THE EMERGENCE OF FINTECH IN MEXICO MICHAEL PEREZ

FINANCIAL ANALYST

FINANCIAL INDUSTRY STUDIES, FEDERAL RESERVE BANK OF DALLAS

THE VIEWS EXPRESSED IN THIS PRESENTATION ARE MY OWN AND SHOULD NOT NECESSARILY BE ATTRIBUTED TO THE FEDERAL RESERVE BANK OF DALLAS OR THE FEDERAL RESERVE SYSTEM.

OUTLINE

• Overview of FinTech and current place in financial system

• FinTech opportunities in Mexico

• Broad look at different FinTech entities

• Opportunities and risks for commercial banks

• Regulatory responses

2

WHAT IS FINTECH

• The use of technologies and innovative business models in financial services

• Sector comprised primarily of non-depository financial institutions that use online, mobile, and other technologies to deliver financial services

• Startup tech companies

• 128 in Mexico, 2,000 in U.S.

• Banks, non-bank finance companies entering FinTech Space • New products

• Investment

3

A FINTECH FOR EVERYTHING

4

Source: CBInsights

5

FINTECH TRAJECTORY

• Complementary, not disruptive relationship with traditional financial institutions

• Partnerships between FinTech and banks present unique advantages for both sectors

6

Source: CBInsights, Accenture *YTD Annualized

7

1.2 1.7 1.8 2.4 2.6 4.0

12.2

19.0 21.2

0

5

10

15

20

25

2008 2009 2010 2011 2012 2013 2014 2015 2016*

USD

Bill

ions

($)

Global Investment in FinTech

8

ECONOMY

• 15th largest in the world

• Privatization • Reforms in finance, infrastructure, energy, telecommunications

• High penetration of mobile and online technology

• Significant small- and medium-sized enterprise presence; most underserved by traditional banks

9

FINANCIAL SECTOR

• Advanced, diverse, well-capitalized and regulated

• Low financial inclusion

10

79% 66%

52% 32% 30%

Panama Chile Brazil Colombia Mexico

Formal Finance as Percent of GDP

DEMOGRAPHICS

• Population: 120 million • 70 percent under age 40, 41 percent between 15 and 39

• 39 percent of population aged 15+ has an account at a financial institution

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FINTECH MEXICO HEAT MAP

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PAYMENTS AND REMITTANCES

• Digital wallets • C2C: Consumers send funds to each other

• Remittances between Mexico and U.S.

• C2B: Consumers pay merchants

• B2B: Automated clearinghouse facilitation • Direct deposit, payroll, vendor payments

13

ONLINE LENDING

• Consumer lending • Unsecured, personal loans

• 3-5 years, APR up to 35 percent

• Monthly payments, rare prepayment penalties

• Focus on borrowers with impaired or no credit histories

• Small business loans • MXN150,000 (USD8,000) or less

• 3-24 months, APR up to 100 percent

• Weekly or daily payments 14

HOW DOES ONLINE LENDING WORK?

• Online application

• Origination handled by a partner bank

• Application collection and loan servicing handled by online lender

• Funding models • Direct debt or equity

• 3rd party sales

• Marketplace lending

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HOW ONLINE LENDING WORKS

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Source: BI Intelligence

WEALTH MANAGEMENT

• Robo-Advisors • Provide online portfolio management with minimal human interaction

• Algorithmic investing

• Reduce costs by cutting out need for human advisor

• Marketed to middle-class and young investors

• Automated savings platforms • Verify user bank account transactions to provide savings advice

• Some automatic, other provide notifications

• Guarantees

• Financial planning platforms • Gather information on financial accounts to provide summaries and suggestions

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CROWDFUNDING

• Raising capital through collective effort of individual investors through digital platforms

• Equity, rewards, bonuses

• Alternative to online lending for Mexico’s small and medium-sized enterprises

18

OPPORTUNITIES

• More products

• Up to speed with young population

• New markets

19

CHALLENGES & REGULATION

• Salient concerns • Money laundering

• Untested credit and business models

• Job cuts (paradigm shift)

• Disruption

• Steps towards regulation • Acknowledgement by financial regulators

• Trade groups

• Balancing act: fomentation v. security

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KEY TAKEAWAYS

• FinTech revolution is underway

• FinTech phenomenon not limited to developed economies • Salient opportunities in emerging markets

• Symbiotic relationship between FinTech and banks, but banks need to keep up

• Regulators aware of FinTech benefits and risks

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EXTERNAL RESOURCES

• Blogs • NerdWallet

• CrunchBase

• TechCrunch

• Mexico-specific • FINNOVISTA

• FinTech Mexico

• Newspapers: El Financiero, El Economista

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