Jaime González Gasque
Digital payments. What is your potential in front of cash, in Mexico?
The immediacy and the few barriers that exist for its use, make cash the preferred means among Mexicans to make payments. Given this situation, some opportunities should be explored that, in the context of low financial inclusion and technological lag, arise for digital means of payment.
In an interview with Gustavo Méndez, Lead Partner of Financial Services at Deloitte Spanish Latin America, and Federico Borrego, Risk Advisory Partner at Deloitte Mexico.
Mexico City, April 4, 2023.
The means of payment represent a distinctive feature of humanity that has been evolving for thousands of years. Currently, we are at a time when electronic or digital means of payment have gained relevance in the scene of financial systems, however, in Mexico, the use of such tools is not yet strong enough to displace cash as the favorite among people.
Data from the latest edition of the Deloitte Consumer Dashboard indicates that the majority of consumers still prefer cash as a means of payment (71%), while digital payments and credit cards are occupied to a lesser extent by them, with 51% and 45%, respectively. How could these means of payment be promoted? What is its potential in our country?
To answer these and other questions on the subject, we interviewed our Partners Gustavo Méndez, Financial Services Leader at Deloitte Spanish Latin America, and Federico Borrego, Risk Advisory Partner at Deloitte Mexico.
Why does cash continue to occupy such an important role among the means of payment of Mexicans?
Federico Borrego (FB).- Cash continues to have several advantages over electronic means of payment and that is what keeps it in a preponderant place among people's preferences.
One of these advantages is the immediacy of payments, that is, for consumers it is practical and quick to use it in any purchase they want to make. In addition, when cash payments are made, there is certainty and clarity of the location of the money, since both the seller and the buyer can follow up on its trajectory, at that very moment. This is something that doesn't necessarily happen with electronic trading, where money blurs into the ethereal world of systems.
Also, with cash, people avoid something they don't like very much: paying fees for handling their money. In other words, cash apparently does not cost who decides to pay or who takes it to sell products or services. On the other hand, with cards, there are commissions. In addition to this, there is also a certain fear of receiving income through electronic means, since traceable payments, such as these, tend to be more subject to control by the authorities.
Due to the above, there are still many payments that require cash, and as long as this continues, it will be difficult to reduce its use. The case of Sweden, between 2016 and 20171, illustrates the need for this means of payment: that country reduced the use of cash so much that it became very expensive to meet certain needs in which it was essential to have immediate liquidity. And not only that, but many older adults were excluded from various services and purchasing opportunities, since they were not very familiar with electronic payments.
Gustavo Méndez (GM).- Regarding the example of Sweden, there is a myth about the use of cash: that it is only used in underdeveloped countries or with an informal economy; However, in nations like Japan, the use of cash (which is very broad) also responds to cultural issues, despite being one of the most developed economies.
But going back to the advantages of cash, another of them is that it does not have barriers to use, while in electronic payments they do exist. A first barrier to electronic operations is not having the necessary infrastructure to carry out electronic operations (this includes everything from internet services to point of sale/POS terminals in stores).
Until 2021, the National Survey on Availability and Use of Information Technologies in Households (ENDUTIH), prepared by the National Institute of Statistics and Geography (Inegi) and the Federal Institute of Telecommunications (IFT), indicated that in Mexico there were 88.6 million internet users, which represented 75.6% of the population aged six or over and an increase of 4.1% compared to the figures for 2020. This means that there are still sectors of the population without access to this service .
Likewise, there is still a lag in terms of the use of the technological infrastructure to accept electronic means of payment. According to the 2021 National Survey on Business Financing (ENAFIN), conducted by the National Banking and Securities Commission (CNBV) and the National Institute of Statistics and Geography (Inegi), 72% of the country's companies accepted payments with electronic transfers and 45% payments with credit or debit cards. While payments through internet pages and mobile applications extended to 53% and 21% of companies, respectively.
The second barrier is the cost of accepting electronic payments, since there is a commission for the use of electronic means of payment (if paying by credit card, the commission is higher; with debit, it is smaller).
And the third barrier has to do with financial inclusion, since many people still do not have a way to access a banking product, and therefore, a digital payment method such as cards or an electronic wallet. The National Survey of Financial Inclusion (ENIF) 2021 indicates that only 12.3% of the population between 18 and 70 years old used a debit card to make purchases of 501 pesos or more; meanwhile, 78.7% of that same segment resorted to cash.
What are the advantages of digital means of payment compared to cash?
