VZCZCXRO0892
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2097/01 1111517
ZNR UUUUU ZZH
R 211517Z APR 06
FM AMEMBASSY MEXICO
TO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHC/SECSTATE WASHDC 0398
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 MEXICO 002097 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
STATE PASS USAID FOR ROBERT KAHN 
TREASURY FOR IA MEXICO DESK - JASPER HOEK 
COMMERCE FOR ITA/MAC/NAFTA ANDREW RUDMAN 
 
E.O. 12958: N/A 
TAGS: ECIN ECON EFIN ETRD SMIG MX
SUBJECT: REMITTANCES AND MIGRATION PART II: THE FINANCIAL 
SECTOR 
 
REF: MEXICO 2042 
 
Sensitive but unclassified, entire text. 
 
This is the second in a series of four cables examining the 
effect of U.S. migration and remittances on the economy of 
rural Mexico. 
 
¶1. (SBU) Summary.  Despite record amounts of remittances 
flowing from the U.S. to rural Mexico, sustainable economic 
development in those regions has been largely elusive.  One 
factor inhibiting productive investment of remittances has 
been a scarcity of reliable financial services in rural areas 
which receive the majority of transfers.  Although financial 
organizations in Mexico, including credit union chains and 
traditional banks, are expanding their coverage and range of 
services, there are a still a number of economic and societal 
challenges limiting the effectiveness of these institutions. 
According to Antonio Carranza of the government development 
bank, (Bansefi), only 33% of the banking-aged population 
utilizes saving or investment services, thus hampering the 
positive long-term effects of the remittance flow into 
Mexico.  End summary. 
 
THE EXPLODING FINANCIAL TRANSFER MARKET 
--------------------------------------- 
 
¶2. (SBU) According to the Bank of Mexico, in 2005 remittances 
from migrants in the U.S. totaled 20 billion dollars, second 
only to oil revenues (31.7 billion dollars) and nearly double 
the value of tourism income (10.7 billion dollars). 
Representing an increase of 17 percent compared to 2004 (16.6 
billion dollars), this economic explosion is showing no sign 
of slowing.  According to Eduardo Gonzalez, an economist for 
Banamex, remittance income in the month of January, 2006 was 
estimated to have risen by 27 percent over the same time 
period January 2005, from 972 million dollars to 1.582 
billion dollars.  The state of Michoacan, a predominantly 
rural state with an agrarian economy, saw on an annual basis 
an increase in 2005 of 399 million dollars to 2.594 billion 
dollars, 13 percent of the national total (though Michoacan 
accounts for less than 4% of the total population).  Carlos 
Garcia, Director of Migrant Services for the state of 
Michoacan, estimated that 1.3 million Michoacanos currently 
reside in the U.S., most of whom transfer funds home on a 
regular basis. 
 
¶3. (SBU) Supporting this growth is a booming money transfer 
industry.  According to data provided by a Mexican Chamber of 
Deputies (lower house of Congress) study in December 2004, 
from 1995-2004 the proportion of electronic transfers (as 
opposed to money orders or cash deliveries) increased from 60 
to 91 percent.  As the sector has grown, it has also 
diversified and fees have decreased.  In 1995 the industry 
was dominated by Western Union and MoneyGram, but by 2004 
increased competition among money transfer organizations 
(MTOs), along with market entry by banks and credit unions, 
resulted in the average transfer fee falling from 18 percent 
in 1995 to 4.4 percent in 2005 (according to Juan Lavalle, 
National Director of Remittances for HSBC bank).  However, 
the participation rate of banks and credit unions in the 
money transfer industry is still estimated to be less than 5 
percent, according to Manuel Orozco of Georgetown University. 
 The increased participation of banks and credit unions in 
this sector could be a key development in ensuring low-cost, 
convenient transactions for low-income customers in the near 
future. 
 
THE POPULAR SAVINGS AND CREDIT LAW 
---------------------------------- 
 
¶4. (SBU) Credit unions (cooperatives) have existed in Mexico 
for over 50 years, but underwent massive restructuring 
mandated by the Popular Savings and Credit Law of 2001 
(PSCL).  The PSCL was passed as a response to the closings of 
numerous credit unions in 1999-2000 due to poor management 
and malfeasance, resulting in the loss of many members' 
savings and a subsequent distrust of these organizations. 
The PSCL requires that all non-bank financial institutions 
that plan to offer savings accounts conform with a rigorous 
standard of internal controls, a benchmark that has been met 
by only a handful of the 650 credit union chains which 
existed prior to 2001, according to Mario Gallarraga, Project 
Director for the World Council of Credit Unions (WOCCU). 
 
