20(EN).pdf 4Finnovista and Inter-American Development Bank (2021). Fintech Radar.

DISCLOSURE INFORMATION

The information contained here has been provided by MicroVest Capital Management LLC (“MicroVest”) and no representation or warranty, expressed or implied is made by MicroVest as to the accuracy or completeness of the information contained herein. Any forward-looking statements contained herein with respect to MicroVest’s plans and strategies, anticipated capital investments, changes in market conditions, financial projections or any other matters that are not historical facts, are only predictions and estimates regarding future events and circumstances. Market conditions and MicroVest’s actual results may differ materially from the market conditions and results discussed in these statements. This article is for informational purposes only and is neither an offer to sell nor a solicitation of an offer to purchase an interest in any MicroVest product (the “Funds”), and nothing herein should be construed as such. Any such offer or solicitation will be made only by means of delivery of a definitive private offering memorandum which contains a description of the significant risks involved in such an investment. Prospective investors should request a copy of the relevant Memorandum and review all offering materials carefully prior to making an investment. Any investment in a MicroVest product is speculative, involves a high degree of risk and is illiquid. An investor could lose all, a significant portion or some amount of its investment. You should not construe the contents of the enclosed materials as legal, tax, investment or other advice. To invest with MicroVest, one must be a qualified purchaser and an accredited investor. The investments may be deemed to be highly speculative investments and are not intended as a complete investment program. They are designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment in the Funds and who have a limited need for liquidity in their investment. There can be no assurance that the Funds will achieve their investment objectives.

Recent News