Mexico’s new government is trying to slash the cost of sending cash home for Mexican families living abroad and is hoping competition from “fintechs” (financial technology) will encourage banks and services like Western Union to reduce commissions and improve exchange rates.
Deputy Finance Minister Arturo Herrera said the government did not plan to place new regulations on the flow of remittances, one of the country’s largest sources of foreign currency and a lifeline for millions of poor families.
However, the former World Bank executive envisaged that the increasing use of money transfer apps would help bring down the cost of sending remittances. Currently, the commission charged and the foreign exchange rates imposed together take a bite out of each remittance of 8 percent on average. Herrera said that should be brought down to 5 percent.
“That is to say, the cost of transactions must come down by about 40 percent. That is something the fintechs are probably in a better position to do than traditional actors such as banks,” Herrera told Reuters in an interview earlier this week.
“Their great advantage is that they can operate in a more efficient and direct way and at lower costs, which should lead to lower commissions,” Herrera said.
President Andres Manuel Lopez Obrador, who took office on Dec. 1, has made fighting poverty and inequality a centerpiece of his administration. Herrera said bringing down the cost for financial services like remittances would help many of the nation’s neediest.
Banking costs are a sensitive issue in Mexico. When Lopez Obrador’s ruling MORENA party introduced a bill last year to limit banking fees it triggered a selloff in the stock market. Lopez Obrador distanced himself from the bill.
Other changes were better received, with credit ratings agency Fitch saying a bill introduced by Lopez Obrador to loosen restrictions on pension fund managers could lead to better returns and payouts for beneficiaries.
Lopez Obrador has also tried to calm investors’ nerves by saying there would be no modifications to the legal framework relating to economic, financial and fiscal matters in the first three years of his tenure.
The government says 24 million Mexicans live in the United States, by far the largest source of money sent home. Mexicans sent a record $33.5 billion in remittances in 2018, a 10.5 percent jump from a year earlier, Mexican central bank data show.
Mexico is already home to 75 startups that specialize in payments and remittances, data from fintech platform Finnovista show, while remittance apps like Remitly and Xoom have been gaining popularity.
Herrera said banks and Western Union would have to make their services cheaper to compete with money transfer apps. He did not say how quickly that would happen.
“I wish we could make it happen immediately,” he said.
No comment from Western Union
Western Union and its closest rival Moneygram did not respond to requests for comment. The Mexican Banking Association declined to comment on the topic.
Turning to fintechs for change is part of a broader strategy aimed at decreasing the use of the cash in Mexico, Herrera said. He said the Finance Ministry planned to reveal additional measures at the annual Banking Convention in March.
Ninety percent of transactions in Mexico are made in cash, in a system that he said is inefficient and expensive and creates ample opportunities for corruption and money laundering.