Overview of the Mexican Payments Systems: Challenges and Opportunities Lorenza Martínez Trigueros Director General of Payment Systems and Corporate Services February 2015

Outline Mexican retail payments Limited adoption of payments Bank of Mexico’s role Opportunities Final remarks

Mexican retail payments By reducing transaction costs, more efficient and reliable payments help to allocate resources more efficiently, which brings about higher social welfare. The challenge is to achieve efficiency in electronic payments such that they can be made anywhere, any time and of any size. As payment regulators, we care about ensuring the sound development of these payments so that their benefits materialize. Why do we care about having anywhere, any-time, any-size payments?

Mexican retail payments Despite the reduction in the use of checks and growth in electronic payments in the last years, Mexico still has opportunities for improvement in the use of more efficient media payments. Source: Red Book, BIS.

Mexican retail payments Cards infrastructure, 2013 Country Number of cards per capita Number of POS per million of inhabitants, Dec. 2013 Card payments per capita Number of ATM per million of inhabitants, dec 2013 Cash withdrawals per capita Korea 5.0 41,575 228.5 2,474 nav Australia 2.7 34,704 1,304 Italy 1.2 26,112 29.9 825 13 United Kingdom 2.4 25,807 181.1 1,060 45 Canada 3.0 23,615 224.8 1,852 Sweden 2.3 22,261 248.6 337 23 France 1.3 20,512 136.7 895 25 Switzerland 1.9 20,474 88.7 843 15 United States 3.8 16,978 248.3 1,385 Netherlands 1.8 14,807 169.5 439 Belgium 12,275 119.5 1,333 38 Germany 1.6 9,057 44.7 1,009 26 Mexico 1.1 5,798 14.6 342 When comparing our card market with other economies, it is inferred that there is room for further development. Source: Red Book, BIS. nav – not available

Mexican retail payments In spite of progress observed, Mexico still lags behind other economies in the usage of electronic payments. Mexico fares better when credit transfers are considered only. Per-capita electronic payments in emerging and developed economies1/ Number of yearly per-capita payments Per-capita credit transfers in emerging and developed economies1/ Number of yearly per-capita transfers Electronic payments In 2013, the number of electronic payments per capita in Mexico was 24 and the average number of electronic payments per capita of several emerging and developed economies was 190; this indicates that the average number of electronic transactions per capita for the whole sample was 690% higher than in Mexico. Nevertheless, it should be noted that the gap between Mexico and other countries has been closing; in 2009, the number of electronic payments per capita in Mexico was 15 and the average number of electronic payments per capita of several emerging and developed economies was 155; this indicates that the average number of electronic transactions per capita for the whole sample was 900% higher than in Mexico. Credit transfers In 2013, the number of credit transfers per capita in Mexico was 9 and the average number of credit transfers per capita of several emerging and developed economies was 42; this indicates that the average number of credit transfers per capita for the whole sample was 368% higher than in Mexico. In 2009, the number of credit transfers per capita in Mexico was 7 and the average number of electronic payments per capita of several emerging and developed economies was around 38; this indicates that the average number of credit transfers per capita for the whole sample was 427% higher than in Mexico. Source: BIS. Electronic payments defined as the sum of the number of credit transfers, direct debits, E-money payment transactions and card payments. 1/ Countries in the sample: Australia, Belgium, Brazil, Canada, China, France, Germany, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, Turkey, (not considered in credit transfers due to the lack of data), United Kingdom, United States (except 2013).

Outline Mexican retail payments Limited adoption of payments Bank of Mexico’s role Opportunities Final remarks

Limited adoption payments: Issues to be tackled Adoption of electronic payments is still limited despite observed improvements. Issues to be tackled: Low financial inclusion Mistrust of payment schemes or banks Payment infrastructure is missing or insufficient in some areas Access to payment services could be expensive Electronic payments are rarely used by the informal sector Adoption of fraud prevention schemes and security standards Interoperability should be supported among payment-service providers offering the same type of service, without discourage innovation. Issues to be tackled: Entry barriers to potential new participants Increasing competition The legal framework should keep up pace with innovation to enable the sound development of more efficient payment alternatives (e.g., e-money). Issues to be tackled: Policies oriented to improve infrastructure Policies oriented to get faster payment systems Payment authorities must be concerned not only with adequate access to payment systems, but also their adequate usage. Supply and demand factors must be tackled jointly, since the actual usage of payment systems is an equilibrium result. To this end, payment policies should be accompanied by demand-targeted actions (e.g., financial education), so as to improve the amount of information and trust of potential consumers. Additionally, it is important to consider policies oriented to improve infrastructure that is not specific for payment purposes but is a necessary condition for them (such as the electric grid and the mobile network).

