Commercial Banking and Treasury Management in Mexico
How significant changes in the Mexican financial sector are impacting U.S.-Mexico business transactions.
Mexico is a key trading partner with the United States and a member of NAFTA, and as such, many U.S. businesses have significant dealings with Mexican suppliers, customers, or subsidiaries. As discussed in a previous article on commercial banking in the United States and Canada, one of the most important business relationships for a company is with the commercial bank they use for credit and non-credit services.
While there are some similarities in commercial banking practices, there are other, very significant differences between the Mexican and U.S. environments, for example, the prevalence of foreign-owned financial institutions, varying payroll delivery mechanisms, and anti-money laundering compliance levels. The purpose of this article is to articulate these differences and evaluate their impact on business transactions in the U.S. vis-a-vis Mexico.
The Mexican Banking Environment
Mexico has a very stable and well-capitalized banking system under the control and regulatory supervision of its Ministry of Finance and Public Credit (Secretaria de Hacienda y Credito Publico or SHCP). As a result of a period of privatization and consolidation in the early 2000s, the banks are primarily large, foreign-owned entities. There are currently 26 financial groups, 31 multiple banks, seven development banks, 42 financial companies with limited operations, and 81 representative offices of foreign banks.
The central bank of Mexico is known as Banco de Mexico (Banxico). It is responsible for the control of monetary policy and is the overall regulator of both financial services and payment systems. It is similar to the Federal Reserve in the United States as it is the lender of last resort to financial institutions and the provider of treasury services to the federal government. As mentioned above, the SHCP shares regulatory duties over the banking sector and is primarily responsible for the day-to-day supervision of banks operating in Mexico.
Currently, the Mexican peso (MXN) is a fully convertible, free-floating currency and there are no exchange controls. In addition, both local and foreign currency accounts are available to resident and non-resident entities. All non-resident entities are required to register any foreign currency accounts held in Mexico with the banking authorities. It is important to note that whether held by residents or non-residents, local currency accounts are not convertible into foreign currency. On a positive note, however, there are generally no lifting fees on transfers between resident and non-resident accounts.
To open a bank account in Mexico, a company must supply a Tax Identification Number (Registro Federal de Causantes or RFC) or equivalent, proof of address, banking or commercial references, and official identification of the company’s legal representatives or guarantees of a power of attorney. Banks are allowed to pay interest on any account, but in practice rarely pay interest on current (demand deposit) accounts.
The table below provides information on the top banks providing domestic banking services in the Mexican market.
Source: National Banking and Securities Commission of Mexico and www.bankersalmanac.com
As shown above, most of the top domestic banks are held by foreign financial institutions (Spanish, U.S., Canadian, and U.K.). In total, five of the largest banking groups and 80 percent of the total banking assets are owned by foreign entities. This was a result of a 1998 law that allowed foreign investment in large Mexican banks for the first time. It is also interesting to note that this trend continues as the National Banking and Securities Commission of Mexico granted licenses to 11 new banks between April 2006 and March 2007, including Banco Wal-Mart de Mexico and UBS Bank Mexico.
Mexican Payment Systems
The country’s central bank (Banxico) owns and operates both the high- and low-value payment systems used in Mexico. In August 2004, a new high-value Real-Time Gross Settlement System (RTGS), which provides services to Mexican banks similar to those of FedWire in the United States, was launched. The system, known as Sistema de Pagos Electronicos Interbankcarios or SPEI, provides high-value and urgent interbank and commercial payments. All payments are processed in MXN and participants include approximately 30 banks, pension fund administrators, insurance companies, and other financial institutions.
The final settlement occurs through Sistema de Atención a Cuentahabientes de Banco de México or SIAC, which is owned by Banxico. SIAC settles interbank transfers and clearing obligations from Mexico’s various payment systems across the current accounts held at the central bank by banks and other financial intermediaries.
For low-value, non-urgent payments, Mexican financial intermediaries use a net settlement system known as Sistema de Camaras (SICAM). This system clears paper-based and electronic payments, including checks, non-urgent electronic credit transfers, and direct debits. Although the system is owned by the central bank, it is actually operated by a consortium of banks (Centro de Computo Bancario or CECOBAN) and has 24 regional branches. Settlement in MXN generally occurs the next business day through the SIAC system and there are no limits on the amounts.
Banks originating the transactions submit electronic files, which are then processed in batches and submitted to recipient banks for validation. Checks are truncated (account and value information only) into electronic items by the receiving bank—similar to check conversion in the United States—and then cleared as standard, electronic, low-value items.
Interbank cross-border payments can also be made via SIAC’s participation in a multilateral clearing system known as the Latin American Integration Association (LAIA). Participants in LAIA include Argentina, Bolivia, Brazil, Chile, Colombia, the Dominican Republic, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela. Mexico also has clearing arrangements with the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.