MEXICO 00002097  002 OF 005 
 
 
 
¶5. (SBU) While the largest credit union chains, such as Caja 
Popular Mexicana and Caja Libertad, are now licensed to offer 
standard services, five years after the passing of PSCL, the 
resulting scarcity of accredited chains has left many 
unserviced, rural areas.  Ironically, many of these 
communities are most dependent on remittance income (in some 
cases comprising 60-70 percent of the local economy), leaving 
many residents no option but to utilize higher-cost money 
transfer companies such as DineroExpress (which also do not 
offer savings accounts and credit services).  Although 
Yolanda Luna, an assistant director for the National Savings 
Bank, told Econoff that the number of credit union members 
nationwide has increased to 3.5 million (from 2.0 million in 
2004), additional branches of licensed cooperatives will be 
necessary to ensure financial services in underdeveloped 
areas. 
 
CAJA POPULAR MEXICANA AND COOPERATIVES 
-------------------------------------- 
 
¶6. (SBU) An example of the growing influence and scope of 
cooperative financial institutions in rural Mexico, Caja 
Popular Mexicana (CPM) is Mexico's largest and oldest credit 
union, with assets of over 1.2 billion dollars and 327 
branches in 22 states, according to Galarraga.  Supported by 
USAID since 1999, and WOCCU since 2001, CPM has demonstrated 
strong growth, increasing its average rate of growth from 980 
members/month in 2001 to 12,200 members per month in 2006.  A 
central challenge faced by any credit union chain seeking to 
offer remittance services is establishing the systems 
infrastructure to transfer the funds as well as having the 
bargaining power to negotiate an agreement with a major MTO 
in the U.S.  CPM has had an agreement with Vigo, a company 
with substantial experience with the Latin American 
remittance market as well as branches conveniently located in 
areas with large Mexican migrant populations in the U.S. 
since 2003. 
 
¶7. (SBU) A key factor in its success, CPM possesses a 
sophisticated information technology system called IRnet, 
which is provided to all credit unions who work with WOCCU, 
and is also utilized by Mexico's second-largest credit union, 
Caja Libertad.  According to Luis Ortiz, a CPM branch manager 
in Pastor Ortiz, a small farming community in Michoacan, the 
number of remittances processed by CPM's remittance service, 
Pagomex, increased from 2,921 transfers in 2003 to 142,567 in 
¶2005.  This pace is showing no signs of diminishing, with 
25,833 transactions made in the first two months of 2006 
alone.  However, although CPM has aggressively marketed 
Pagomex in Mexico, Pagomex is still virtually unknown in the 
U.S. 
 
¶8. (SBU) CPM faces formidable competition from other credit 
unions as well as national banks in larger communities. 
While credit unions generally do not yet offer many of the 
services banks do, such as ATMs, internet banking, and credit 
cards, Santiago Alvarez, branch manager in Puruandiro, a 
larger agricultural community of 70,000 located 60 miles west 
of Morelia in the state of Michoacan, explained to Econoff 
that CPM's competitive advantage versus the larger banks was 
the non-intimidating, personal service provided by their 
employees.  Puruadiro is an exception due to the presence of 
Bancomer and HSBC branches, although Alvarez estimated that 
only 5 percent of local residents are bank customers, while 
the 18 credit unions capture the majority of business. 
 
¶9. (SBU) In contrast to the commercial banks (Bancomer and 
HSBC) located on the central plaza, the CPM in Puruandiro was 
opened on a side street next to the bustling fruit and 
vegetable market.  In some ways, the branch looks like a 
garage, lacking a door but having an inviting atmosphere. 
Clients who regularly receive remittances there attested to 
Econoff that their previous distrust of financial 
institutions had been overcome by the friendly, helpful 
atmosphere of the company.  One customer, Maria Ramirez 
Arriaga, stated that "I am a poor person, and of course we 
don't use banks, who only steal from us anyway.  However, 
Caja Popular Mexicana has treated us with respect."  Ramirez 
went on to mention that since becoming a member, she had 
applied and qualified for a loan based on the remittance 
income she receives from her sons, which she used to purchase 
an additional tractor.  Other clients cited lower fees 
(compared to banks) as the primary reason for their loyalty. 
 
