CONTINUE TO SITE »
or wait 15 seconds

blog

Mexico's new QR-based payments system — will it succeed?

Banxico recently rolled out CoDi, a smartphone and QR-based payments system. ATM historian Bernardo Batiz-Lazo steps us through how QR codes became so popular and what this means for cash-dependent Mexico and the ATM industry.

Mexico's new QR-based payments system — will it succeed?Photo: iStock


| by Bernardo Batiz-Lazo — Professor of Business History, Bangor University

A few weeks ago, Banco de México (Banxico), Mexico's central bank, rolled out CoDi — a smartphone and QR-based payments system. 

How did QR codes become so popular? What does this mean for Mexico, a heavily cash-dependent country? And what does it mean for the ATM industry? 

To understand more, let's step back 45 years. 

Rise of the QR code

The ubiquitous barcode revolutionized the retail industry upon its arrival on a packet of Wrigley's chewing gum in 1974. The success of the black-and-white striped sticker lay in its ability to encode information about a product that could be easily scanned, speeding up checkout and making logistics easier. 

In 1994, and as a response to the needs of the Japanese automotive industry, the machine-readable optical label evolved into a matrix form called quick response, or simply, the QR code.

More recently, the ability of the QR code to meet the demand for more detailed information questions the longevity of this form of labelling in logistics. However, while logistics found QR codes increasingly inadequate, others found its simplicity appealing. As a result, the QR code evolved from an advertising mechanism to a way to download apps to retail payment systems.

It started in China with Tencent and Alipay and with British supermarket Tesco making a huge success of QR codes in South Korea. The latest move in Mexico, of the county's central bank-sponsored roll out of a QR solution for retail payments, attests to how QR digital payments are no longer simply Asian but have now gone global. 

Mexico's launch of large-scale QR retail payments — or CoDi, short for plataforma de Cobros Digitales, as it is known locally — in September 2019, followed a two-year concerted effort of Banco de Mexico, which included a pilot project in April. 

As expected, CoDi's launch was wrapped in the overall narrative of the cashless economy, promising greater efficiency, security, and an increase in financial inclusion. 

CoDi is a merchant-presented QR code. Here the customer rings up their items for purchase, and then the merchant's point-of-sale system produces a QR code for the customer to scan with their mobile device. This tells the customer's mobile payment app or eWallet how much they're being charged, and the customer's device sends a payment for the total charge to the merchant. 

CoDi is directly linked to the Interbank Electronic Payment System (SPEI), the Mexican version of a real-time payment clearing system. If a user does not have a checking or savings account, banks will give the option to open a “plain vanilla” account within a couple of minutes, through the same application, requiring only the most essential information. 

Mexico's central bank designed CoDi with the aim to reduce the use of cash and its associated malaise during on-the-spot retail transactions. The obvious question for the ATM and cash management industries is whether these new forms of digital payments will further erode the use of cash or — as is my view — a more likely outcome will be to completely eliminate personal checks (which have been on a nose drive since the early 2000s), displace plastic and possibly even POS terminals as we know them today. 

Mexico's cash-based economy 

QR-based digital payments are certainly great — if you have a smartphone. 

According to official statistics, between 2016 to 2017, the number of smartphone users in Mexico grew by 4.1 million from 60.6 to 64.7 million. This represents a little more than half of the total population of the country. 

In contrast, the number of smartphone users in South Korea was 39.5 million or 76% of the country's 51.5 million inhabitants in 2017.

Although Mexico is a country characterized by a growing young population, a very large section of the country's economy is cash dependent. The nature of these cash payments is quite diverse. Some of it is in response to drug trade and corruption. But it is also due to a large number of the country's inhabitants finding subsistence through self-employment as street vendors. Roughly 80% of Mexico's 130 million inhabitants are now urban, but that still leaves a large number of people living in autarky.

