Where to bank? - Tips for Mexican Savers

Monday, September 11th, 2023

• In this report, we delve into the best banks, SOFIPOs and FinTech/wallet options for Mexican residents to manage their financial transactions, invest their savings and, when necessary, get access to cash. In future reports, we will look at the best banks for credit cards, mortgages, insurance, brokerage and other products. This is a follow-up report to our Miranda’s Guide to Mexico FinTech, published January 2022.

• There is, of course, no best bank for all. Users will value differently the benefits of yields on their cash, instant liquidity, financial strength, UX of the app, proximity of physical locations, ease and cost of cash in/cash out, transaction fees and maximum monthly deposits. What is for sure, historically, is that Mexican bank customers have been poorly served when it comes to interest rates and commissions on small bank accounts, with some of the widest savings/lending spreads and highest commissions in the world.

The Best Mexican Banking Alternatives

• If you are rich and preferably have an assistant, (0.01% of the population), the best traditional bank right now seems to be the INBURSA CT account – it offers Cetes rates (11.25%) and instant liquidity, if you keep P100,000 in deposits. It has no meaningful limits of monthly deposits if you open a N4 account and a full range of other banking products (credit cards, mortgages). The drawbacks are that the UX is poor, the INBURSA systems are not great and it takes days to fill in the forms and get an answer.

• If you are a Yuppie, and do not need cash, there is a draw from both Hey, Banco and Nu. Hey, Banco, a regulated bank (part of Banregio), provides IPAB protection up to P3.1mn, pays 4% on demand deposits and a great 10% on seven-day time deposits to clients. With a short video call, it is now fairly easy to get a N4 account online, meaning no deposit limits. You can take cash out for free at Banregio ATMs and other banks with whom Banregio has agreements (or with a fee at OXXO) and put cash in at Banregio. It has a great credit card and offers other investment products.

• Nu is also great, and after using it for this past week, we have become fans. It gives you 9% tax-free yield on excess cash up to about P200,000. The debit and credit card are all you need. If you live in Las Lomas, Polanco, Roma, or Condesa, it’s perfect.

• For customers who need cash, and who are experts at navigating government websites, a good combination is BBVA or BanCoppel and Cetes Direct. If you maintain P300 at BanCopppel or P1,000 at BBVA, as far as we can see, there are no relevant commissions, cash in/cash out is free in their own plentiful locations. You also have access to a lot of other banking products and great apps and a N4 account without deposit limits. And then you can send excess liquidity to Cetes Directo and return it back in a day. You can invest from P100 to P10,000,000 in Cetes Directo. Cetes Directo's website

• We like Covalto’s IPAB-backed savings product of 14%. No risk up to the IPAB limit of P$3.1mn and great yield. However, the onboarding process is drawn out and the least digital imaginable.

• In addition, we suggest shoppers at WalMart get a Cashi card, shoppers at Oxxo get Spin by Oxxo and users of Mercado Libre get a Mercado Pago card, as all have promotions and in-store credits for past spending.

Traditional Big Four Banks  

The traditional big Mexican banks – BBVA, Citibanamex, Banorte and Santander – in general do not pay any relevant interest on accounts with immediate liquidity (demand deposits). That said, they offer a full range of banking products – credit cards, mortgages, insurance and investing. One can easily earn CETES on large balances via a related brokerage account or wholesale bank account and obtain overnight government interest rates or better. Putting in and taking out cash is easy and free and there are no deposit limits.

The big banks currently offer rates on Pagares (fixed-term CDs) from 3%-7%, versus Cetes of 11.25%. Admittedly, Citibanamex is offering a promotion of 12% right now on 90-day Pagares but there are conditions, such as being a client of the banking app and reinvesting the money with Citibanamex after the 90-day period. And the promotion is only temporary. It is unlikely that it is worth banking at Citibanamex just for this promotion.

A recent JP Morgan report highlighted how much money the large Mexican banks make off their customers’ small bank balances and the impact that has on demand for deposits and thus informality in the economy. Demand (i.e., interest-free) deposits are at 67% of total deposits in Mexico, versus just 32% in Brazil and 42% in Chile. In Mexico, deposit costs for the system are at 5.4% or about half of the CETES rates, (time deposits pay on average 9.5% and demand deposits on average 3%). BBVA’s deposit cost is a paltry 3.3% and Banamex’s 3.8% is a fraction of the CETES rate. The result? Mexico's total deposits are just 25% of the country’s GDP, versus 70% of GDP in Chile and 45% in Brazil as many people do not see the benefit of keeping their money in the banking system with rates so low. Low deposits impact lending.

