Poverty and Banking Exclusion in Mexico: How can remittances and technology contribute to improve access?

The empowerment of the poor through cell phones is this paper’s central theme. There already exist a number of cases in the world where such empowerment has already occurred in the financial sector through the usage of cell phones: the cases provided throughout the paper are Kenya, the Philippines and South Africa. There exist many reasons why it is imperative to facilitate access to the financial system for the entire pyramid of the population. To achieve financial inclusion in the remittances industry, the authors suggest an M-banking like solution for remittances transfer. M-banking offers the advantage of having a very low cost structure – making it lucrative for banks to target the rural poor. Poverty is an insidious problem in Mexico. A large share of the population has to live on less than US$2 a day. In rural areas, and particularly in the Southern states, the issue is even more pressing. High levels of poverty lead to high rates of migration towards the North. Augmented migration in turn results in remittances inflows, which have reached unprecedented levels in Mexico with about US24bn in 2006. But immigrants have not fully capitalized their remittances because they are outside the banking system and pay high costs of transfers. New and cheap channels for transferal are available, but only for the banked. In Mexico between 20 or 30 percent of the population do have a bank account. However, cell phone penetration is about 45 percent – about twice as high as the level of bank account ownership. Consequently, given cell phones’ increased processing power and the high penetration rates of cell phones, they are the obvious means to have people take part in the financial sector. We show in our econometric study that remittances promote savings accounts, but at the same time have an ambiguous effect on them through increased cell phone penetration. By creating virtual mobile bank accounts, banks can leverage the relatively high cell phone penetration across the income pyramid, to bank Mexico’s population – while benefiting from additional profitable business. Given remittances’ savings increasing nature, starting with remittances’ recipients is the logical and most powerful tipping point of the process. Our study finds that banks ignore the potential of the mobile banking market, including remittances transfers over cell phones. We suggest a number of policies to be implemented to enable the prospering of the mobile financial industry.