Most cross-border payments are routed via the Society for Worldwide Interbank Financial Telecommunications (SWIFT) and settled via correspondent bank accounts. For USD transfers from the United States to Mexico, payors may utilize the U.S. Federal Reserve’s Directo a Mexico service, which allows them to send USD. The money becomes available to a Mexican beneficiary denominated in MXN the next business day.
Payment and Collection Instruments in Mexico
Though checks are not used as much in Mexico as in the United States, they still represent a notable portion of payment transactions. It is also worth noting that cash payments represent a very large portion of the Mexican economy for low-value payments, especially among consumers.
In general, check usage has declined significantly since 2000, but small companies and households still tend to pay the majority of their bills with checks. Since June 2003, all checks are truncated and images are exchanged electronically, similar to trends in the United States. There is also increasing use of remote deposit capture, where a small desk-top machine (about the size of the proverbial breadbox) is utilized to capture images of checks at the point they are received. These machines create specially formatted image replacement documents or IRDs, which can then be cleared as images, rather than as paper items. Finally, there is also some use of Mexican postal drafts, primarily in rural areas of the country.
As shown in the table below, the bulk of transactions in Mexico are via debit and credit cards, which have grown significantly in volume since the introduction of banking deregulation in 1998. By value, the bulk of the traffic is via the SPEI real-time gross settlement system discussed earlier. Although they currently represent only a small percentage of payments, the use of direct debits is rapidly growing in popularity for regular payments (e.g., utilities). These types of payments have only been offered on an interbank basis since 2002.
Source: Banco de Mexico, January 2008
Card payment volumes have grown significantly in Mexico since 2000, with the bulk of the transactions being in the form of debit cards (77 percent in 2006). Visa (Electron) and MasterCard (Maestro) are the main card schemes operating in Mexico, with Banamex and Bancomer operating their own networks for clearing card payments. Another company, Prosa, processes transactions on behalf of 20 other Mexican banks.
As of the fourth quarter of 2007, there were over 28,000 ATMs and almost 350,000 POS terminals in Mexico, most of them operated by Banamex and Bancomer. Debit cards linked to savings and demand deposit accounts can be used for ATM cash withdrawals and purchases at POS terminals. There has also been substantial growth in the use of stored value cards for payroll disbursements. These cards allow employees easy access to their salaries via the network of ATM and POS terminals.
Use of Payroll Cards in Mexico
Because Mexico has a highly mobile workforce, it is often difficult for employees to prove residency and, therefore, open any kind of bank account for direct deposit of paychecks. As such, employers who would like to institute direct deposit payroll programs to reduce potential fraud find it difficult to do so as a significant portion of their workers are effectively un-banked. This is similar to the situation in many U.S. companies that have significant numbers of un-banked employees.
Historically, payroll in Mexico has been in the form of cash payments, requiring the use of armored car services and creating major security concerns. Cash payments are a result of both the mobility of the workforce—workers stay employed by moving from plant to plant or working in seasonal industries—and the high level of workforce unionization. Wages are often based on a daily, rather than an hourly, rate and are subject to many other regulations for overtime and statutory benefits. This often makes it necessary for companies to pay mobile workers on the day they join the company.
The primary solution for both mobile employees and permanent employees who might be un-banked is the payroll card. These cards are essentially stored value cards onto which net wages can be loaded. Employees can then use ATMs or POS terminals to access their wages. In many cases, the company bears the cost of the card program, but can usually justify the cost through savings in other areas, such as processing costs and reduced fraud.
A payroll card solution addresses a number of critical business requirements:
- It cuts administrative costs associated with the opening of bank accounts for hourly workers.
- Centralization of treasury operations is enabled by a zero-balance account (ZBA) structure, optimizing the use of company resources with just-in-time funding of a centralized payroll account.
- The solution delivers more control over payroll and empowers HR departments by offering a near-card, real-time solution. This also helps to improve compliance with regulatory requirements.
There are a wide range of short-term borrowing options available in Mexican financial markets. Commercial banks generally offer overdrafts on current accounts (these are relatively expensive—usually twice the going rate of Mexican treasury bills) and more formal lines of credit. The most common type of working capital loans are revolving short-term loans of 28 days or more. Interest rates are based on interbank money market rates, but additional fees or restrictions may be imposed.
Some of the other sources of short-term financing are discounted trade bills, factoring, commercial paper (only for companies with very strong credit ratings), banker’s acceptances ,and supplier credit.
In Mexico, banks are permitted to pay interest on demand deposit (current) accounts but rarely do so. Most companies prefer to transfer excess funds into an investment account. As in the United States, most large banks offer some sort of overnight investment vehicle for their corporate clients, often linked to a zero-balance account (ZBA). Each day, these accounts are literally brought to a zero balance by either transferring out excess funds to an investment account or funding negative balances in the account from an investment account.
