IFC Mexico+Public

8/9/2019 IFC Mexico+Public

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Overall Mobile Money Readiness 3 (Good)

Current Mobile Money Solution N/A

Population 112 million (Very High)Mobile Penetration 79% (High)

Banked Population 30% (Low)

Remittance % of GDP 1.45% (Moderate)

Percent under poverty line 18% (Relatively Low)

Economically Active population 42% (Moderate)

Adult Literacy 86% (High)Main banks Bancomer, Banamex, Santander, Banorte, HSBC

Mobile Network Operators Telcel (71% market share), Movistar (21%), Iusacell (4%), Nextel (4%)

Ease of doing business 35 th out of 183

Comments Mexico is one of the largest economy and one of the most populated countriesin Latin America. Mexicos banking sector is mainly dominated by foreign bankswith the exception of Banorte and to a lesser extent Inbursa. The mobilesector is almost a monopoly of Telcel, however its main competitors aregaining market share (Movistar). There were few examples of mobile bankingsolutions and no mobile money solutions until recently, but the market isstarting to show signs of activity, leveraging a favourable regulatoryenvironment for simplified bank accounts and use of non banking agents.

Mexico SummaryMobile Money readiness (1-5)

Regulation 4

Financial Sector 3Telecom Sector 1

Distribution Channel 4

Market Demand 3


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Macro-economic Overview

Regulations Financial Sector Telecom Sector Distribution Channel Mobile Financial Services Landscape

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Population: 112,322,757 (57ppl/sqm) Age distribution:

0-14 years: 28.2% 15-64 years: 65.2% 65 years and over: 6.6%

Urban/rural split: 80/20 (1.5%

urbanization rate 2005-2010) GDP (PPP): $1560Bn in 2010 GDP per capita (PPP): $14,932 Literacy rate: 92.43% Banking penetration: 30% Mobile phone penetration: 79% Remittance (% of GDP): 1.45%

Key Country Statistics

Sources: IOM world, Wikipedia, CIA WORLD FACTBOOK, GSMA

Actual potential market size of 60-70m peopleis favorable for both a volume approach anda value approach and a rapid adoption ofmass- market services (P2P)

Median age and high literacy rate are enablingfactors: more elaborate mobile moneytechnology is relevant in Mexico

Price sensitivity is likely to be high due to thepopulation distribution (youth proportion,under poverty line rate) and will be a keyelement of a successful value proposition

G2P payments and domestic transfers could besizeable enough to represent an interestingopportunity

Value wise, international remittance (IMT) issignificant, IMT to be considered at a laterstage once basic MM services have gainedground

Macro-Economic Overview

Insights

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1. Banking infrastructure availability, thoughrelatively good overall, is low for certainsegments of the population:

Infrastructure network is far more developedin urban areas than in rural areas

Overall, 10.6 bank branches / 100,000 Mexicanresidents

32 ATMs / 100,000 Mexican residents

415 PoS terminals / 100,000 Mexican residents2. Some banks, like Banco Azteca, focus onlow income population

3. A rather elitist approach of some otherbanks (corporate like IXE Banco, high-end,middle-class)

Several factors limit banking growth

Sources: IOM world, Wikipedia, CIA WORLD FACTBOOK, GSMA

Mobile & Banking Penetrations

Whereas mobile penetration has increased steadily

Despite a relatively well organizedbanking sector, bankingpenetration remains low comparedto mobile penetration.

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Mobile penetration rate evolution in Mexico

Customer base Penetration rate

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Role: Ensure stability of the Mexicanfinancial system, foster its development andefficiency for the benefit of Mexican citizens

ComisinNacional

Bancaria y deValores (CNBV)

Role: legal authority to supervise, promote,regulate and coordinate an efficientdevelopment and the social coverage of thetelecommunication sector

Cofetel Comisin Federal deTelecomunicaciones(Telecom Regulator)

Buoyant regulatory environment:Recent introduction of a newregulation on branchless bankingthat paves the way to broaderfinancial inclusion through mobilephones

Wal-Mart Bank was the first to inauguratethe agency model, after a longauthorization process by the CNBVBanks may provide a number of servicesthrough a network of banking agentsRegulator is open to Mobile Banking;several mobile banking services havealready been launchedRecent regulation (Feb 2010) allowsMNOs to set up agent networks andmanage mobile accounts on behalf ofbanks, based on outsourcing agreements

Role: Responsible for receiving, analyzing,and disseminating STRs (SuspiciousTransactions Reports) and CTRs (CashTransactions Reports), as well as reportson the cross-border movements of currency

Unidad deInformacin

Financiera (UIF)

Role: Issuing regulations and criteria tointerpret AML regulations

Banking,Securities

and savings Unit(UBVA)

Regulatory Bodies

Implications Roles & Responsibilities

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There is no regulation on e-money.The Niche bank system encourages non -banks to offer financial services.