Mexico is the second-largest economy in Latin America and the 15th-largest economy in the world by the size of its GDP. But, at the same time — and if the size of the financial sector is any indication of economic activity — then Mexico is small even for emerging market standards. In 2014, when the latest comparative data was available, Mexico's overall debt to GDP ratio was 73%, well below the 212% average of other large emerging markets. 

This is understandable on the back of high indebtedness leading to a severe economic crisis in the 1980s and 1990s. But today Mexico's household debt to GDP hoovers around 7%, quite similar to that of India (9%), and the lowest for any of the countries in the sample of the 2015 study by McKinsey Global Institute.

Recent commerce data further supports the idea that it will take a long time to displace cash in Mexico. According to data from the National Association of Self-service and Department Stores (ANTAD in Spanish), the proportion of purchases paid in cash during “Buen Fin 2018” (the Mexican version of Black Friday) was 38% while debit payments represented 25% and credit 37%. This trend is similar to data from the Federal Reserve, which tells us that in 2018, Americans with an annual income of $25,000 or less made 38% of their payments in cash, 15% with a credit card and 47% through other means. 

The fundamentals are therefore on the side of cash in Mexico. Plastic beware!

Looking ahead

As was the case in India under Prime Minister Narendra Modi, the roll out of QR payments in Mexico has a clear aim to reduce corruption, increase financial inclusion and squeeze out the informal economy. Yet the success of CoDi fully displacing cash is up against heavy odds — anecdotal evidence is that there is a strong distrust in banks and few people in the country have fully embraced internet banking or mobile payment solutions, such as Apple Pay. 

A more cumbersome point has to do with the country's tax administration system. It is currently reliant on those working in the formal economy, mostly composed of salaried people who are banked or underbanked but fully active in the retail financial sector. Increasing the number of fully banked people and/or people subject to digital payments would be attractive for tax authorities, but I can't see the incentives for those in the margins to join the mainstream, especially considering that these are people who have to pay policemen for the right to stand in a corner.

As well, Mexico's state educational system is in dire straits, its public health system is far from world class — health insurance hugely expensive — while the level of violence and insecurity in the country has increased under the current administration. So, very little to show for your tax pesos, I'm afraid. 

I am also unclear of the pathway to adoption by the country's self-employed merchants who have already adopted solutions such as Zelle to enable payments with plastic. Meanwhile, large retailers could potentially reduce costs of having multiple card reader terminals on the side of the checkouts.

To the extent that significant investments have been made in plastic enabling technology, like Zelle or near-field-communication card readers, then small-sized and large merchants will have little incentives to adopt QR codes right away. 

However, if you were to upgrade or embrace a new retail payment solution then you might as well go digital and obviate plastic. In other words, it is likely that the large merchants will be driving QR adoption, with smaller ones following suit, as their card reader solutions become dated.

To be fair, Banxico and the Mexican commercial banks do not expect CoDi to be an overnight success. Neither do I. But to the extent that QR becomes prevalent, it will be mostly displacing plastic and to a much lesser extent, cash. 

Meanwhile, the ATM network in Mexico remains firmly in the hands of commercial banks with a number of non-plastic-token solutions (such as sending a unique withdrawal code via SMS) already available and very much in use. For them, QR codes are not — nor should they be — an issue as sponsors of CoDi.



Bernardo Batiz-Lazo

Bátiz-Lazo is Departmental Chair in Business History and Bank Management at Bangor University, Wales. He has written about ATMs for publication, been a guest on BBC Radio, and spoken at the Federal Reserve Bank of Kansas City and the ATMIA conference.

Connect with Bernardo:  

KEEP UP WITH ATM AND DIGITAL BANKING NEWS AND TRENDS

Sign up now for the ATM Marketplace newsletter and get the top stories delivered straight to your inbox.

Privacy Policy

Already a member? Sign in below.

  or register now

Forgot your password?


You may sign into this site using your login credentials
from any of these Networld Media Group sites:

b'S1-NEW'