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What’s Blocking Digital Adoption in Mexico
La opinión, por Amanda Jacobson
I moved to Mexico in 2014, riding the nascent wave of fintech startups emerging in the region and launching a business accelerator here. Since then, there has been 56x more startup investments in the region. However, on the ground, it still feels like we’re leagues behind the world’s leading markets in technology and talent.
To help Mexican startups scale faster–and in turn have an impact on its 130 million citizens who are widely underbanked and underserved–I’m supporting The Chapter 26 Program (C26+), a policy working group organized by the US-Mexico Foundation, in which the Mexican government, policy thought leaders, major corporations, and startups have been exploring the question, How can the US and Mexico better collaborate in digitalization to increase competitivity of the region.
As we dove into the challenges that hold back citizens and businesses from adopting technology and using it to their advantage, we uncovered four main blockers:
Digital trade: Banks and fintech (financial technology) companies face too much friction, which drives up fees for the end users and slows down trade.
Cyber security: There’s no comprehensive way to manage fraud and ensure security for everyone participating in the digital economy.
Data flow: Data storage restrictions that prioritize national security slow down innovation.
Talent gap: On both sides of the border, companies are struggling to fill vacancies for skilled, especially tech, talent.
Why are so many corner stores and taco stands still weary of card transactions and technology adoption? All these offline, mostly cash transactions lead to a data gap, making it impossible to understand and resolve deeper problems like the lending gap and business management issues.
The working group explored several actionable solutions to encourage digital trade:
Drive down government fees on payments. Banxico (the Mexican Central Bank) determines fees for payment providers. Direct Acquirers (mostly banks with complicated and selective onboarding processes) have fees as low as 0% in select sectors; while Aggregators (mostly technology providers like Conekta and Clip that have simplified processes for small businesses) experience a flat 1.76% fee for credit card payments. This means that Aggregators that reach the majority of micro-entrepreneurs need to charge high fees, often over 3.5%, to achieve a decent margin. We need to lower aggregator fees in Mexico, so tech companies can also lower fees, giving access to affordable payments products for SMBs.
Make a cross-border payments rail for the region. Paying clients across the US-Mexico border takes days to weeks to process, is expensive, bears exchange rate risk, and involves messy processes to make sure the money arrives at all. Businesses revert to paying providers and employees abroad via cryptocurrencies like Bitcoin to avoid fees, even if it complicates their accounting. Within Mexico, money moves through the SPEI system; globally, money often moves via SWIFT. If a new North American block rail were created to facilitate fast and affordable money movement, digital trade would be much simpler.
Encourage collaboration among banks to make USD accounts for Mexican businesses. In Europe, there is just one currency, the Euro, that makes it easy to manage commerce across countries. While North America continues to operate with multiple currencies, the US dollar could become a financial lingua franca. Without citizenship, Mexicans can’t hold US bank accounts. US and Mexican banks should partner to enable Mexicans to receive and send funds in the US without the constant transfer fees and exchange volatility risk.
Financial incentives for digital adoption. Mexican small businesses often believe that the promise of marginal higher income from accepting card payments is counterbalanced by the fear of fees and taxation. If these fees were covered through tax credits or grants, like INADEM did from 2013-2019, business owners would be more inclined to experiment, knowing that they won’t lose money as they learn about new technologies.
For digital trade to flourish, online transactions must feel safe. However, with high profile hacking incidents, like the US$ 20M SPEI money transfer hack in 2019, Mexicans are weary of digital commerce.
Build robust technology to share intelligence on cyber threats across the region and activate investigations (especially between the US Department of Homeland Security and Mexican counterparts); and
Invest in education and training, supported by initiatives like the National Institute of Standards and Technology (NIST) Cybersecurity Framework 2.0 and the National Initiative for Cybersecurity Education (NICE).
These working groups are still in progress, and we need to put clear deadlines on the group to formalize and launch an Action Plan.
Across the region, banks and hundreds of fintech startups are racing to deliver better services, also meaning we need best practices to securely store user data, especially when it comes to holding money.
To ensure national security, the Mexican government published a Circular for banks and Art. 50 of the Fintech Law for fintechs, requiring financial institutions to have a disaster recovery plan with servers in national territory. While this is a relevant requirement to address security issues, it forces financial entities to spend time and money to keep their cloud storage compliant.
So that businesses could have cloud services with them both in the US and Mexico to comply, AWS recently launched a local zone in Queretaro. Cloud services are adapting to the current rules, but that doesn’t address how to make it easier for financial businesses to select the best cloud service for them regardless of jurisdiction.
Responding to this issue, the United States-Mexico-Canada Agreement (USMCA) recently published recommendations on data localization: “No Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that territory.”
In a time when financial technology is evolving so rapidly, it’s key to make sure that internet infrastructure is readily accessible for innovators. The key will be to
Maintain a better knowledge base for regulators. With rapid turnover of government officials, we need to better document and hand off learnings.
Define processes and response times to get cloud infrastructure approved in Mexico for new actors, replacing the heavy and vague paperwork.
Create frequent space for discussion among innovators and regulators to maintain a live conversation over time.
Both in the US and Mexico, there is a shortage of workers. This means that we need to get more talent for companies and we need more visibility for the job-seeking talent already out there.
The working group discussed several ways to solve these challenges:
Fellowships. Create a Fellowship to send US experts to Mexico to train local junior tech talent on global best practices. Today, the Fulbright Fellowship encourages a cross-cultural dialogue by giving US students access to work experience in Mexico, but there is little knowledge transfer. Mexican startups need to train up early talent and would benefit from mentorship from seasoned professionals from the US. For example, investment fund Iluminar Ventures is developing a talent recruiting strategy to attract top US tech talent into Mexican companies.
Reskilling and upskilling. Job vacancies today have requirements of knowledge that most couldn’t acquire when they were at school. Product Managers go to Product School, Developers to Platzi, and others entrepreneurs to Soy Startup. In the same way we support schools and students with loans and other financial aid in college, we need to support them with lifelong learning through financial support for online education.
Digital nomads. Mid-career professionals are already coming to Mexico, but don’t have an easy way to help support local talent. Unlike Barbados, Croatia, and Estonia that have nomad visas, Mexico has no policy. In Mexico, fees collected from nomad visas could be used toward programs that ensure that the foreigners coming to Mexico have access to programs where they can share their knowledge with local talent. For example, Nomads Skillshare helps expats share skills with each other.
Mapping. Unlike the US, Mexico does not have thorough job boards for senior talent. Most roles are shared through Whatsapp groups and other networks. For people who are talented, but not well connected, finding a job can be a huge mountain to climb. The government and international organizations should ban together to create better job boards with cross-border opportunities, especially for remote workers, to best place top talent.
Maintaining regional competition is a constant priority, and we can only achieve it if North American countries work together. Through taking action on initiatives to address some of the greatest challenges in digital trade, cyber security, data flow and talent, we can continue to be one of the top regions in digital technology and innovation.
Amanda Jacobson se dedica a brindar las herramientas que los emprendedores necesitan para crecer y tener impacto. Lleva ocho años invirtiendo en — y operando —fintechs en México. Escaladora y salsera.