E-Money

Commercial Code defines a deposit asrepayable fundsNonbanks excluded from the deposit-takingbusiness

Only authorized banks can have bankingcorrespondentsBanks can open mobile accounts viaagents (including MNOs), and mustproduce a file with the clients name, birthdate and addressMonthly deposits are limited to MXN 8,720

Retail Agents

Regulatory Framework & Requirements

ImplicationsCurrent Regulations

Deposit Taking

Only registered banks or non-banks will beable to offer mobile financial services. MNOsrole is limited by the law.

Non-banks are still authorized to issue prepaidcards used for purchases of goods that belongto the same business as the issuer

Increasing number of banking correspondents(around 16,000 as of today) should fosterfinancial inclusion and give the unbankedpopulation access to basic type of accounts

Financial consumer protection law and thetransparency law (Condusef specializedfinancial consumer protection agency)Basic consumer protection principles,conflict resolution procedures, andpenalties for noncomplianceRequire banks to provide all-inclusive priceinformation by displaying fees and chargesin branches

CustomerProtection

Mexicans usually own an ID or other type of

identification formExisting consumer protection agency shouldmake it easier to deal with the specificities ofconsumer protection applied to mobilefinancial services

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There are four types of transactionsaccording to AML/CFT risks and securitycontrols: Micro payment (


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The legislation provides for recognition ofelectronic signatures when the authenticityand integrity of the original electronicdocument is preserved according tospecified parameters

Integrity of the original electronic documentis preserved according to specifiedparametersElectronic documents can be used as proofin court and in complaints filed in consumerprotection agencies.CNBV has issued extensive regulation onsecurity requirements for electronictransactionsNo specific data privacy law yet (draft lawin Congress)Some ATMs and Pos terminals areinteroperable allowing withdrawal andpayments with cards from any bankDeposits can be made only at ATMs andbranches of the bank where the account isheld

Additional Regulatory Considerations

ImplicationsCurrent Regulations

Given its complexity and strictness, regulationon security requirements for electronictransactions may eventually create obstaclesfor emerging branchless banking models, asdescribed by some industry actorsPenalization of digital crimes is reportedlyslow and difficult

High cost of withdrawing money in a differentbank

Interoperability

Data Privacy

Tax on cash deposits (law of 2007)IDE (Impuesto a los Depositos de Efectivo)is a 2% witholding tax on all cash depositsEach agents operating account subject tothe IDE

TaxationHigh level of taxation will have a significantimpact on the final price of the service toconsumer

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Source: CGAP


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Source: Prodesarrollo.

Financial Infrastructure

Facts:Strong banking system, increasingly dominated by foreigninstitutions: Citi-Banamex, BBVA-Bancomer, Santanderand HSBC among the leading banks (with the exception ofBanorte)In recent years, the government and the CNBV havepassed several banking reforms aimed at fosteringfinancial inclusion and strengthening the nations financialnetwork and systemSignificant low income masses once out of the financialsystem are today more addressed by the agency bankingmodelThe microfinance market is one of the most dynamic inLatin America with 85 registered MFIs, 1522 branches and4.3m clients (85% are women)

BanksPublic 41Private 6

BranchesATMs 35 932 POS terminals 457 677 Debit cards 12 000 000 Credit cards 26 000 000 Microfinance Institutions > 100,000 customers 5 20,000 to 100,000 customers 9

< 20,000 customers 71

Clearing and Settling

Clearing house settlement system (SICAM)

Ownership: Banco de Mxico Description: provide clearing and settlement of interbankdocuments, including checks, electronic funds transfers, directdebit operations, and interbank cash operations. Participating banks: banks offering checking accounts, directdebits, and electronic funds transfer.

Credit Bureaus

Bur de Crdito

Ownership: private organization collectively owned byMexico's banksParticipants: Mexicos financial institutionsUsers also include Sofoles, real estate co, automobile financecompanies, credit card companies

TransUnion de Mxico (collects and distributes creditinformation on individual consumers for Buro de Crdito)Ownership: JV between TransUnion, Fair Isaac Corp andMexican commercial banks

Dun and Bradstreet (focuses on the activities of firms andindividuals with entrepreneur activity for Buro de Crdito)Ownership: Dun and Bradstreet, TransUnion and Mexicancommercial banks

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1,797 Branches

6,760 ATMs

1,395,319 checking accounts

7,882,143 savings accounts

6,576,455 payroll accounts

297,774 deposit accounts

Bank Snapshot

1,696 Branches

5,855 ATMs


33,347 savings accounts



1,075 Branches

4,439 ATMs





1,134 Branches 5,004 ATMs

580,132 checking accounts 5,731,214 savings accounts

4,200,249 payroll accounts 512,706 deposit accounts

1,144 Branches

6,331 ATMs





255 Branches

745 ATMs

312,525 checking accounts


111,639 payroll accounts


647 Branches

1,492 ATMs



627,945 payroll accounts


BBVA Bancomer

Banamex

Santander

Banorte

HSBC

Inbursa

Scotiabank

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1,625,151Customers

Loan portfolio: $US705,453,215 Average loan: $US 434.1

MFI Snapshot

1,343,900Customers


34,582 Customers Loan portfolio: $US65,319,439 Average loan: $US 1,888.8

104,155Customers


72,240 Customers Average loan: $US 816.1

198,550Customers Average loan: $US 233.5

109,502Customers Average loan: $US 284.7

Compartamos

FinancieraIndependencia

Eurekasoli

Apoyo EconmicoFamiliar

Fincomn

Came

Finca Mxico

Loan portfolio: $US58,957,706



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Large Financial FlowsOpportunity analysis summary

