Mexico is a mixed economy developing country. It has a fairly stable economy and unlike other developing countries, over 70% of Mexico’s population falls in the urbanized sector with relatively easier access to physical banks and other financial service providers.
Even after having such a huge population in Urban areas, the Mexican population has abstained from using regulated financial services and institutionalized financial offerings. As a result of these personal choices and behaviors on economic and financial terms on the part of Mexican civilians, there is a large chunk of people which consist of around 50-65% of the population, that is unbanked.
Therefore, this has become a big concern around the economic and financial dimensions of Mexico as well as outside its territorial boundary—those outside doing business with Mexican business entities. The question then is why most Mexicans are not saving using formal financial tools.
Why are Informal Financial Services Preferred Over Formal Savings Products?
As a developing country, the Mexican government has initiated multiple schemes to increase the usage of financial products and services by the lower-income sector. Despite their efforts, the trend of financial inclusion has been in decline. The majority of adults are unbanked (who do not have an account in any formal institution) and de-banked (who once had access to bank accounts but have since decided to stop using them).
In fact, the picture that arises is that Mexicans prefer informal ways of savings as compared to formal ways of savings as customers switch to traditional methods of savings (or no savings for the lower-income group) despite having access to formal financial products and services.
Barriers to Savings Among Low-income Mexicans
Savings are an important aspect of any economy. The ability and option to save differ in developing countries. In many countries where that have already established formal financial institutions that are capable enough to provide savings facilities for their customers, people are often reluctant to save using such facilities because they are more comfortable continuing with their traditional saving methods.
Further, it is observed that financial inclusion in Nigeria lagging due to conditions that are very similar to Mexico. In Mexico, people who have lower incomes are deterred from savings as a combination of many factors. They are enumerated below.
The poverty rate in Mexico, as of 2020, is 41.9% which has increased since the last surveys. This is an alarming trend and it will only get worse if the common folks do not increase their savings. Sadly, due to necessary expenditures such as food, housing, medical, etc., they have very little money left over to contribute to their savings.
Unevenly Distributed Financial Services
Mexico has enough financial institutions to cater to their populations but they are concentrated in the urban areas. People living in rural areas do not receive such facilities, like Myanmar’s first e-commerce platform, which allows more even distribution of resources. In order for them to avail of any financial services, they would have to travel great distances. It becomes an inconvenience and a hassle for them to even withdraw cash which becomes a problem in case of emergencies. In fact, in rural areas, only 6% have access to formal financial services.
The availability of financial services is not enough to make people use these facilities. This is mainly because they do not know how to use them. A majority of the population is unaware of the benefits of using formal financial institutions for savings purposes. So, they steer clear from saving in banks and prefer to keep their earnings at home. They are also unclear about the policies and services other than savings offered by the institutes. Due to a lack of financial literacy, this section of society is prevented from contributing to the economy and improving its own standards of living.
Lack of Transparency
The policies and schemes offered by the existing financial service providers are not marketed with complete and clear instructions. Customers are often confused about why they have to pay surcharges as they do not understand which service or product they are receiving in exchange.
Often the ad campaigns, boasting the offered facilities, are misleading and do not evoke any faith on the part of the customers. The banks seem to be untrustworthy, so people generally avoid banks and other financial institutions for managing their finances. If pushed to the limit, people only use their bank accounts to receive salary or any other source of income, which they promptly withdraw to keep at home.
Transparency is also essential when it comes to credit reporting. It is a system where background checks are done to decide the creditworthiness of individuals and businesses. This data is decided based on various criteria, which should be made clear to the clients. The adventures in love and credit reporting are nuanced as the credit of each individual is also decided by association.
Lack of Convenience
For many Mexicans, it is easy to keep their savings in a locked box at home instead of any formal financial institution as they consider withdrawing to be a hassle. The infrastructure is so poor that it makes it extra difficult for people from the rural community to commute to urban areas just to access financial services when they can just as easily save at home. Even with proper access to financial institutions, people are worried that the facilities will not be available to them when they need them. As ATMs are not always in proper condition, people generally do not trust them.
For the lower-income section, it is extremely hard to save any money for the future as their immediate needs are more pressing. Naturally, they are very conscious about where and how they keep their savings, whatever little they can manage. Banks in Mexico, sadly enough, do not offer security. The problem is not necessarily with banks but the places of withdrawals, like outside ATMs or banks, are fraught with thieves. It is pointless for people to use banks for deposits if they cannot safely withdraw cash from their own accounts when required.
Steps to Increase Inclusion: A Guide from Other Countries
A country’s economic growth depends on its ability to handle poverty rates, offer access to financial tools to rural areas, and develop new strategies for financial growth. Financial inclusion is key in improving all these sectors and, ultimately, the economic growth of a country. Every country that has pledged to improve the financial inclusion among its citizens in the Maya Declaration has enacted various strategies to meet its goals. Some countries have been much more successful than others in this respect.
Growth of FinTech
FinTech is short for financial technology, and it refers to financial services provided digitally. Many banks are reforming their operations to provide more and more of their services online to reach a larger group of people. Competing with banking systems are the emerging mobile financial service providers.
