The ultimate guide to Mexico fintech

The ultimate guide to Mexico fintech

  • Mexico’s fintech scene is less developed than other EMs but can grow strongly by servicing the financially-excluded
  • Popular growth strategies include entering new customer segments and investing in technology
  • Major constraints: market dynamics, competition, funding. Incumbents are countering via technology, cost-cutting

In this 16-page report, continuing our series on the risks and opportunities in the key emerging fintech markets, we evaluate Mexico by drawing on the results of three detailed proprietary surveys we conducted in the country of 10 local fintechs, 6 incumbent firms and 100 consumers, allied to desk research into a total of 170 local fintech firms.

Some of our key findings

  • Mexico’s fintech landscape scores poorly relative to other EMs in terms of the scale and profitability of individual firms and the overall diversity of product offerings.

  • Major values that fintechs bring to their customers include fast approvals, high product quality and personalised service.

  • Fintechs in Mexico are likely to see a substantial improvement in market share, mainly by enfranchising financially-excluded customers.

  • Key strategic priorities include entering new customer segments and investing in technology (such as chatbots and cloud computing).

  • Market dynamics, competition and funding are key growth constraints.

  • Capital requirements, deposit insurance and data protection are the main regulatory hurdles.

  • Incumbents are primarily responding to fintech competition by investing in technology, and through cutting costs.

Mexico’s fintech landscape

Source: Tellimer Research, Crunchbase

Overview

We examine the fintech landscape in Mexico, including firms’ success factors, future strategies, innovations and growth constraints, and the impact that fintechs have on their customers. We evaluate listed financials, telecoms and technology sector incumbents in the country to assess how they are responding to the fintech threat. We also analyse the results of our survey of Mexico consumers to ascertain their current financial product preferences and future expectations, and what that means for Mexican fintechs. Lastly, we highlight some interesting innovations from selected local firms.

Mexico’s fintech landscape scores poorly overall compared to other emerging markets. Individual firms are typically small and are concentrated in traditional segments such as payments and lending. Firms’ profitability is also poor, with only 10% of fintechs currently profitable. That said, funding access appears sound, particularly small-ticket funding to early-stage start-ups, indicating that fintechs’ scale should improve in the future. The top values that Mexican fintechs offer their customers are fast approvals, good product quality and personalised service. The most important factors driving these firms’ success to date include first-mover advantage, funding access and unique service offerings.

Looking ahead, Mexico fintechs are likely to increase their market share substantially, primarily by increasing the size of the pie (enfranchising financially-excluded customers). To achieve this growth, fintechs are planning to expand into new customer segments and invest in technology; targeted innovations include introducing digital banking, cloud technology and chatbots.

Overall market dynamics, competition and funding seem to be the major constraints to fintech growth, while capital requirements, deposit insurance and data protection are the key regulatory hurdles.

Technology investment and operational efficiency are the main strategies being pursued by incumbents in Mexico to compete with fintechs.

The fintech landscape in Mexico is not very diversified

The Mexican fintech ecosystem is primarily dominated by payments and lending, which together account for 63% of total fintechs compared to 56% for other EMs. Insurtech and investech appear less developed in Mexico compared to peers.

Mexico fintech product mix

Mexico’s level of fintech sophistication is poor

To evaluate Mexico’s level of fintech sophistication we have assessed the country relative to six other emerging markets (Brazil, China, India, Indonesia, Kenya, South Africa) across a range of metrics (fintech density; scale of fintechs; ecosystem diversity & profitability; funding access; positioning and strategy).

Mexico fintechs score poorly on our sophistication assessment, ranking sixth among the seven assessed countries. The scale of individual fintech firms tends to be small, and the ecosystem is neither well-diversified nor profitable; only 37% of fintechs are outside of payments and lending, lower than the EM average of 44%, and only 10% of surveyed fintechs are currently profitable (37% for EMs). Firms’ positioning and growth strategies also appear weak compared to global peers, in our view. Access to funding, however, is slightly better than average; although dealflow appears strong, the typical transaction size remains small. Mexico is the second-biggest market in Latin America, after Brazil.

Fintech sophistication scores

Funding analysis

Mexican fintechs raised around US$700mn funding in 2019 across 106 deals (Crunchbase data), ranking the country second to Brazil in Latin America.

