Fulfilling FinTech’s Promise | Global Investors' Symposium Mexico City 2024

Context and Scope

• The session, "Fulfilling Fintech's Promise," was moderated by Michael Pivovar (Executive VP, Milken Institute Finance) and featured panelists Adolfo (Clip), Marlene (Story), and Heath (Circle).
• The Milken Institute's fintech program focuses on three core pillars: improving access to capital, financial inclusion, and regulatory transparency/accountability.

The Cash Problem in Mexico

• Over 80% of total private consumer expenditure in Mexico remains cash-based.
• Adolfo identifies cash as a barrier to inclusion because it excludes individuals from formal financial systems (loans, insurance).
• Cash transactions facilitate anonymity, which aids money laundering and illicit activities (drugs, weapons, illegal gambling), hindering rule of law enforcement.
• Cash usage imposes high operational costs due to robbery risks, physical transport needs, and ATM infrastructure maintenance.
• The cash-heavy economy disproportionately disadvantages lower-income populations and reduces overall economic efficiency.

Market Structure and Oligopoly

• Mexico's payment ecosystem is hindered by an oligopolistic structure controlled by two bank-switches, which dictate fees and rules.
• Neither international Visa/Mastercard models (which generate revenue for companies) nor the Indian model (which generates revenue for the government) are present in Mexico; the country has neither benefit.
• Only ~300 billion USD of the 1.3 trillion USD consumer-to-business economy is processed digitally; the remaining ~1 trillion is unprocessed cash.
• 80% of Clip's 40% of merchant market share consists of merchants who previously only accepted cash.

Story's Approach to Financial Inclusion

• Story, founded in 2018, launched in 2020 to address the 18-20% credit card penetration rate in Mexico.
• Story has acquired nearly 3 million customers and obtained a deposit-taking license in October 2023 to enable savings.
• In October 2023, Story launched an interest rate offering of 15% to promote savings, a move followed by other market players.
• Story utilizes a proprietary "construye" model with a 99% acceptance rate for first-time credit seekers, targeting those never previously in the formal financial system.
• The company embeds financial education and behavioral economics into its products to incentivize on-time payments and responsible credit use.
• 80% of Story's customers are receiving their first formal credit card.

Circle's Stablecoin Value Proposition

• Stablecoins differ from traditional digital dollars by moving actual value over the internet via blockchain, rather than just communicating via ledgers between banks.
• Cross-border remittances currently cost ~3% fees and take 2 days; stablecoins aim to reduce this to instant, low-cost wallet-to-wallet transfers.
• Mexico-US remittance corridors are identified as a primary use case for stablecoins.
• Circle previously utilized stablecoins to distribute millions of dollars to Ukrainian refugees in under 24 hours without government intermediaries.
• Heath projects that the merger of capital markets and the internet (becoming "on-chain") is likely a decade away.

Regulatory Landscape and Policy Recommendations

• Mexico's regulatory framework is robust on paper but suffers from poor enforcement of antitrust and competition laws.
• Adolfo cites a timeline disparity in market entry: Mexico took 6 months/$100k (historical PayPal example) vs. Brazil's 2 years/$5M vs. Argentina's 10 years.
• Marlene notes that while regulators aim to protect users, the pace of regulation is significantly slower than technological advancement.
• Industry leaders advocate for active engagement with regulators to educate them on technology and propose solutions to regulatory gaps.
• Singapore, Japan, and Brazil are cited as examples of nations with established stablecoin regulatory regimes.
• Circle has proactively adopted transparency measures (publishing reserve lists, utilizing third-party fund managers) in anticipation of future global regulations.

Education and Technology Integration

• Story is integrating AI-driven financial education bots, leveraging World Bank models to accelerate financial literacy.
• Education is delivered via "just-in-time" notifications (e.g., reminders for cut-off dates to avoid interest) to prevent delinquency.
• Clip utilizes human customer service (real people answering in <20 seconds) to onboard merchants and explain complex payment processes.
• Clip's platform records cash transactions digitally, allowing merchants to gain a full view of their business and build data for risk management.
• The panel concludes that Mexico should emulate successful emerging market models (Brazil or India) focused on competition, rather than remaining in a hybrid state with the downsides of both.