The Unbanked in Mexico and the USA: Five Questions Addressed Finance Forum 2004 Tova Maria Solo, LAC Region – World Bank Prof. John Caskey, Swarthmore College Prof. Clemente Durán, Universidad Nacional Autónoma de México (with contributions from Manuela Francisco and Anjali Kumar – LCSFF)

2 1.Who Are the Unbanked ? USA & Mexico Similarities Low income groups Low income groups Below median income USA 79% Mexico 90% Less educated Less educated Less than high school USA 56% Mexico 51% Marginalized in socio- economic terms Marginalized in socio- economic terms Mexico ( informal sector) 60% USA ( Latino and Afro American) 90% Differences Percentage of Unbanked Percentage of Unbanked Mexico ( Mexico City) 75% Mexico ( Mexico City) 75% USA 9.1% USA 9.1% (Percentage of Unbanked is markedly greater in Mexico) Home Ownership of Unbanked Home Ownership of Unbanked Mexico (own home in Mexico City) 63% USA 7.8% (Yet surprisingly home ownership is markedly greater in Mexico)

3 2. Why Don’t the Unbanked Use banks ? Main Reasons USA Mexico Don’t need account – no savings53% 7% Don’t need account – no savings53% 7% Fees and minimum balance too high45% 70% Fees and minimum balance too high45% 70% Want to keep records private22% 2% Want to keep records private22% 2% Not comfortable with banks/don’t trust18% 16% Not comfortable with banks/don’t trust18% 16% Inconvenience – location and hours10% 2% Inconvenience – location and hours10% 2% Banks won’t let us/lack of documentation 10% 3% Banks won’t let us/lack of documentation 10% 3% Costs for maintaining a basic savings account USA Mexico USA Mexico Affordable to earners above (percentile):75th 25th Affordable to earners above (percentile):75th 25th (Based on income required to maintain an adult savings account in 2001 where interest earned matches bank fees. Assuming that 50% of monthly income can be maintained and 1% of monthly income can pay for maintenance fees – Banco Azteca not included in survey)

4 3. Where Do the Unbanked Get Financial Services? (a) Saving Mechanisms USAMexico Informal savings – cash, money orders, signed checks, clubs, loans, jewelry etc. 20.5%28% Home ownership 7.8%73% No financial savings 68.6%56%

5 3. Where do the Unbanked get Financial Services? (b) Income Receipts USAMexico Check (Check cashing operations charges 2-3%) 50.5%85.6% Cash18.8%7.8% Direct deposit to non-bank 16.6%6.3%

6 3. Where do the Unbanked get Financial Services? (c) Bill Payments USA – How they pay Mexico – How they pay Cash 36% Money order/bill payment services 35% (Mostly through check cashing operation) Cash and in person 95-99% USA–What it costs Mexico – What it costs Check payments 2-3% ($600/year for a median income household) Check payments 5% Check payments 5% (Time : 2-4 days plus travel )

7 3. Where do the Unbanked get Financial Services? (d) Remittances A $100 wire from New York to Mexico costs for Banked - $9 plus exchange rate (unknown) Banked - $9 plus exchange rate (unknown) Unbanked - $19 plus exchange rate (unknown) Unbanked - $19 plus exchange rate (unknown) But only 2% of Mexican families reported receiving remittances

8 3. Where do the Unbanked get Financial Services? (e) Credit USA (consumer credit) Mexico Bank 5.9% Finance Company 2.8% Mortgage company 0.3% Family 16.6% Friend 8.4% Car dealer 2.3% Retail store 1.9% Individual (who charges interest) 0.4% Payday lender 0.0% Credit Union 1.4% Finance Company 2.9% Saving Bank 4.3% Savings and loan association 1.4% Friend 8.6% NGOs 1.4% Department store 48.6% Government 5.7% Others 25.7%

9 4. What is the Cost of Being Unbanked? Cost for the Unbanked – estimates based on median income household Cost for the Unbanked – estimates based on median income household USA 2.5% Mexico 5% Less than optimal choices for savings, investments and borrowing Costs for the Financial Sector – urban population excluded: Costs for the Financial Sector – urban population excluded: USA 8% Mexico 75% Development Costs Development Costs –Reduced aggregate savings –Reduced productive reinvestments of savings –Increased income inequality through upward redistribution of income

10 5. What Initiatives Help Improve Financial Services for the Unbanked? MEXICO Focus on Non-Banking Institutions Focus on Non-Banking Institutions BANSEFI – Regulating and setting up electronic base for cooperative and social sector SOFOLES – Lending to finance corporations for housing, car and business loans PRONAFIM - Grants to micro finance companies Mexican Banks Innovation Mexican Banks Innovation Banco Azteca – New and outside the banking sector - virtually without competition Banamex/CAME joint venture –cooperative working with a commercial bank USA Public Policy Initiatives: e.g., CRA(Community Reinvestment Act), CDFIs (Community Development Financial Institutions) Public Policy Initiatives: e.g., CRA(Community Reinvestment Act), CDFIs (Community Development Financial Institutions) New Products / Institutions: Pay cards, Electronic Transfer Accounts, IDAs (Individual Development Accounts), ID Cards for Non-registered aliens New Products / Institutions: Pay cards, Electronic Transfer Accounts, IDAs (Individual Development Accounts), ID Cards for Non-registered aliens Educating the Unbanked: Savings and Lending education, working with NGOs Educating the Unbanked: Savings and Lending education, working with NGOs

11 6. Lessons from Two Countries 6. Lessons from Two Countries USA: Goals and Instruments Goal: Goal: - Reduce costs for Unbanked households and help low income households build assets through savings Instruments: Instruments: - Regulatory measures: Disclosure (CRA); basic accounts and bank fees, specialized institutions - Promoting lower cost technologies / products - Financial education Mexico: Goals and Instruments Goal: Goal: - Expand the “popular” banking sector and to improve its financial stability Instruments: Instruments: - Institutional support to non-banking institutions - Increasing competition and regulating banking efforts to reach lower income groups (Banco Azteca)