Bill payments

35m clients

for CFE

Bills (electricity, water) can be paid at partner banks branches and also in stores (Soriana, Wal -Mart)

Companies exploring mobile bill payment services with partner banks (e.g. CFE bills withseveral banks)

P2P(domestic)

N/A

Strong domestic migration from rural areas to the main metropolitan areas

G2P N/A

There are several government programs in place in Mexico (e.g. Oportunidades, a governmentsocial assistance program providing cash payments to 5m families)Bansefi & Diconsa partnership to create a network to provide access to government benefits

B2B, B2C orB2Employees

N/A

Some banks have expressed interest in exploring salary payment opportunities through mobile

Credit &micro-finance

N/A

Compartamos is by far the dominant player in the MFI landscape while many other MFIs haveyet to be more mature in their operationsPotential for microfinance remains high

Remittances(international) US$ 21.7bnUS-Mexico corridor is one of the largest worldwide corridors for international remittances

Market is competitive, highly fragmented and already well addressed leading to relatively lowpricesBanks benefit from their large distribution network to serve most of the incoming remittances

Source: Amarante analysis Significantopportunity Potentialopportunity Weakopportunity

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Additional opportunities: Public transport, Payroll (informal market)


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Mobile Outlook - a Dynamic Market

Key Learning:Dynamic market, subscribers base will reach 107.3M people by the end of 2014 according to forecastsTelcel dominates the mobile landscape in Mexico and any of its decisions in the MFS space shall significantlyinfluence the overall industryTelcel has a very dominant position in the market but competition is on the rise (monthly churn rate for Telcel is3.6%). According to forecast, its market share is likely to decrease and reach 67.4% by 2014While Movistars market share, and to a lesser extent Nextel and Iusacells will increase ( Movistars market shareis predicted to reach close to 25% in 2014)

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Mobile subscribers forecast

Telcel Movistar Iusacell NextelSource: ie Market Research

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Relatively low ARPU: around $12 (atthe exception of Nextel that does nottarget prepaid customers) Note: Iusacell has not reported anyfigure on its ARPU.Mobile data applications usages growthshould sustain ARPUs growth andcompensate potential lower revenue peruser on voice Consequence

Potential revenue growth fromvolume recruiting new customers(around 80% penetration rate as oftoday)

And from additional servicesproviding new revenue stream

Key learning and conclusions

Mobile Outlook - ARPU Trend

ARPU/Operator ($US equivalent)

Need for value creation and new revenue streams beyondtraditional voice to sustain ARPU levels

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ARPU/Operator ($US equivalent)

Telcel Movistar Iusacell Nextel

Sources: ie Market Research

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Key figures: As of Q3-2010, Prepaid customersaccount for 87% of total customerbaseHowever since 2008 postpaid shareis on the rise with MNOs developing

medium/high-end segmentstargeted offersNextel is clearly targeting postpaidcustomers

Consequence:MNOs are trying to be innovativeoffering new VASWe can expect MNOs to rapidly

introduce additional MFS in Mexico

Key learning and conclusions

Mobile Outlook - a Prepaid Market

Prepaid vs. Postpaid customers (as a %)

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PREPAID POSTPAID

Source: Cofetel

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Retail network structure

Specialized /Convenience

Stores

Corner Stores

DepartmentStores

HyperSuper

Markets

3,398 stores

14,177 stores

1,473 stores

Source: ANTAD, August 2010

Offer a large variety of items (grocery products, clothing,home products, electronics). Typically located around urban areas with over 100,000inhabitants.Industry leaders are: Wal-Mart, Mega Com Mexicana, Soriana,Superama, HEB, Chedraui

Mexico has a large number of department stores, including the

Mexican chains: El Palacio de Hierro, Liverpool, Suburbia,Sanborns, Coppel and Elektra

Oxxo and 7 eleven are the two largest chains with Oxxo havingmore than 7,300 stores in Mexico and 7 Eleven more than1,000.They both offer financial services partnering with banks aswell as airtime mobile recharge.

There is no exact figure on the number of corner stores inMexico.

Distribution Landscape

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Regulatory barrier to obtain a MM license-

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Operator-led model Service entirely distributed and

managed by the operator underits own license and own brand

Joint Venture model

Service co-branded and co-distributed with the operatorand/or the bank

Bank-led model

Mobile channel is only seen as anaccess channel (bearer) tobanking services

Operator-driven model Service distributed and managed

by the operator under apartnering banks license

Highlights

Third-party ledModel

Current MFS Initiatives in Brazil

Several banks offertraditional internet m-banking services

As of today, no knownMFS services have beenlaunched in Mexico

Several initiatives taking

place at present in themarket:

Since 2011,Mastercard/Movistar JV partnership

Bill paymentinitiatives fromseveral banks

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