The range of short-term investments in Mexico would be very familiar to any U.S. treasury manager, including: time deposits, certificates of deposit, treasury bills (Certificados de Tesoreria de la Federation or CETEs), commercial paper, money market funds, and repurchase agreements. While these markets may not have the depth and breadth of those in the United States, they are more than sufficient to meet the needs of most investors.
Anti-Money Laundering Efforts in Mexico
It is an unfortunate fact that Mexico is a natural corridor for drug trafficking to the United States. According to the U.S. State Department, it is also a source of other serious crimes, such as human and weapons trafficking. Although Mexican authorities have made some progress in fighting these crimes, they continue to present significant money laundering risks and, as a result, the U.S. Department of State still considers Mexico a jurisdiction of primary concern regarding money laundering.
In 2000, Mexico was granted full membership in the Financial Action Task Force on Money Laundering (FATF), establishing basic anti-money laundering (AML) guidelines for financial institutions operating in Mexico. There are, however, significant challenges ahead for AML efforts in Mexico. The credibility of AML policies and procedures are generally measured by the number of convictions and the amount of frozen or seized crime-related assets. In its 2004 annual report, the FATF judged Mexican AML efforts as low relative to convictions and seizures.
For Mexico, the fact that a significant portion of the economy is cash-based also presents some serious problems in AML compliance. Efforts such as the payroll card and the increasing use of debit and credit cards will help the banks and authorities to gain more control of money laundering going forward.
Treasury Technology in Mexico
Ten years ago, the term “Mexican Treasury Technology” would definitely have been considered an oxymoron. Today, as a result of banking deregulation and the implementation of major changes in the payment and clearing systems, Mexico has joined the modern world of treasury management. Electronic banking is used widely by large Mexican companies and multinational corporations in Mexico—most banks offer electronic banking systems with comprehensive account information and transaction initiation capabilities.
Corporate treasurers need to find secure ways to manage their business processes, while also preventing fraud and integrating treasury information with their company’s Enterprise Resource Planning (ERP) systems. Other factors impacting the increasing use of treasury technology in Mexico include: U.S. Sarbanes-Oxley legislation, migration from use of checks to electronic transactions, implementation of electronic invoice presentment and payment, government regulations requiring online payment of business taxes, centralization of treasury functions, and the use of ZBA accounts for managing liquidity.
In the last ten years, commercial banking and cash/treasury management in Mexico have undergone substantial changes. While the economy is still largely cash-based on the consumer side, on the commercial side, businesses have embraced both technology and electronic transactions. The Mexican financial sector has implemented significant new systems for managing transactions and financial information, and large companies have availed themselves of modern technology in the treasury area. One area of future concern is the slow progress of anti-money laundering efforts in Mexico, but at least progress is being made. Overall, for today’s treasury professional, the Mexican banking market may offer a few new challenges, but many familiar products and services will be readily available.
 Information in this section is based on information from: Association for Financial Professionals. “Cash and Treasury Management Country Report: Mexico,” January 2008.
 In international banking, a lifting fee is often charged when money is moved from a resident account (one held by a domestic entity) to a non-resident account (one held by a non-local entity). The general rationale is that when money is in a resident account, it is under the control of the local monetary authority and thus part of the country’s money supply. When it is moved to a non-resident account, it leaves the control of local authorities (effectively crossing the country’s border) and a fee may be charged for that transaction. In some countries (e.g., Germany and France), these fees may be significant.
 Fay Deevy. “Payday in Mexico: Payroll Card Solution,” Global Treasury News, March 29, 2005.
 Information in this section is based on information from: Association for Financial Professionals. “Cash and Treasury Management Country Report: Mexico,” January 2008.
 Carlos A. Rochin. “AML Challenges for Mexico,” Global Treasury News, June 26, 2007.
 U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs. 2006 International Narcotics Control Strategy Report, report, March 1, 2006.
 In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit held in Paris in 1989. Recognizing the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member States, the European Commission, and eight other countries. Since its creation, the FATF has spearheaded the effort to adopt and implement measures designed to counter the use of the financial system by criminals. In 1990, the FATF established a series of recommendations that set out the basic framework for anti-money laundering efforts and are intended to be for universal application. The recommendations were revised in 1996 and in 2003 to ensure they remained up-to-date and relevant to the evolving threat. From the FATF-GAFI website: http://www.fatf-gafi.org/
 Eduardo Palacio. “Technology in Mexico: Meeting Treasury Needs,” Global Treasury News, December 5, 2005.
About the Author(s)
D.J. Masson, PHD, CTP, Cert ICM, is an associate professor of finance at the Graziadio School of Business and Management at Pepperdine University. Dr. Masson is a frequent conference speaker on a variety of financial, treasury management, and electronic commerce topics, and is the author of numerous articles and such financial textbooks as Treasurer's Handbook of Financial Management, Essentials of Cash Management, and Essentials of Treasury Management. He holds an MBA and PhD in Finance from Indiana University and professional certifications in cash/treasury management from both U.S. and U.K. treasury associations.