LatAm fintechs set foot in Mexico’s unexplored remittances market

For years, fintech companies have looked at Mexico’s massive remittance market as a potential target to disrupt.

The country records significant inflows of remittances from Mexicans living abroad. Last year, inflows amounted to almost 4% of the GDP, and over 50 billion dollars were transferred into Mexico.

Now fintechs want a small piece of it.

Last month, Argentine neobank Ualá announced it was moving into the segment, partnering with Mexican incumbent ABC Capital in a bid to get a slice of the billion-dollar market.

To be sure, ABC Capital is no stranger to the Argentine unicorn company. The fintech, which launched operations in Mexico in 2020, acquired the bank last year to access its coveted banking license. Such permits allow neobanks in Latin America to expand the range of financial products they can deliver and boost engagement through their ecosystem.

Ualá has also pursued a similar strategy in Argentina, where it bought Wilobank. However, it’s the first time the fintech is setting foot in remittances. The process of acquiring ABC is still awaiting regulatory clearance, and in the meantime, companies are exploring the segment ahead of the takeover.

Record flows to Mexico

This year, Mexicans living and working abroad sent record remittances to their families as the economy struggled. Monthly inflows are now above $5 billion, and the accumulated transactions through the year’s first seven months stretched to almost $33 billion.

By entering the remittance market, Uala and ABC Capital will compete with U.S. players such as Western Union, Wells Fargo, Moneygram, and Xoom, in a primarily new market by domestic fintechs.

But more importantly, Uala will compete with a deep-rooted preference among Mexicans for cash.

“Today, 94% of remittances are paid in cash,” said Ulises Tellez, CEO at PagaPhone, a Mexican fintech and partner with Western Union. “Digital payments are safer, faster, easier, and less expensive, plus it works and operates 24/7.”

According to him, concentration in the current market is high, for which technology can open the door to new fintech players looking to cater to Mexicans this way.

“The market is now very mature, and there are a variety of ways to send money,” he said. “Complementary digital solutions are expected to proliferate in the coming years, and whoever gets here first will have a dominant position.”

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A concentrated market

Uala’s new feature will allow domestic users to access funds sent by family or friends abroad using the app that charges no commissions.

In Latin America, citizens have long faced expensive fees when it comes to cross-border transactions. In a 2019 paper, the International Monetary Fund said fintechs could play a decisive role in cutting such costs, alleviating families in the region facing overpriced fees. The fund noted that traditional financial services for moving money across countries averaged 6% of the total.

“A more cost-effective approach for Latin American countries relies on using fintech, like mobile banking, to send money across borders,” the fund said. 

According to the Inter-American Development Bank, in 2021, Latin America and the Caribbean got 127.6 billion dollars in remittances, an annual growth of 26.0%. Mexico received almost 40% of those.

Cryptocurrency as an alternative

It’s not only neobanks that are looking into the market. Bitso, a Latin American cryptocurrency unicorn founded in Mexico, is also targeting the segment. In the region, cryptocurrency has drawn much interest as they facilitate fast cross-border transactions at a lower cost.

“Remittances is one of the use cases of crypto that has grown the most in recent years,” Ernest Calero, general manager at the local fintech association, said. “Stablecoins make this possible, making sending remittances across borders faster and easier.”

o be sure, fintechs getting into remittances is no easy feat. For some reason, just a handful of newcomers have looked at the market.

For PagaPhone’s Tellez, the main challenge could be customer identification and knowing your customer rules. “It is a highly regulated industry,” he said. “However, wallets can solve this issue with biometrics and proof of life, ID validation, and geolocation.”

Source: Fintech Nexus