Latin America fintech funding flows

That said, the average transaction size in Mexico is smaller than other EMs, notably Brazil, perhaps pointing to a prevalence of early-stage rather than late-stage deals, and suggesting that the scale of individual firms is likely to grow in future.

Average funding deal size

The largest 2019 funding deals in Mexico were almost all in the payments and lending segments, including Konfio (US$350mn, SME credit platform), Credijusto (US$142mn, business lending platform) and Clip (US$100mn, payments infrastructure).

Top fintech funding deals in Mexico

The fintech customer value-proposition: Faster approvals, quality and customisation

According to Mexico’s fintechs, the top values they provide to their customers are rapid approvals, high product quality and personalised service. Relative to fintechs in other emerging markets, we observe there is more emphasis on personalised service and less on convenience.

Faster approvals: This is the most important value cited by Mexico fintechs. Fintechs can bypass the legacy systems used by incumbents that require human interaction. They may also be less constrained by compliance checks. We think fintechs will need to keep progressing forward in this area as incumbents are also working to up their game. Dapp (payments) and Klar (lending) are among the fintechs that mention fast approvals as a key value they provide to their customers.

Product quality is a catch-all term, in our view, which includes factors like ease-of-use, product innovation, seamless execution and speed of service. This may explain why it is mentioned as one of the top values by both fintechs and consumers, not only in Mexico but in most of our surveyed markets. Some Mexican fintechs mentioning this as their key value proposition include Clip (payments) and Konfio (lending).

Personalised service: Fintechs use machine learning and big data analysis to provide tailor-made products to consumers and businesses. This allows these firms to build stronger customer relationships, boosting retention. Fintechs that mention personalised service as a key value include Zenda.la (insurtech) and Kueski (lending).

Key fintech values

Key factors for fintech success: first-mover, funding and innovation

The top three success factors cited by Mexican fintechs are first-mover advantage, funding access and unique service offerings. Compared to other EMs, Mexican fintechs seem to benefit more from innovative offerings and funding, but less from management expertise and competitive pricing.

First-mover advantage. When consumers become familiar with using the product (such as in insurtech, where insurance plans can range from one month to lifetime) and as the userbase of a given network grows (eg a payments product), it becomes more difficult for customers to switch. Examples include: Zenda.la (insurtech) and Conekta (payments).

Funding access. We have seen that fintech products can have a market structure where a few firms dominate, while other competitors have a very small market share. Therefore, to effectively compete with big industry players and achieve scale, start-ups may need significant funding for marketing, infrastructure and network-building. Fintechs that cite funding access as a key success factor include KuE Capital (investech) and Klar (lending).

Unique service offerings. Innovation is a key way for digital financial services to compete with incumbents, or to attract financially-excluded customers. Fintechs often innovate to provide convenience, customised services, low pricing etc. Fintechs that think unique services have contributed to their success include Albo (payments) and Openpay (payments). We also present some innovative offerings by Mexico fintechs at the back of this note.

Key fintech success factors

Fintechs’ future plans: new customer segments and technology investment

Our survey shows that the top two strategies for Mexican fintechs are entering new customer segments and technology investment. Compared with those in other emerging markets, Mexico fintechs are more focused on expanding into new customer segments and less focused on operational efficiency.

Entering new customer segments. Mexico has a diverse customer base, geographically, demographically and in relation to income, so it makes sense for fintechs to modify their existing offerings to appeal to new customer segments. Kueski (lending) and Bitso (blockchain) are among the fintechs planning to adopt this approach.

Technology investment. Technology such as machine learning (ML) and artificial intelligence (AI) can improve the speed, cost and quality with which services are delivered to consumers. Zenda.la (insurtech) and Albo (payments) are among the Mexican fintechs planning more technology investment.

Fintechs’ future plans

Fintech innovations: Digital banking, cloud technology and chatbots

Considering their plans over the next three years, Mexican fintechs, in common with those in other EMs, are focused most on introducing digital banking, cloud technology and chatbots.

Digital banking encompasses the full suite of products offered by traditional banks, but via digital channels. By adopting this approach, fintechs are simultaneously trying to capture a greater share of existing customers’ wallets and attract new customers to their franchise. Fintech companies with digital banking in their innovation plans include Clip (payments) and Klar (lending).

Cloud technology. Fintech companies use cloud technology to store and protect consumer data and to host services, which helps to reduce both operating costs and operating risk. Openpay (payments) and Zenda.la (insurtech) are among the fintechs planning to utilise more cloud technology in their businesses.