Outline Mexican retail payments Limited adoption of payments Bank of Mexico’s role Opportunities Final remarks

Bank of Mexico’s role in retail payments: overview One of Bank of Mexico´s objectives is to promote the sound development of payments systems, on that regard it plays different roles: Operates the RTGS (SPEI), the backbone of the Mexican payments systems, not only for large but also for retail payments transactions. Regulates the retail payments systems: Electronic funds transfers, card payments, direct debits and checks. Bank of Mexico has issued regulation in order to promote transparency in fees and competition among clearing houses processors. Mobile payments clearing houses rules, requirements for authorization and technical specifications for the interoperability among such entities (SPEI). Card payments clearing houses rules, requirements for authorization and technical specifications for the interoperability among such entities. Regulatory changes have facilitated the entry of new participants, aggregators (i- Zettle, Pago Fácil, Mercado Pago, etc.), clearing houses, (two in process of authorization), new non-bank issuers and specialized companies in card processing (issuing and acquiring).

Bank of Mexico’s role in retail payments: operator Since 2005, Bank of Mexico operates the SPEI, a real time settlement system (RTGS). The use of SPEI, in conjunction with other policies of the Central Bank to promote more efficient means of payment, has allowed a sustained growth of electronic payments in the last years. Retail payments have progressively gained importance in Mexico. Electronic payments Billions of USD Average Annual Growth Rate 5% 44% 19% 26% Source: Bank of Mexico. 1/ Third-party payments: those which are both sent and received by SPEI participants on behalf of their clients. 2/ Calculated with the average exchange rate of October 2014.

Bank of Mexico’s role in retail payments: regulator Mobile payments On December 2013, Bank of Mexico issued regulations to promote and facilitate electronic transfers initiated with a mobile device. The changes include: Rules for the clearing houses which process electronic transfers initiated with a mobile device. Association of mobile phone numbers to bank accounts. (since November 2014) The banks should allow to their costumers: The association of mobile phone numbers to bank accounts and, The processing of electronic transfers in which the beneficiary account is identified with the 10 mobile phone number digits. Some facts: Subscriptions to mobile phones in Mexico in 2013: 103 millions Around 39% of mobiles in Mexico are smartphones According to The Competitive Intelligence Unit, the average life of an smartphone in Mexico is around 18.39 months

Bank of Mexico’s role in retail payments: regulator Mobile payments Extended hours of operation and reducing processing times of mobile payments through SPEI. Service hours 11.5x7. (January 2015) Service hours 20x7. (March 2015) Service hours 24x7. (November 2015) The processing timeframe could take up to 15 seconds. (May 2015) 5 sec. Issuer bank 5 sec. SPEI 5 sec. Receiving bank

Bank of Mexico’s role in retail payments: regulator Tiered-system accounts Introduced in 2011 to enable banks to offer more flexible payment and financial products. Four tiers, from lower to higher functionality and from looser to stricter KYC & AML/CFT requirements. Tier Max. monthly deposits Max. account balance Debit cards Electronic fund transfers** Checks 1* 272 USD 363 USD  2 1,088 USD NA 3 3,625 USD 4 The market uptake of tiered system accounts (3rth quarter 2014): Level 1 accounts: 11,974,503 Level 2 accounts: 10,316,366 Level 3 accounts: 583,057 Level 4 accounts: 101,676,804 Only level 4 accounts will not have an upper limit, unless negotiated by institutions with their clients Even though all of the four levels of accounts include debit cards, only accounts level 2, 3, and 4 allow their clients to access their funds through electronic funds transfers Only level 4 accounts allow withdrawals by cashing checks * Only for domestic transactions. ** Includes direct debits, Internet and mobile payments origination .

Bank of Mexico’s role in retail payments: regulator Basic accounts Must be offered by all banks since 2007 Most services are free: Opening or closing the account Debit card Cash withdrawals & balance enquiries at bank’s branches or ATMs Direct debits Balance check There’s evidence that mandating basic accounts in Mexico has contributed to financial inclusion by enabling users to access more sophisticated financial services.1/ Still, authorities could play a more active role in publicizing basic accounts, since branch employees sometimes don’t offer them.2/ There are two types of basic accounts: payroll basic accounts and general basic accounts. Major differences are: General basic accounts have a monthly average balance requirement (determined by each institution); if not met by three consecutive months, the account could be canceled Payroll basic accounts may only be opened by employers for their workers The market uptake of basic accounts in Mexico: 22,213,505 accounts (third quarter 2014) Market uptake of general basic accounts: 2,852,682 accounts Market uptake of payroll basic accounts: 19,360,823 accounts Some important lessons deriving from the Mexican case with basic accounts are: Basic account products should be standardized in order to allow for easier comparisons between institutions offering them Due to the fact that this market is characterized by incomplete information, there should be stronger campaigns aimed at informing citizens about the possibility of getting these types of financial products 1/ Kaiser K., Lever C., Salcedo A. (2011), “On the Impact of Mandatory Basic Accounts on Financial Development: Evidence from Mexico”, mimeo, Banco de México 2/ Giné X., Martínez C., Keenan R. (2014), “Financial (Dis-)Information: Evidence from an Audit Study in Mexico”, The World Bank

