The Mexican Payment System: A Tale of Remarkable Progress

Just over a decade ago, the Mexican payment system made only limited use of new payment technologies. Since then, the banking industry, the government and the central bank authorities have radically changed the payment systems landscape. While further progress is required, Mexico is now in the final stages of implementing an efficient payment infrastructure on a par with that of developed countries throughout the world.

What has been achieved so far?

• The creation of a real-time gross settlement system (RTGS), SPEUA, for high value payments.
• The introduction of an inter-bank direct debit and direct deposit service.
• The integration of the different ATM and POS systems into a single unified system.
• The ongoing implementation of an electronic check truncation system, including the digital exchange of check images. Operational since 2003, this system has allowed the Mexican payment system to cut the costs and risks associated with the exchange of checks. Financial entities elsewhere should consider this system as a best practice for check truncation project.
• The adoption of a uniform 18-digit long account standard, CLABE (Clave Bancaria Estandarizada), facilitating automation and the tracking of payment instructions through the payment system.
• The introduction by the Central Bank of Mexico of an Extended Security Infrastructure for the financial industry. Under this infrastructure, financial institutions can become a Certificate Authority and/or Registration Authority and issue and register Digital Certificates. CECOBAN is the first Certificate and Registration Authority authorized by the Central Bank.
• The active participation of CECOBAN in supporting the development of interbanking solutions. CECOBAN also provides a single unified interbank national clearing house for low value and non-urgent payments.

Changes in the legislative and interbank framework

A major milestone for the future development of the Mexican payment system has been the interbank agreement that all costs deriving from the maintenance and development of the clearing house will be shared equally amongst the banks and that all participants will have equal access to the system regardless of their size and their capabilities. Naturally, the infrastructure development work already done by larger banks has been taken into account. The larger participants also benefit from economies of scale due to the volumes of payments they channel through the system, but essentially all banks and all branches enjoy the same access and price conditions.

In addition, there have been a number of important legislative changes that are facilitating the modernization of the Mexican payment system:

1. Under the new law for the Transparency and Ordering of Financial Services, published in the Diario Oficial de la Federación on January 26, 2004, bank fees need to be transparent and easy to understand for the customer. The above mentioned interbank agreement on non-discrimination between payment system participants largely achieves this objective. Every bank in the country, regardless of its size or location, pays the same tariff for usage of the payment system and therefore each customer, whether they are a company or a retail user, benefits essentially from the same tariff.
2. Another important piece of legislation are the rules published by the National Banking and Shares Commission (CNBV) on November 25, 2003, which give legal validity to the electronic files that replace paper-based items. As a result, banks are now able to truncate all paper items.
3. Finally, the introduction of legislation permitting the use of Public Key Infrastructure (PKI) and The Extended Security Infrastructure initiative of The Central Bank of Mexico provide further impetus for the development electronic/web-based payments. PKI has been introduced via a decree that reforms The Commercial Code (El Codigo de Comercio) and adds several dispositions related to the use of electronic signatures to the code.

Challenges ahead

Retail

With most of the infrastructure in place, Mexico now has to increase the uptake of electronic payment instruments among the general population to take full advantage of the cost savings and increased efficiency potential of the new payment system. To this end, the banking industry and the government have adopted a two-pronged approach: actively discouraging the use of cash and check payments by charging higher fees and, in the case of checks imposing a longer clearing cycle, while at the same time seeking to increase the attractiveness of electronic payments through the promotion of new payment channels and products.

Indeed, both companies and private individuals continue to rely heavily on checks. Currently checks represent around 17% of the total annual volume of non-cash payments. In an effort to promote credit transfers and direct debits, banks have therefore agreed to increase the pricing on check payments and maintain a longer clearing cycle (generally T +2) than needed (technically, checks can now be cleared on a T + 1 basis).

