Mexico Is a Top Neobank Market to Watch in 2020

Jan 2020
Mexico, January, 06 2020 - In addition to its underbanked conditions, Mexico is a prime market for neobanks due to its favorable regulatory landscape and consumer demographics.

Latin America's (LATAM's) second-largest economy counts an estimated 42 million unbanked consumers, and only about one-third of small- and medium-sized businesses (SMBs) have access to banking loans.

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Digital players are recognizing an opportunity to fill these gaps with digital banking and business lending products. The wide addressable base is attracting neobanks, which are just starting to take off in Mexico, and will likely see a big growth year in 2020.

In addition to its underbanked conditions, Mexico is a prime market for neobanks due to its favorable regulatory landscape and consumer demographics.

Regulators are seeking to increase financial inclusion. Banks' lack of transparency and past scandals have led to low consumer trust and low financial inclusion. But Mexico's finance minister, Arturo Herrera, is spearheading efforts to increase financial inclusion.

The government has been looking to fintechs and banks to reduce cash in circulation, to ultimately cut down on money laundering and bring more people into the formal economy. And Mexican authorities have enacted some of the most supportive regulations for fintechs, including a fintech law in introduced in 2018 which will take full effect in 2020, providing a regulatory framework for players looking to create new fintechs. Government support could ultimately help accelerate neobank growth. 

The market is digitally engaged — which could make consumers receptive to neobanks. Mexico has a consumer fintech adoption rate of 72%. The median age in Mexico is 28, while 41% of the population is 25 to 54 years old, creating a wide base of young, tech-savvy consumers to which neobanks can cater. More than 60% of Mexicans used smartphones in 2017, a 10-percentage-point increase from 2015, and that figure is expected to tick up to 76% by 2025, per GSMA data.

Meanwhile, internet penetration stands at 67%, which is almost 10 percentage points higher than the global average. This mass penetration of smartphones and internet access makes digital-first services like neobanks accessible to the majority of the Mexican population. 

There are two areas in particular where we expect to see neobanks in Mexico build momentum this year. Here are some notable neobanks currently operating in each segment: 

- Consumer lending. Just 15% of adults in Mexico have access to a credit card, and only 3% of credit applications from middle-class consumers are approved. This is attracting neobanks from other regions, like Brazil's Nubank and Spain's Bnext, to set up shop in the country. A key homegrown neobank is Klar, which launched its digital bank account in 2019, boasting a 5-minute account opening process, and no minimum balance or transfer fees. Klar aims to provide underbanked Mexican consumers with an alternative to traditional credit card and debit services — to do so, it assesses creditworthiness on the basis of account history rather than going through a credit bureau. Klar could cement a lead ahead of other competitors in the still-growing neobank space.

- SMB lending. SMBs account for nearly 90% of businesses in Mexico, yet there remains a lending gap for these businesses. Konfio is a homegrown fintech that provides SMBs with unsecured loans — it has reached more than 1 million clients by leveraging technology to meet their lending needs. As neobanks scale, another route to address the SMB lending gap in Mexico could be to partner with incumbents and leverage each other's competitive advantages: Incumbents could provide the capital for SMB loans which can go through neobanks' systems, as they're unencumbered by legacy infrastructure, and neobanks could use alternative data sources to better assess SMB credit risk.

Source : Business Insider

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