Chatbots and virtual assistants help improve the customer experience by automating customer service/education and simultaneously allow fintechs to reduce their operating costs by limiting the staff required to handle customer queries. Fintech companies with plans in this area include Dapp (payments) and Kueski (lending).

Targeted fintech innovations

Fintechs will gain market share by improving financial inclusion

We asked consumers which kinds of providers were meeting their current financial services needs for different products, and which ones they expected to be using in three years’ time. We used this data to estimate current and likely shifts in share of wallet for different types of firms.

Currently, fintechs in Mexico have a 24% share in overall financial services industry, which is slightly below the 26% level for global EMs. Looking ahead, Mexico fintechs are likely to gain 11ppts market share, which is considerably higher than the 5ppts average gain expected in global EM. The shift is mainly driven by offering services to financially-excluded customers. Note that these responses are unweighted; we think formal financial institutions would have a much higher share if our survey were volume-weighted.

Financial services provider market shares

Key constraints to fintechs’ growth: Market dynamics, competition and funding

Market size and growth, competition and funding are the three biggest growth constraints cited by Mexican fintechs. Compared to fintechs in other EMs, market dynamics appear to be a bigger challenge in Mexico, while regulations represent less of a concern.

Size and growth of the market. It can be difficult for industry leaders to outgrow the overall market, particularly as the number of competing fintechs rises. We think market size is impacted by customer awareness; for example, insurance is a less-penetrated product in low-income countries and blockchain is still an area where corporates and individuals have very limited understanding. Bitso (blockchain) and Clip (payments) are among the fintechs that cite market dynamics as a concern.

Competition from financial institutions and other fintechs. New start-ups face many challenges to achieving scale. Incumbents are actively developing digital products, while new fintech start-ups are also ratcheting up the competition. Fintechs that cite competition as a key growth constraint include Konfio (lending) and Zenda.la (insurtech).

Funding/capital: Depending on the business model they employ, funding is essentially the lifeblood of lending fintechs, but it is also important for fintechs active in payments, investech and insurtech. Fintechs citing this constraint include Kueski (lending) and KuE Capital (investech).

Key constraints to fintech growth

Fintech regulatory hurdles: Capital requirements, deposit insurance and data protection

Regulations are the most important risks for fintechs in Latin America, as per a Bank of International Settlements study.

Latin America fintech risk scores

According to our own survey, capital requirements, deposit insurance and data protection requirements are the key regulatory hurdles that Mexican fintechs face. This is broadly in line with the experience of fintechs in other emerging markets.

Capital requirements. Capital requirements tend to have a significant impact on barriers to entry for new players and are also a key consideration for incumbents expanding their businesses. In general, fintechs tend to favour capital-lite business models. Fintechs citing this regulatory hurdle include Bitso (blockchain), and Clip (payments).

Deposit insurance. This challenge is cited more frequently by fintechs that are active in payments and lending. Since digital wallet accounts are one of the most frequently used financial products for low-income customers, they play a key financial inclusion role in emerging markets. This is drawing the attention of local regulators, who are understandably concerned about protecting customers’ balances. Affected fintechs include Konfio (lending), and Dapp (payments).

Data protection requirements. One way fintechs can generate competitive advantage is through the collection and utilisation of customer data. Data protection regulations play a key role in determining the extent to which these companies can obtain and use such information, and the processes they must follow to protect it. Fintechs citing data protection regulations as a hurdle to their growth include Kueski (lending) and Albo (payments).

Fintech regulatory hurdles

How incumbents are fighting the fintech threat: Investment in technology and cost cutting

Technology investment is the main tool used by incumbents in Mexico to fight off fintech competitors, followed by cost-cutting. These strategies are broadly in line with what incumbents are doing in other emerging markets.

Investment in technology/automation. To boost process efficiency, financial institutions are adopting SaaS applications in areas such as accounting, human resources and KYC verification. They are also using cloud technology for data storage and security. Santander Mexico and Banco Del Bajio are among the companies in Mexico that are boosting technology investment.

More focus on cost-cutting. This helps incumbents price aggressively to compete with fintechs; our survey indicates that financial sector consumers are very price sensitive. Cost efficiency also allows incumbents to increase profitability build up capital. Companies focusing on cost-cutting include Maxcom Telecomunicaciones and Gentera.

Incumbents’ steps to counter the fintech threat


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