At the same time, the banking industry aims to take truncation a step further by transforming electronic check files into simulated electronic debits that can be submitted electronically to the drawee bank for authorization. This process which the Mexican banks hope to have in place by March 2005 completes the automation of the payment system as far as checks are concerned.

The banking industry is also redoubling its efforts to promote the recently introduced direct debit service. From a corporate view, this development is particularly encouraging for those companies that have a large retail customer basis as it should lead to a significant improvement in the receivables collection process.

The banking industry and the government have also been working hard to move tax payments and other payments to government online using the infrastructure of the banks through the so-called NEPE (New Structure of Electronic Payments) campaign. NEPE aims not only to persuade the relatively high percentage of existing internet users of the merits of paying taxes and other government-related bills online, but also to ‘convert’ the general population to this new form of payment. Internet payment terminals have been installed in bank branches as well as in local corner shops throughout the country with the merchant costs being shouldered jointly by the government and the banking industry. The first results of this ongoing campaign are impressive: For the last fiscal year, most high value tax payments were filed online. The ultimate target rate is 95%. As is the case of the direct debit service for recurring payments, an increased uptake of online payment offers considerable potential for companies with retail customer bases to accelerate and improve their collections process.

However, despite these advances, a large section of the Mexican population still do not use banking services. To overcome this hurdle banks now offer payroll products whereby employees are paid their salaries into a debit-card linked account. The upside potential for these payroll products is considerable: there are only 35 million debit cards in circulation for a total population of over 100 million. It is estimated that card usage among the active population is 60% below its maximum potential. The creation of a unified ATM system should accelerate payment card adoption. In addition, a considerable proportion of those Mexicans that have a card, only use it as a means of withdrawing cash from ATMs. The Mexican banks have identified this as one of the main hurdles preventing a more efficient use of the country’s payment system and have started to promote the use of debit cards as a means of payment while at the same time accelerating the development of a nationwide POS system. The banking industry is also helping the government with the use of debit card technology for its social programs. Thus the government has started to issue fuel cards that allow socially disadvantaged segments to buy subsidized fuel.

Corporate

In terms of purely corporate banking, the potential for development is more limited. The presence of the major US cash management banks has meant that most corporate banks already offer sophisticated services, including cash management products such as netting and cash concentration (generally, under the form of same entity zero-balancing though, in some cases, cash concentration involving different legal entities).

One area with important growth potential is electronic banking. In particular, there is an increasing use of EDI, with electronic bill presentation and payment becoming key areas for development.

Cross-border

Outside the purely domestic payments scene the most important area for development concerns the cross-border remittances between the USA and Mexico. Since March 2002, when Mexican president Vicente Fox and The US president George W. Bush agreed under The Partnership for Prosperity to stimulate economic growth in both countries, both governments have created a low value payments system connection between the two countries operated by the Federal Reserve and the Mexican Central Bank, Banco de México. In October 2003, the system began transferring US government social security payments to Mexico and, in February of this year, the cross-border system has started to process commercial transfers from the USA to Mexico. The system is expected to be operating in both directions by 2005. While this initiative is in the first instance undertaken with the retail user in mind, its benefits will no doubt be extended to the corporate sector in the long run.

Finalizing the modernization

While the pace of modernization of the Mexican payment system has been remarkable, there are still some ‘loose ends to tie up’. The most important ones are:

• The implementation of a new real-time gross settlement system, SPEI, to replace SPEUA by 2005. It will further reduce settlement risk in line with the BIS recommendations for systematically important payment systems and improve efficiency by allowing, among others, the sending of online payment instructions.
• Migration of all payment cards to the more secure chip technology over the next four years.

In a nutshell

In less than a decade Mexico has transformed its fragmented and largely manual payment system into a modern and efficient system fit for the 21st century. The result of the combined effort of the banking industry, the Mexican Central Bank and the Government, it represents an ideal platform to reach all segments of the diverse Mexican marketplace and to revolutionize both consumers and companies’ payment habits.