FB.- The main one is security: if you have the money in an account, it is more difficult for someone or those who intend to steal it to use it. Electronic means also make it possible to reduce the amount of cash that is carried in the wallet and this is an advantage both for individuals and for companies that handle high volumes of money.
The immediacy of electronic transfers represents another advantage, since the deposits are practically reflected at the time of the operation; however, not all electronic means of payment have this feature (in the case of cards, for example, the payment is regularly validated the day after the purchase).
GM.- Another great benefit of electronic means of payment is that they can provide very valuable information for financial institutions, such as the amount that goes into people's accounts, how much they spend and what type of services or products they consume. This could help financial institutions to define if that person can be subject to credit and, consequently, financial inclusion could be promoted.
According to ENIF data, 41.1 million people between the ages of 18 and 70 (49.1%) had an account at a bank or financial institution in 20212,
while 27.4 million (32.7%) had at least one formal credit. But to the extent that the institutions get to know this market that is in the informal economy, as well as their consumption and payment patterns, they can also offer them loans. So it is a great opportunity for many more people to obtain credit and to grow the portfolios of financial institutions.
In this same sense, remittances can be used to trigger electronic means of payment, since, in addition to allowing the traceability of money, that is, having a record of what happens with these electronic purses (which does not happen when the person makes use of cash remittances), offer other banking products such as savings accounts or debit cards, extending the life cycle of that money within the financial system.
Currently, we see a lot of interest in the market to grow the means of payment among the population, with credit or debit cards, electronic wallets. At the same time, in shops there is also a great appetite to put these POS terminals (in corner shops, for example), which will contribute to digitization.
How could the use of digital payments in Mexico be promoted? Is there enough potential for it?
FB.- One of the keys is precisely to close the payment circle: we always have to think that there are two parties involved in the payment, the one who puts in the money and the one who receives it. So, the important thing will be to think that both parties have advantages. If this scheme is not closed, it will be difficult to achieve great progress in this regard.
GM.- In terms of competition, as there is more competition, the commissions charged to businesses, and which discourage the use of electronic payments, can be reduced. That is why it is essential that there is still a lot of competition.
In addition, it would be important for the government to promote the use of means of payment in two ways: on the one hand, it could explore the possibility that the support that today goes to the population and that is delivered physically, could be sent electronically, as this could take advantage of the fact that around 12 million people are receiving support in one way or another, in order to trigger electronic means of payment.
On the other hand, the government could contribute to the issue of inspection, providing more information on the commissions that businesses that accept electronic payments would have to pay and perhaps establishing a symbolic tax for small businesses, based on their annual income. , or also, promoting the payment of basic services (electricity, water, property) through the reference of a bank account or electronic means. In this way, electronic payments could be encouraged from the edge of the government, but with benefits for companies and consumers.
Another area of opportunity to promote digital payments in Mexico has to do with financial education. According to the ENIF 2021, the lower the school grade of the population, the lower the degree of financial education it has, while, as the socioeconomic level increases, the higher the level of financial education.
Therefore, a great effort is still needed so that people know how to use their money, what the means of payment are for them and how to save, as well as what a compound interest rate represents, how much they actually charge for a loan , etc.
What is expected for the use of cash in the future? Does the fact that digital payment methods increase mean that at some point they will stop using them?
FB: I think that the moment in which the use of cash could be stopped is still a long way off, but it is possible to reach much more efficient levels of the use of electronic means of payment, without a doubt. In Mexico and Latin America, there is a good space to grow in electronic means of payment. The more access to technology there is, the more likely that will happen. In addition, it will be important to maintain free competition. Although it is necessary to watch that the actors of the financial system perform correctly, the ideal is that the authorities do not take a restrictive role on the possible uses of the means of payment.
GM: Humanity has always sought to make things easier. 600 years ago things like cocoa were exchanged; Now, there are cryptocurrencies and this means of payment, like the others, what it seeks, in the end, is to make life easier.
One issue in the offing is the issuance of digital currencies by central banks. And although this still seems far away for Mexico, in countries like Brazil this year a pilot test will begin with companies to use a fully digital currency. Unlike the best-known cryptocurrencies (Bitcoin or Ethereum, for example), these currencies will have the support of said monetary authorities.
This topic is undoubtedly interesting because if it continues to evolve and we see, as humanity, that the model works, perhaps we will see that, instead of the paper that Banco de México issues today, in the future we could see digital currencies issued by the same institution. It is difficult to predict the future, but the best way to predict it is to create it, see how we are modifying it as humanity.