How Mexico's real-time payments plan threatens mainstream options

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Banco de Mexico (Banxico), Mexico's central bank, is developing a free mobile payment system to increase digital transactions — and while it is meant to target cash use, it may inadvertently cannibalize card payments as well.

The system, called Cobro Digital (CoDi), is part of a government program to increase financial inclusion via digital banking and payments among young people and among inhabitants of rural areas lacking bank branches.

Banxico and Mexico’s banking and securities regulator, Comisión Nacional Bancaria y de Valores (CNBV), also plan to increase financial competition by introducing open banking via API sharing between banks and fintechs.

But, as CoDi provides an opportunity to increase payment acceptance at no cost to retailers, it may disrupt card acquirers and issuers. Although targeting cash transactions, unbanked merchants and underserved consumers, CoDi could be used by banked/terminalized merchants to displace higher-cost card payments.

The World Bank estimates that 34 million Mexicans had bank accounts in 2017, while, according to a government survey, 64.7 million Mexicans had smartphones in 2017.

At a January 8 press conference, Banxico’s governor, Alejandro Díaz de León, said CoDi will be launched in March 2019 and will initially be piloted by 20 FIs. The scheme will be mandatory for all FIs in the third quarter of 2020, he said.

Marcos Martínez Gavica, president of the Asociación de Bancos de México, said that CoDi will be free of charge to consumers and merchants. Banxico plans to amend its regulations so FIs participating in CoDi as acquirers or issuers can’t charge users and there is no interchange.

The government hopes CoDi will help combat the informal economy and increase payments terminalization among small merchants. According to a Banxico report, benefits to merchants from accepting CoDi payments will include limited technology infrastructure costs for the scheme; no chargebacks; and immediate payments instead of waiting for funds to clear through card networks.

How CoDi works
Brick-and-mortar and e-commerce merchants will request payment via their smartphones using QR codes or NFC; via the internet; or through static QR codes displayed on their products. Customers will authorize payment using their smartphones and transfer funds to merchants.

CoDi will use Mexico’s real-time interbank payment network Sistema de Pagos Electrónicos Interbancarios (SPEI) to clear and settle transactions up to MXN 8,000 in seconds, Banxico says. Users will need to register their bank account details with Banxico in order to use CoDi.

“In a context where there are a growing number of mobile payments services based on real-time payment systems such as Modelo Peru’s BIM (Billetera Móvil) and Thailand’s Promptpay, it’s logical for Banxico to expand SPEI’s use through mobile payments,” said Francesco Burelli, an independent payments industry expert.

Unbanked consumers will be able to open basic, low-risk bank accounts that don’t require them to apply via branches.

In 2011, Banxico introduced regulations stipulating four tiers of bank accounts with different levels of KYC and different limits on monthly deposits and transactions. These range from no-name prepaid accounts with limited balances; through basic accounts just requiring the user’s name, date of birth and address; to full accounts.

Criticism
In January, Banxico concluded a month-long consultation with stakeholders on CoDi. One potential issue identified was transaction latency and slow user experience.

“CoDi’s success depends on its ability to actually work in Mexico, where connectivity may suffer latency acting as a barrier to adoption,” said Burelli. “Telecoms' connections can be unreliable outside major urban areas.”

Banxico’s goal is to see CoDi used by all of Mexico’s cellphone users. It plans to modify the regulations under which it operates SPEI to ensure proper governance for SPEI participants providing access to CoDi, and to establish high levels of security and efficiency.

“The advantage of QR code-based payment platforms is that the infrastructure is built around smartphones instead of card network rails,” said Thad Peterson, senior analyst at Aite Group. “So it’s much faster to implement and achieve critical mass. Using QR codes also simplifies merchant acceptance.”

“CoDi is a Banxico-mandated standard for payments using QR,” said Jeffrey Bower, principal of Bower & Partners Consulting Services. “The idea is to replicate what China accomplished with WeChat Pay and Alipay. The CoDi standard is being developed for traditional issuers and acquirers as well as fintechs and approved non-bank entities.”

SPEI has succeeded in transforming Mexico’s payment industry, but is largely used by businesses for B2B transactions, Bower said.

“While the issuance and use of debit and credit cards have grown, driven by the huge growth of smartphone-based mPOS acceptance by merchants, cash remains the primary transaction method for Mexicans,” he said.

However, developing the technology for CoDi will be insufficient to develop the ecosystem necessary to scale up the use of mobile payments. “Technology can only go so far, and without a strong business model incorporating all the players in the ecosystem, it’s unlikely that a standard can generate scale,” Bower said. "Mandating no interchange means CoDi’s business model is challenging for both existing and new issuers to participate in.”

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