In Mexico, ‘Know Your Customer’ Innovation is Critical to Making Financial Inclusion Programs More Effective

A few weeks ago, the UN ratified a series of Sustainable Development Goals (SDGs) including goal #1: to end poverty in all its forms everywhere. Already, we know this is important in Mexico where the UNFPA reports that more than half of people live in poverty.

While there are many dynamics at play here, I believe one of the most powerful tools society has to defeat poverty is financial inclusion. It would seem the UN agrees given that progress against SDG1 is measured by ensuring that “all men and women, in particular the poor and the vulnerable, have equal rights to economic resources” including access to financial services.

This is significant for Mexico. With only 39 percent of Mexican adults having access to any sort of financial institution account, the country lags in relation to comparable nations. For example, half of people in Latin American and Caribbean countries have bank accounts, while 7 in 10 do in countries of similar economic size to Mexico.

For Mexico to make strides toward SDG1, the country must close the financial inclusion gap. In many ways, the country has already made great progress, but there is still so much work to be done.

Mexico’s novel tiered account strategy is a starting place

In 2011 Mexico’s financial authorities approved a system of tiered accounts that required varying levels of customer authentication as follows:

SOURCE: Adapted from CGAP

A significant driver for such a solution was Mexico’s 2011 transition to electronic disbursements of government subsidies. To realize the cost savings and efficiencies associated with electronic disbursement (both to the government and other entities involved in payments infrastructure), Mexico needed to rapidly increase the number of bank accounts in the country.

Mexico’s program was considered an important breakthrough because it applies a risk-based approach to Financial Action Task Force recommendations for anti-money laundering and combating the financing of terrorism (AML/CFT). Importantly, that means many more people who pose little to no threat have the opportunity to access financial services.

There is no doubt that the program has succeeded in increasing access. At the national level, account ownership is up 41 percent and savings rates have more than doubled since 2011. However, these macro numbers only tell part of the story.

According to the CNBV (Mexico’s banking and securities commission) 1.9 million people had opened tier 1 accounts as of August 2015. However, that data is overstated. First, with accounts so easy to open, it is likely that many people hold numerous accounts. Second, account ownership is anonymous meaning that there is no way to know if tier 1 account owners also have other types of accounts.

Tier 2 numbers (5.1 million accounts opened) are also likely to be overstated. One reason is that many people have opened debit card accounts (the Banamex Saldazo card, with 1.7 million customers, is one example) and are using them as an easy alternative to cash. However, these cards are not being used as a gateway to more formal financial services, which is where the real opportunity for poverty alleviation comes in.

From a financial inclusion standpoint, the hope was that people would “graduate” from one tier to the next. There is reason to believe that isn’t happening—at least not at a high rate.

For banks, programs like the tiered account strategy promise a reduction in costs—due to eased documentation procedures and reduction in branch traffic. The latter is not as easy to achieve, however, because it requires either digital solutions or the engagement of a third-party location. In practice, third parties like OXXO and 7-11 convenience stores have played a large role, but not at a low cost. Even when the cost-per-account-opened is reduced, customers end up paying high agent fees. There is room for improvement on all fronts.

To scale, a digital course correction is needed

The tiered account system was an innovation in KYC regulations when launched, but given the pace of technology innovation it is already outdated as it excludes an essential component of next-generation financial inclusion: meeting KYC standards digitally, also known as eKYC. eKYC can include relatively simple solutions like digital signatures as well as more advanced technologies including biometrics (fingerprints, facial recognition, iris scans and the like).

This is a huge opportunity for Mexico’s citizens. The percentage of people who own a mobile phone has grown significantly in recent years – from 63 percent in 2012 to a projected 70 percent in 2018 and there is no sign of slowing in the future. This means that a large share of the population already has the hardware necessary to transmit “identification” that can replace a hardcopy of a driver’s license or birth certificate.

This also presents a significant opportunity for financial institutions. Currently, much of the emphasis is on opening tier 1 accounts. While they are easy and inexpensive to open, they have very restricted revenue streams and don’t provide many mechanisms for financial institutions to differentiate themselves. eKYC changes the equation. With digital identification, it enables greater focus on higher-level accounts and the revenue-generating services associated with them. Importantly, digital offerings also allow banks to create products that set themselves apart.

These kinds of innovations can effectively cut the number of tiered account types in half—a tier 3 with remote verification and tier 4 as it is now. Most importantly, it means that millions more unbanked and underbanked people will be able to obtain full bank accounts and all of the benefits associated with them.

Clearly it’s not as simple as developing a biometric product offering. The technology needs something to authenticate—namely a government-driven, universally accepted source of truth that integrates biometrics. This is precisely what India seeks to achieve with a program it launched in 2009 called Aadhaar, which issues a unique ID number linked to multiple biometrics. This is exactly the kind of thing that could take financial inclusion in Mexico to a completely different level. (Check out this recent blog post to read a bit on technology Globe One is developing to provide remote authentication so banks don’t have to.)

An investment in technology-driven national identification should be a high priority for Mexico (and any other country). The benefits of knowing who is in a country and moving money within its borders, as well as formalizing once-informal economies impacts everything from national security and tax revenue to GDP growth and leakage-reduction.

Mexico has already taken important steps toward achieving financial inclusion, but there is still much to be done. It is now necessary to put eKYC rules into place and develop plans to allow financial institutions to take advantage of them. The technology exists to safely deliver the power of digital banking to everyone and I believe Mexico is poised to make it a reality.