Pagos Digitales Peruanos (PDP), a service provider established in 2015, started the BiM money platform in Peru as a part of the “Peru Model for Unbanked” initiative. During the early stages of their implementation, they realized through trial and error that they needed to improve methods of cash collection by business owners and connect agents online. As they are improving their standing, their customer base is improving, resulting in increased financial inclusion in the country.
Present Status of Savings Among Mexicans
The financial services available to urban Mexicans are often exclusive and limited to people from rural communities. This is mainly because the rural community does not form the key demographic for whom these financial products are developed. The commercial banks do not see the potential of the rural population because of their high illiteracy rate, scattered geographical locations, and low income.
The Bank for National Savings and Financial Services (BANSEFI) has initiated several schemes to promote the financial inclusion of the marginalized community. According to the needs of the people, BANSEFI tried to improvise their products to better fit the profile of the customers targeted. Also, in order to encourage financial institutions to provide better service to the rural community, BANSEFI has subsidized much of its operations.
In countries like Tanzania, they have identified key areas for improvements within their financial structures. Keeping these points in mind, Tanzania launches a national financial inclusion framework, which has been a success in improving the financial inclusion of marginal communities. They have set standards to measure the success of their framework. Mexico, too, should set standards for testing the success of its schemes to know how to improve on them.
In order to battle financial ignorance widespread among the community, BANSEFI has introduced information “caravans” which are trucks that go through villages and remote areas spreading awareness about “L@ Red de la Gente” and the benefits and services available to them.
The People’s Network
The People’s Network, or L@ Red de la Gente, is born of an alliance between BENEFIT and around 280 savings and credit entities. Through this alliance, they serve the marginal community by providing microfinance services like micro-insurance, micro-credit loans, etc., and also account-to-account transactions between people in Mexico and the United States.
Technical Assistant Program
The technical assistance program is an initiative of the BANSEFI supported by the World Bank. As a part of this program, someone from financial institutions travels to rural communities via a motorcycle carrying portable technology like card readers, tablets, and mobile phones. People can easily access this service to make deposits or withdraw their money without having to travel long distances for a simple task. This is done to strengthen financial institutions established in rural areas.
Way Forward for Mexicans in Terms of Savings
New designs for financial services in Mexico are required to encourage people to use formal financial services as opposed to other informal methods of savings and managing their finances. This is crucial, as a huge gap is observed between the knowledge of customers regarding financial tools and products and the usage of those facilities. The major problem lies, not in acquiring new customers but in retaining them and proving that formal financial services are still relevant, say, a year down the line.
Based on behavioral studies that account for how individuals choose to spend their earnings, methods preferred for savings, and preferences in financial tools and services, new financial products should be designed to market them better to the majority of the population.
While designing any financial products, the particular needs of the customers should be kept in mind. The financial tool that is being made available should be easy to use and accessible. They should address any grievances a customer may have. It should be relevant to people’s lives. The financial product on offer should have diverse use to cater to groups of people with different levels of income.
Marketing is essential in providing information about various financial tools and services available to customers. But if the terminology used in ad campaigns is full of jargon, ordinary people will have a hard time grasping the idea of the product. Sometimes, ads are intentionally misleading, which leads to exploitation. To prevent just this, government and official organizations should keep a tight check on all financial institutions via regulations and policies.
The marketing should be transparent to evoke trust and faith. It is the responsibility of financial service providers to educate the public on the nitty-gritty of their products. It is clear from studies that people react better when they are aware of the tangible services that they receive against the payments that they make.
The problem of poor infrastructure in rural areas can be improved by introducing them to financial technology. Digital transactions do not require individuals to physically go to the bank and can be done online at any time of the day. As is observed in Latin America, fintech for financial inclusion the path forward for Columbia has focused on financial inclusion through digital financial services.
Frequently Asked Questions (FAQs)
Q1. What are the reasons people don’t save?
The lower-income people do not have enough earnings remaining over after their necessary expenditures for savings. All their savings are assigned to specific things in mind and never for the long term. The other reason why many people do not readily avail of formal financial services for savings is that they prefer other methods that seem more accessible, easy, and trustworthy.
Q2. How can I keep my money safe in Mexico?
Although there are financial institutions available in Mexico where you can save your earnings, keeping it safe and earning interest on top of that, the Mexicans prefer to keep their hard-earned cash at home stowed away in a lockbox.
Q3. Are banks safe in Mexico?
Mexicans do not trust their banks in terms of savings because of unclear policies and high charges for their financial services. Also, withdrawing cash from banks is a safety concern as thieves are known to wait around places where money is available. Thus, by extension, they make banks quite unsafe for use.
In spite of what the statistics show, several studies have confirmed the trend that the rural community is savings-oriented. It is simply that they prefer traditional methods over formal savings accounts when it comes to storing their excess income. So, more efforts on the part of the government to improve the financial system available in the country are necessary to make them a more lucrative offer as compared to the more popular methods used by the population at present.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.
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