For all these reasons, FinTechs rushed into Mexico. But many have found the going tough, lacking the scale and product range to make money, and underestimating the resistance from the public to reducing the use of cash. The big banks are digitalizing fast and offer a broad range of products to amortize customer acquisition costs and IT, unlike many of the single-product FinTechs. Five years on from the passing of Mexico’s FinTech law, BBVA makes more money than ever, ($4.5bn in 2022), and probably all of the main Mexican FinTechs remain loss-making. Use of cash remains at about 85% of transactions.

NeoBanks  

Unlike the SOFIPOs, the regulated NeoBanks (Covalto, Ualá, Hey Banco, PagaTodo) come with an IPAB guarantee of savings protection up to 400,000 UDIs or P3,131,196. Their biggest problem is cash in/ cash out as they mostly do not have branches, and cash machines in Mexico charge P40 or so. Their second biggest problem is as they generally onboard clients virtually, they often limit monthly deposits of P3,000 UDIs (P23,000) per month (this problem is gradually going away, as it is now getting much easier to have a full N4 onboarding with a video.) For someone who uses cash, or makes sizeable monthly deposits, NeoBanks can work as a supplementary bank, but often not as a primary one.

• Covalto is a NeoBank that mainly offers credit products to SMEs. However, it offers CDs with rates of up to 14% for 91 days and 11.25% for 28 days, IPAB protected up to P3.1mn, and has just been upgraded to BBB by HR Ratings. Its onboarding UX needs improvement and is far behind Klar/Nu/Mercado Pago’s. Its main banking operations are targeted at lending to Mexican SMEs. Covalto's website

• Ualá-ABC recently announced it will be offering 9% yield on deposits, available 24x7. However, this offer is not currently available. After contacting the company, we were told that it would be available in a few weeks. The key issue is whether the 9% yield will be available on cash balances or on money transferred to another Ualá savings account. If it is available on cash balance, then Ualá could become a very good option. Ualá's website

• Hey, Banco (part of Banregio) offers approximately 10% for existing clients on seven-day time deposits and 4% on demand deposits. It also has a great credit card and investment products. No taxes are paid on the first interest on P190,000 balance (as with Nu). You can withdraw cash from Banregio cash machines and related banks for free, or from the banks. It is very easy to migrate to a N4 account via a video call. Hey, Banco's website

• PagaTodo is also a fully regulated bank which offers great functionality in sending and receiving money between individuals and paying one’s bills automatically. It's easy to save your recurring bills into favorites and the application assistant will remind you of your due date well ahead of time to avoid late fees. But it does not pay interest. PagaTodo’s website

SOFIPOS

An increasing number of FinTechs are opting to become SOFIPOS: Nu, Klar, Finsus, Kubo Financiero, and now Fondeadora and Stori following their acquisitions of other SOFIPOs. The logic is that IFPEs as currently regulated really do not allow licensed FinTechs to do much, (no interest on deposits), and being regulated as a bank is expensive and time consuming. It is also much easier and cheaper to buy a SOFIPO than a bank, which is what Nu, Klar, Fondeadora and Stori, among others, did.

That said, traditional banks complain that Nu is operating as a bank and should be regulated as such. In our view, Nu made a major strategic mistake not becoming a bank. The extra costs are not that relevant given its 3mn customer base, and the perception (and limited deposit insurance of a SOFIPO, caps on monthly deposits/transfers, etc.) of the weakness of its product offering opens it up to attacks from incumbents. By contrast, Ualá and Covalto took the bank option but unlike Nu do not (yet) have the revenues nor product offering to pay the regulatory costs and be profitable. We would expect Nu to rectify its mistake and become a bank in Mexico before long.

