CoDi: How the New Mexican Payment Platform Will Boost Innovation
In April, a pilot test was started in Mexico for a new solution to electronic payments. A breakthrough in the context of financial services, CoDi is also a revolutionary development for the second largest Latin American economy - and we tell you why
38% – this figure represents the proportion of purchases paid in cash last “Buen Fin” (the Mexican version of Black Friday) while debit payments represented 25% and credit 37%, according to data from ANTAD (National Association of Self-service and Department Stores).
This figure indicates that cash continues to play a very important role in Mexico, primarily due to such issues as low financial inclusion, the informal economy, distrust in banks, and the tax administration system.
However, the administration of cash is costly, insecure and inefficient, and as well as decreasing access to other financial services such as loans, not having a cash registry gives way to corruption.
But this is all about to change. One of the first initiatives made by the government of Andrés Manuel López Obrador was the Program to Promote the Financial Sector, presented this year in January as part of the government’s main agenda: the fight against corruption.
Faced with the challenge of modernizing the financial system and reducing the use of cash (and so reducing corruption and increasing access to financial services), the program has eight key issues:
- Promote financial inclusion through the development of digital banking.
- Strengthen and improve the conditions in which workers can access payroll loans.
- Allow Mexicans between 15 and 17 years-old to open bank accounts in their own name, independently of a legal guardian.
- Promote the bond market by updating the stock loan system.
- Strengthen the systems available for superannuation funds and voluntary savings.
- Ensure equivalent tax treatment for the holders of both national and foreign bonds.
- Promote the capital market through a mechanism that allows the development of companies that can later enter the stock market.
- Increase flexibility for the operations of financial intermediaries.
CoDi – The keyword is access
“Widespread adoption of new technologies does not require an understanding of how these solutions work, but in fact has more to do with the ease and benefits they can bring to everyday life.” This is what Vinicius Donin, founding partner of the RD2 Ventures, said to LABS in an interview.
And it is precisely to provide this easy and straightforward experience that one of the first things done by banks aligned with the Program to Promote the Financial Sector has been the launch of a new payment platform: CoDi – Cobros Digitales (Digital Collections).
By means of electronic transfers using the Interbank Electronic Payment System (SPEI), CoDi uses a combination of smartphones and QR technology in a new system based on several similar models that have already been widely adopted in Asia.
With the aim of standardizing electronic payments from smartphones, CoDi will be available to the public at the end of September. Meanwhile, the platform is undergoing multiple stages of testing. Four institutions are currently participating in the micro tests on the platform: Banbajío and BanRegio, in addition to the popular finance companies Fincomún and ASP Integra Options.
During the Digital Payments Summit (organized by MasterCard), Miguel Diaz, the director of payment systems at the Bank of Mexico (Banxico), announced that, in addition to the eight institutions that are already anticipated for the testing stage, more institutions will gradually join the system until all banks and financial entities are integrated.
How does CoDi work?
Only three things are needed to use this new system:
With just these three elements the pay flow occurs very simply: the beneficiary (seller) shows the transmitter (payer) a QR code, which will be read by the transmitter’s smartphone. The smartphone then receives an immediate notification of the payment to be made, which can be accepted or rejected through the payer’s mobile banking application. If the payment is accepted, the transaction is processed and the resources are sent through SPEI.
The implementation of CoDi, currently still in the pilot stage, has been divided into three stages, according to the undersecretary of the Ministry of Finance. First, with a government program focused on young people; then with an initiative aimed at medium-sized cities and, finally, with a program aimed at small communities without local bank branches.
However, there are still some challenges left for the new system. Of these, offering a simple and safe experience, attracting new users without a bank account, and migrating the volume of payments currently made directly with debit are among the largest.
On the other hand, the public that will most benefit from the implementation of CoDi is, without a doubt, that which is most comfortable with technology: young people.
As well as those between 18 and 25 years old, people aged between 15 and 17 will also be able to use the new service, as part of the initiatives proposed by the Program to Promote the Financial Sector. In Mexico, people in this age group alone (who are now able to open their own bank account) account for 6 million inhabitants and represent a demographic with high general use of mobile devices and great consumer potential.
The adoption of CoDi will be measured by changes in payment indicators. These indicators are presented by Banxico every quarter, with previously observed consumption habits indicating that the use of cash continues to be prevalent: of the total operations with debit cards in the last quarter of 2018, 53% were made at a POS (point of sale) terminal, 42% at an ATM (cash withdrawals) and only 5% in electronic commerce. Converted into proportions representative of all transactions, these figures indicate that 74% of operations are cash withdrawals, 25% occur in POS terminals and 2% in electronic commerce.
Regarding transactions completed with SPEI, 2018 data indicates that 68% of all payments made were for values lower than eight thousand Mexican pesos ($423USD) – the cap for payments with CoDi. This suggests that transactions completed with SPEI are likely to increase after the implementation of the new CoDi system.
What does this say about ecommerce?
The platform is primarily designed to make payments to and between retailers, demonstrated by several of the system’s features. For example, the system has a cap per transaction of eight thousand Mexican pesos, it can be used 24/7, and the proof of resources takes place online. The advantage experienced by the consumer, in addition to the ease of use and efficiency of the system, is the fact that it is free to use – a point that has been emphasized by the AMLO government.
For physical stores, the principal benefit is the platform’s simplicity. Payments that would previously be carried out in POS terminals become much more straightforward: with CoDi the only step necessary is to show the QR code to the customer. On top of this, although verification takes place online, transferred resources can be used instantly, whereas resources received through traditional card payments are only made available 24 or 48 hours after the transaction.
In the case of electronic commerce, the user’s experience is of primary importance. Although online stores will maintain the same general conditions, the process is still being defined and the Bank of Mexico is already collaborating with major ecommerce players such as Amazon and Mercado Libre to establish and guarantee the best possible UX.
Inclusion: a promising future for Mexico
Representing a great advance for financial services in Mexico, the launch of CoDi seeks to integrate new technologies to create a low-cost process that is safe and accessible for the majority of the population.
Undoubtedly this will be a trigger for traditional banking institutions and fintechs to develop more digital services, supporting an endeavor that continues to be one of the country’s biggest challenges: financial inclusion.
Although CoDi will be adopted more quickly in districts that already have very high or high financial inclusion (which account for 50% of the adult population [45 million]), the objective is to also reach districts with low or very low inclusion rates, which account for 30% of the population (27 million). While this is surely the program’s biggest challenge, expectations remain optimistic anticipating that communities with low financial inclusion rates will increasingly start to adopt the new platform.
Reduce corruption, encourage the opening of bank accounts, reduce the use of cash, integrate young people, supervise and promote financial inclusion: the Program to Promote the Financial Sector in Mexico has many objectives, to which the implementation of CoDi has now been added.
But one thing is for sure: ecommerce will be able to take great advantage of this new and promising moment in the Mexican market.