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CoDi Primed to Drive Mexican Payments Revolution

July 21, 2020

Jonathan Kriegel

CEO

Mexico remains stubbornly a cash economy for the moment. However, government stimulus and the 2019 launch of an NFC/QR enabled mobile payments platform mandatory for all of the country’s major banks are expected to drive more significant volumes of contactless transactions and electronic wallet (eWallet) adoption.

The country is ripe for fintech innovation and is home to a large number of startups, including mobile payment providers Clip and Flinto. A young population (median age of 29) contains around 89m regular Internet users and almost all Mexicans aged between 16 and 64 own smartphones according to statistics compiled by GlobalWebIndex in the third quarter of 2019.

Large numbers also own laptop or desktop computers (76%) and tablets (50%), buoyed by fixed broadband connections which have seen a capacity increase by around 33% to 34Mbit/s over the last 12 months. Yet the smartphone appears to be the go-to device for most of the country’s citizens. The vast majority (91%) of all Internet users in the country browse the web via their smartphone, spending an average of four hours and fifteen minutes on mobile devices in the process. With average download speeds of around 28Mbit/s as measured by Ookla speed tests, mobile data capacity is already on a par with fixed-line equivalents. However, that ratio should shift in mobile’s favour over the next few years. 

In its Mobile Economy Latin America 2019 report, GSMA Intelligence estimates that Mexico will have the fastest adoption rate of faster, more reliable fifth-generation (5G) network connections in Latin America, forecast to reach 12%, or 15m connections, by 2025. Not only is 5G expected to bring faster download speeds of up to 1Gbit/s, but it will also deliver more reliable, low latency connections to Mexico’s densely populated cities.

Mobile transactions support e-commerce activity

Given the total size of its population (128m) e-commerce activity in Mexico currently looks modest compared to other Latin American countries (notably Brazil) and emerging economies elsewhere. Statista’s market outlook calculates the total value of online consumer purchases in 2019 at US$9bn (1.4% of GDP per capita) with just short of 65m people spending an average of around US$140 per year. PPRO’s payments and e-commerce reports for 2019/20 put the value of the Mexican business to consumer (B2C) e-commerce in 2019 higher at US$21.8bn, up 34% over 2018 but still account for only 2% of total B2C retail spend in the country.

Mobile e-commerce purchases represent a growing proportion of that total. PPRO estimates that Mexicans spent US$8.5bn on mobile e-commerce transactions alone in 2019, 39% of the total. Two thirds (69%) of 16 to 64yr olds use shopping apps on their mobile devices while 44% make at least one online purchase via a mobile device every month according to GlobalWebIndex. App Annie ranked Latin American e-commerce platform Mercado Libre tenth in terms of active users in January 2020, and eighth in terms of total app downloads over the course of 2019.

Shift from cash economy underway

For the moment though, Mexico remains an economy dominated by cash. Roughly 88% of its citizens use the physical Peso as their primary form of payment according to data from Minsait, an affiliate of Spanish consultancy Indra. Because of that reliance on cash, few of its citizens see the need to have bank accounts. Only 35% of Mexicans over the age of 15 have accounts with a financial institution, and less than 10% credit cards, according to World Bank global financial inclusion data gathered in January 2020.

Concerns around corruption, cybersecurity and high bank fees, coupled with a lack of branches in many towns and regions and the fact that the majority of the country’s workers are still paid in cash have all contributed to that trend. And as a result, cash is still widely used for e-commerce payments, with PPRO estimating cash payments funded 26% of all e-commerce transactions in 2019. 

To accommodate that preference, Mexican convenience store chain Oxxo has partnered Boleta Ebanx and fintech startup Conekta to allow customers to buy groceries and pay for utility bills online before paying for them at one of its 17,000 national stores through a voucher system. Local startup ComproPago developed a similar system that allows customers to fund online purchases with cash payments conducted at 7-11 stores and various pharmacies in the country. Some reports suggest that over 30% of online payments in Mexico are made using this kind of voucher system.

Many Mexicans are funding their e-commerce activity in particular in different ways, though. Credit cards accounted for 40% of transactions in 2019 according to PPRO, and electronic wallets (eWallets) a further 15%. GlobalWebIndex concludes that 45% of 16 to 64-year-olds use banking apps, while the World Bank estimates 5.6% have mobile money accounts.