Bank of Mexico’s role in retail payments: regulator Card payments clearing houses In order to accomplish the financial reform published in January 2014, in March 2014, Bank of Mexico issued: The rules for the organization and operation of card clearing houses, requirements for authorization and technical specifications for the Interoperability among such entities. Avoid establishment of entry barriers Avoid market distortions and lack of transparency Promote innovation Improve security and risk management Allow clearing houses to contract with third parties the provision of routing services, clearing and settlement. Allow clearing houses to charge in proportion to the payment amount. Clearing houses regulations objectives: Avoid establishment of entry barriers Avoid market distortions and lack of transparency Promote innovation Improve security and risk management

Bank of Mexico’s role in retail payments: regulator Card payment networks In conjunction with the National Banking and Securities Commission (CNBV), in March 2014, issued regulation related to card payment networks. The general provisions applicable to card payment networks, which seeks: To set terms and conditions that participants must accomplish in such networks. To promote transparency in fees. To promote competition. To avoid discriminatory conditions. To set responsibilities for brand card owners to grant liquidity. Clearing houses regulations objectives: Avoid establishment of entry barriers Avoid market distortions and lack of transparency Promote innovation Improve security and risk management

Outline Mexican retail payments Limited adoption of payments Bank of Mexico’s role Opportunities Final remarks

Opportunities: mobile payments Besides P2P payments, mobile payments have potential to broaden P2B electronic payments, in addition to card payments. There has been a growth in value and volume of the transactions made through a mobile device; regulation is expected to incentivize higher growth. In Mexico, the mobile phone has, by far, a greater presence and is more affordable than a computer for most population (over 80% of the population have a mobile phone), which allows new schemes for sending and receiving payments. Year Population (millions) Mobile phone contracts subscribed (millions) Contracts per capita 2005 103 47 0.5 2006 104 55 2007 105 67 0.6 2008 106 75 0.7 2009 107 83 0.8 2010 108 91 2011 109 95 0.9 2012 116 101 2013 118 Source: Bank of Mexico. 1/ Transactions made thorough phones or mobile devices include: transfers, payments in businesses and other operations such as payments of services

Opportunities: card payments Card payments per capita As it can be observed, the reforms and policies implemented by Bank of Mexico in recent years, have opened the possibility for new entities to participate in the Mexican payments market. There is also a potential for growth on card payments transactions. The regulation, promotes the entrance of new participants: clearing houses, specialized service providers, aggregators, acquirers, issuers, etc. Although there has been an important growth in the card payments, Mexico is still fallen behind respect other countries. It is expected that these recent improvements promote further growth of card payments. Country GNI per capita Card payments per capita Korea 33,440 228.5 Australia 42,450 Italy 35,540 29.9 United Kingdom 38,160 181.1 Canada 42,610 224.8 Sweden 46,680 248.6 France 38,530 136.7 Switzerland 59,210 88.7 United States 53,750 248.3 Netherlands 46,400 169.5 Belgium 41,240 119.5 Germany 45,620 44.7 Mexico 16,110 14.6 Source: World Bank and Red Book, BIS.

Opportunities: banking agent The National Banking and Securities Commission issued regulations to allow outsourcing some banking services to banking agents, to broad access and to reduce costs. Banking agents can take cash and check deposits, commercialize banking cards related with accounts type 1 and open accounts type 2 and 3, pay remittances, cash withdrawals . Banks are responsible that the banking agents comply with all the regulation requirements in the banking services they provide. Banks need authorization of the National Banking and Securities Commission to hire banking agents. The regulation has been useful to widen access. When the regulation was issued, there were around 11 thousand bank branches and some unregulated service points with very limited services. Since then there have been 15 banks authorized to work with banking agents with more than 26 thousand service points. Currently a banking agent (convenience store) has been opening an average of 5 thousand account type 2 per day. Infrastructure 2010 2014 Average growth (2010-2014) POS 482,299 872,865 16% Branches 11,291 12,715 3% Banking agents 9,137 26,857 31% ATM 35,936 42,643 4% Source: Bank of Mexico and National Banking and Securities Commission.

Outline Mexican retail payments Limited adoption of payments Bank of Mexico’s role Opportunities Final remarks

Final remarks The Bank of Mexico has followed two strategies to enhance the availability, reliability and convenience of electronic payments: Exploit economies of scale and scope of SPEI Improve the regulation for privately-run payment services and providers Coordination with the industry is necessary to ensure that society enjoys the benefits from more efficient payment alternatives. Payment authorities should continue to strengthen incentives to use electronic payments, particularly for those currently excluded from formal financial services. Since payment system technology is in constant evolution, authorities must attend closely new developments in order to evaluate their possible opportunities or challenges, and to act promptly. Some payment markets are two-sided. Therefore, authorities must be coordinated with all participants to guarantee that they have a comprehensive view of the market.