Mexico’s Real-Time Payments May Stiff Card Issuers and Acquirers

Mar 21, 2019

Banxico, the central bank in Mexico, will launch the pilot phase of its free mobile payment system. The system, which aims to increase digital transaction, provide greater access to banking to underserved communities, and move the country toward a cashless economy, allows payments at participating bricks-and-mortar and online stores via QR codes.

The system, known as Cobro Digital (CoDi), aims to provide its population, especially younger groups and those who live in rural communities, more access to digital banking and payments. Its government regulators also plan to introduce open banking via API sharing between banks and financial technology businesses in the hopes of boosting competition. CoDI provides retailers with an opportunity to increase payment acceptance without paying any extra money.

Excitement for the system is building; and just recently it was confirmed this month that online retailing giant, Amazon and a major Latin American online retailer, MercadoLibre, are in discussions with CoDi about accepting its system.

Despite the interest, those in the credit card industry should be worried. The structure behind QR code-based payment platforms are smartphones not card networks, so Mexico’s system could drastically alter business for card acquirers and issuers. If Mexico’s system is a success, it may trigger terminalized and bank merchants to replace higher-cost credit card transaction options with CoDi. The number of smartphone owners in Mexico already doubles the number of citizens who have bank accounts, so this could mean a tough road for acquirers and issuers.

A Better Understanding of CoDi and Why It Will Attract Users

When it launched this month, 20 financial institutions piloted the program. By the third quarter of 2020, all financial institutions must be part of CoDi. The beauty of the program is that neither consumes or merchants are charged. Another important aspect is that regulators plan to change the rules, preventing any institution that participates in CoDi as an acquirer or issuer from charging users. Also, no interchange fees will be charged. This would have a huge impact on issuers and acquirers bottom lines.

Merchants also will be lured into CoDi because technology costs for the system are limited, there are no chargebacks, and the payments happen immediately. They will be true real-time payments because there are no waits for funds to clear credit card networks.

The Nuts and Bolts of CoDi

Both bricks-and-mortar and online merchants have three ways to request payments:

  • Through the internet
  • Through static QR codes on products
  • Through QR codes or Near-Field Communication (NFC) tags on smartphones

After a business requests a payment, the buyer uses a smartphone to authorize the payment and transfer the funds to the merchant. The transactions will clear and settle via Mexico’s interbank payment network, Sistema de Pagos Electrónicos Interbancarios (SPEI). Within seconds, transactions of up to $MXN 8,000, or about $400, settle. All CoDi users must register their bank account details with Banxico.

Where It is Flawed

Though many aspects of CoDi is appealing, it’s not perfect. Many have expressed early concerns about slow user experiences and transaction latency due to unreliable telecom connectivity in rural areas. Changes, including developing new technology, likely will be needed to address these issues.

The Last Word

Bringing banking to the underserved that is something that needs to happen in Mexico. Nevertheless, if Banxico expects to take the system from pilot to full-scale system, it will need to come up with a business model that addresses all of the major players in the industry, including issuers and acquirers. Since it is expecting to mandate that these parties can’t charge interchange fees, eventually the central bank will need to come up with a solution that is challenging for all parties involved.

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