Alongside fintech innovators, the Mexican authorities are also working hard to shift the country away from the cash economy, with some reports suggesting that the government is even considering a ban on the use of cash to pay for petrol and toll road fees. Another part of that strategy involves working with e-commerce giants Amazon and Mercado Libre to design an approved national NFC and QR instant mobile payments platform last year, which was subsequently switched on in October.

Dubbed Cobro Digital (CoDi) the program is designed to expand the volume of electronic purchases in the country, bring a new client base to financial services companies, and help the government crackdown on fraud and illicit transactions to boost tax revenue and eliminate money laundering operations.

CoDi to revolutionise Mexican mobile payments

If it delivers on its promise, CoDi could transform the digital and mobile payments landscape. Mexico’s central bank estimated that almost two dozen financial institutions rolled out full payment-processing apps tied to the CoDi system as of December 2019 including Santander, Citibanamex and Banco Bilbao Vizcaya Argentaria (BBVA). Six more, including HSBC, offer just person-to-person payments. Santander worked with 450 retails in three Mexican cities to trial its service, including sellers such as tortilla vendors on street corners and local bodegas that largely depend on cash transactions.

CoDi enables consumers and merchants to request and make purchases online and in stores and pay utility bills with no commission fees. Users only need a current, deposit, savings or payroll account with an approved financial institution and to download the relevant mobile banking app to make purchases via NFC or QR. All Mexican banks with 3,000 accounts or more (estimated at 33) were required to start implementing the system as of October 2019, with transactions limited to around US$400. Fintechs wanting to participate need firstly to apply for an electronic payment institution license from the central bank which could delay their market entry.

The CoDi platform’s chances of success are increased by the limited availability of alternative global digital wallet services in Mexico. Samsung Pay entered the market in 2018, with the smartphone maker partnering Mexican banks Banorte, Banregio, Citibanamex, HSBC, Santander and Scotiabank alongside American Express, MasterCard and Visa. At last count, the payment service was accepted by just 25 retailers in the country. Google Pay currently allows users in Mexico to make online payments but does not support contactless payments. Apple Pay remains unavailable in Mexico though reports suggest it will debut soon after being launched in Brazil in 2018.

Paypal appears to have made greater headway though its business remains under scrutiny after the government ordered Paypal it could no longer carry balances for its Mexican customers in September last year as part of efforts to crackdown on tax evasion. The company has previously entered multiple partnerships to expand its Latin American presence, notably a deal with local telco América Móvil which made Paypal’s digital wallet available to an estimated 140m Telcel and Claro users in Brazil and Mexico. The agreement allows the MNOs’ subscribers to use Paypal’s NFC-enabled mobile app to pay for in-store items using their smartphones and send money overseas.

Last December saw Mercado Libre announce that users of its Mercado Pago digital payment platform could use Paypal’s app to make payments at online checkouts. The integration allows PayPal users to shop at thousands of new merchants while PayPal will become a payment option on the Mercado Libre e-commerce platform. 

Telcos have a crucial role to play

It is early days for CoDi, but there is no doubt that retailers and merchants in Mexico see mobile payments as an opportunity to reach more customers in the country, especially the “unbanked” who continue to prefer cash and do not use credit/debit cards.

Digital wallets could also help eliminate some of the reliability problems that have plagued Mexico’s banking system in the path. Last summer saw many of Mexico’s largest banks encounter problems with debit and credit card payments that saw customer transactions declined and shops across Mexico City accepting payments only in cash for example.

With smartphone penetration in the country already high and mobile network speed, reliability and reach set to improve, Mexico’s telcos and MNOs have an important part to play in that evolution. Effective partnerships similar to the one forged between América Móvil and PayPal can provide payment providers and merchants with ready access to millions of mobile phone subscribers (88% of which are pre-paid according to GSMA Intelligence).

MNOs can also support direct carrier billing (DCB) which allows consumers to fund eWallet purchases directly from their mobile phone accounts to maximise customer take-up and provide crucial secondary payment options in the event of primary unavailability or failure. In turn, DCB improves the customer experience by making payments fast and simple to conduct with the added reassurance of embedded smartphone authentication tools to boost cybersecurity.

In its Global Carrier Billing Forecast 2019-2024 report, research company Ovum predicts that global revenue from DCB transactions will increase 71% over the next five years as more consumers switch onto the convenience of funding purchases of both digital and physical goods using their smartphone. Some countries will see faster growth than others, but the high percentage of Mexican citizens that currently do not have bank accounts put the country in prime position for rapid mobile payments expansion.

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