The government’s PROSOFIPO only guarantees savings of up to 25,000 UDIs (or P195,700) in SOFIPOs, so it is best to check the credit rating if investing above that – especially as many SOFIPOs (including Nu) actually lose money even if well capitalized. Also, if onboarded digitally, SOFIPOs will generally start with limits of P23,500 on monthly deposits, but with a video call this can be upgraded to about P230,000/month. If you need cash, expect to pay P40 at a cash machine or maybe half that at supermarkets with whom they have agreements. Moreover, it is impossible or expensive to deposit cash in these accounts.

• Nu offers a 9% yield on cash and this money is available 24x7 if moved to the Investment Account (Cajita). Nu is heavily marketing how safe the investment vehicle is but mainly ignores the fact that the money is not IPAB-protected. It’s not super easy to find the savings account, and we suspect the company is trying to discourage people from transferring all their money to the higher yield box. And as with savings accounts at banks (but not investment accounts), the interest on the first P190,000 of balances are tax free (5x minimum wage), a huge advantage over investment products for small savers. You cannot deposit cash into Nu, a problem in an economy where 85% of transactions are in cash. Nu’s website

• Klar is offering 11% on seven-day investments and 14% on one-year investments. However, your money is locked up during the agreed investment period and there is no yield on your cash balance. It boasts a great UX, and our onboarding took minutes. We were limited to P23,000 monthly deposits. You cannot deposit cash into Klar, and taking cash out via a card is expensive. Klar’s website

• Kubo Financiero and Finsus are two other well-established SOFIPOs that also offer attractive yields, 13%, and 14.5% respectively for one-year CDs. The main issue for the risk adverse is the low government insurance limits for savers in SOFIPOs, even if both are liquid and well capitalized. Kubo Financiero’s website, Finsus’s website

IFPEs (Wallets)

Legally, IFPEs are not allowed to offer clients a yield on their cash balances, which in our mind is an absurd constraint imposed by the FinTech law. Also, there is no insurance on deposits. If the Wallet goes under, say goodbye to your money. Cash-in/cash out is expensive, even with OXXO’s card. In a high-interest rate environment, Wallets not attached to a retailer are largely pointless.

• MercadoPago has gotten around the noninterest-paying rule by making it easy to open an account with a GBM money market fund from the APP, which pays about 10.5% yield. You can quickly switch money between the money market fund and MercadoPago APP or use a debit card linked to the GBM fund. The APP has great UX, and onboarding is trivial. MercadoPago also offers a credit card. However, cash out/cash in is expensive as users need to use third parties, and there are limits on daily and monthly transactions. It offers lots of promotions for shopping on Mercado Libre so it can be a good complementary card if you use that site for ecommerce. MercadoPago's website

• Spin by Oxxo stands as FEMSA's latest digital banking solution, aimed at offering user-friendly banking services directly through the application. Within the app, users can engage in various financial transactions, including interbank transfers, deposits, cash withdrawals at OXXO stores and more. This platform is not the ideal option for investment purposes, it provides cashback on only about 1% of purchases. Annoyingly, as far as we can tell, it charges for cash in/cash out in its own stores, undermining much of its potential appeal. But if you shop at OXXO, there is no downside, and you get a 1% discount. Spin by Oxxo’s website

• Cashi the IFPE of Walmart de Mexico is offering a 2% in-card bonus for purchases made in-store using its card along with many other promotions. For Walmart shoppers, that is a great deal which may explain why it has 4mn users right now. You can use the card for other basic payment services and remittances. Cash in is free with Cashi, but there is no cash out; you have to spend the money at Walmart. If you are a Walmart customer, you should definitely get it as a 2% bonus adds up. Cashi’s website

Brokerage Houses and Savings Products

There are scores of brokerage houses that will offer clients money market funds, direct access to government and corporate short-term paper. Anyone with millions of Pesos to invest should invest in brokerages or Cetes Directo, instead of the banks.

• Cetes Directo offers 11%-11.5% depending on maturity, making it the safest and most attractive choice, although your money will be locked up for the specified period. There are no hidden commissions but unlike at Nu, you do pay taxes.   Cetes Directo's website 

• GBM offers a popular money market mutual fund, but the rates are lower than CETES direct due to commissions and you pay taxes. GBM’s website

• Actinver has a 25-year history of attending to small, medium and large investors, offering very competitive returns in its mutual funds and direct access to money market instruments. Actinver’s website