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Mexico’s government sees state-owned fintech as a means of financial inclusion and a way out of poverty for millions of Mexicans. Can it work?

Recently the administration of President Andres Manuel Lopez Obrador announced measures aimed at making financial services more accessible to more than half of the country’s population – an estimated 42 million – who are unbanked. The government is planning a digital payments system called CoDi, built and run by the central bank, which will allow users to make transactions on their smartphones at no charge. A pilot roll-out for the platform is expected in the coming month.

“In the future, it will no longer be necessary to have a bank in the sense of a traditional, established bank,” said Arturo Herrera, Mexico’s Deputy Finance Minister. “Mobile phones will become banks.” Becoming a part of the banking system could help poor people, many of whom live in small towns with no bank branches. They are paid in cash and must pay for everything in cash, which makes it difficult to save or borrow for bigger expenses. This in turn hinders the country’s economic growth.

Financial technology such as mobile banking has been a success in other emerging markets, such as China, India and Kenya. In these cases, it has been driven by private fintech firms offering affordable, user-friendly smartphone apps. Since Mexico’s system will be state-run, it remains to be seen whether it will be as nimble and effective at encouraging people to sign on.

More problematic, CoDi will require the cooperation of big banks, which have long shut low-income Mexicans out with expensive fees. And ironically, in order to use CoDi, consumers will need to open a bank account. This is because the platform will be powered by the country’s interbank payments system, comprised mostly of big banks like BBVA Bancomer, Banco Santander and Citigroup.

There is a cultural issue at play, as one of the reasons so many people are unbanked is taxation: Nearly 57% of Mexicans work off the books, Reuters reports. “People who work and live in the informal economy do not want to be taxed,” said Carlos Lopez-Moctezuma, Head of New Digital Businesses and Global Director for Financial Inclusion at Mexico’s largest bank, BBVA Bancomer.

Inconsistent telecoms pose another potential obstacle to implementing financial technology. Cell phone and internet coverage have improved, but the infrastructure has yet to reach more remote areas. “Mexico has a lot of the key ingredients to succeed, but it’s not plug and play,” said Monica Brand Engel of Quona Capital, a venture capital firm that invests in fintech firms focused on the unbanked in emerging markets.

Adolfo Babatz, CEO of payments startup Clip, said that Mexico’s government should work with fintech entrepreneurs rather than banks that have benefited from high barriers to entry. His Mexico City-based company offers a low-cost mobile credit card reader that fits on smartphones. In reference to the strides made in other emerging markets, Babatz said that Mexico should “look at the examples from the rest of the world”.

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