MEXICO 00002097  003 OF 005 
 
 
The lack of certain services offered by banks did not appear 
to be a detriment to most rural customers, many of whom now 
have access to financial services for the first time. 
Marketing credit products to previously un-banked customers 
appears to be an important key for credit union 
profitability, given the low money transfer profit margins. 
 
 
¶10. (SBU) There has also been a change in the perception of 
the credit-worthiness of remittance recipients.  While 
historically wire transfers (even those sent on a regular 
basis) were not considered dependable indicators of solvency, 
today clients of cooperatives such as Ramirez can obtain 
credit based solely upon remittance income.  The new ability 
of many people to obtain loan products from credit unions may 
significantly boost productive economic activity in many 
rural areas, and illustrates a major difference between 
cooperatives and traditional banks. 
 
THE NATIONAL SAVINGS BANK 
------------------------- 
 
¶11. (SBU) Created by the Popular Savings and Credit Law, 
Bansefi serves as a second-tier bank designed to offer 
savings accounts to the unbanked population as well as to 
strengthen a network of smaller credit unions across the 
country.  Authorized by the federal government to create a 
national remittance delivery network in 2003, it developed 
"La Red de la Gente" (The People's Network), which has 
negotiated agreements with 10 money transfer organizations 
(MTO) including MoneyGram, Vigo, and USBank.  "La Red de la 
Gente" has been marketed heavily by Bansefi, utilizing former 
migrant stars such as Andres Bermudez (The Tomato King) as 
spokespeople.  Presently, La Red includes over 750 branch 
offices, many of whom are small chains of only one or several 
branches and would have little or no chance of negotiating 
agreements with U.S.-based MTOs.  Antonio Carrasco, National 
Director of La Red, explained to Econoff that Bansefi is 
aggressively pursuing agreements with large national banks 
and credit unions in the U.S. in order to expand the reach 
and capabilities of La Red.  Carrasco and his colleagues, 
Yolanda del Rosario and Jaime Reynosa, fervently described 
their desire to include not only banks but universities, 
governmental institutions, and even the U.S. Embassy in the 
network in the future. 
 
¶12. (SBU) Although Bansefi enjoys the advantages of being 
promoted by the Ministry of the Economy, a distinct product 
(La Red) and brand name, and a single-minded philosophy 
("bank the un-banked"), it has suffered setbacks in its 
attempt to create additional financial opportunities for 
Mexico's poor.  One problem is that Bansefi does not allow 
member organizations to join other financial networks, such 
as WOCCU's IRnet, which has resulted in the two largest 
credit unions in Mexico, Caja Popular Mexicana and Caja 
Libertad, deciding not to join La Red.  Another concern 
voiced by several branch managers with CPM and Caja Libertad 
is that Bansefi, rather than supporting the credit union 
industry as was originally intended, actually is focused on 
competing with and even subverting "rival" cooperatives. 
When asked about Bansefi and La Red, several Caja Popular 
clients responded with comments such as "they're not 
trustworthy," and "they charge way too much."  Privately, 
Carrasco admitted to Econoff that Bansefi was suffering from 
public relations problems issues in 2005 concerning suspected 
financial mismanagement and malfeasance.  In addition, 
Carrasco also mentioned that Bansefi and La Red are 
priorities for the Fox administration; the incoming 
administration may not be as supportive. 
 
THE TRADITIONAL BANKING SECTOR 
------------------------------ 
 
¶13. (SBU) The traditional banking sector is also targeting 
the remittance market, aggressively leveraging partnerships 
with U.S.-based banks to offer convenient transaction 
services to account holders on both sides of the border. 
Armando Albores, Regional Director of Banamex in the state of 
Michoacan, explained to Econoff that more effectively 
penetrating the remittance market is a top priority.  Banamex 
is cooperating with Citibank, their parent company, to offer 
low-cost wire transfers (five dollars per transaction) 
between U.S. and Mexican account holders.  While stating the 
Banamex was a "financial institution for all," Albores 
 
MEXICO 00002097  004 OF 005 
 
 
admitted that the cost of opening a branch in a community 
with less than 30,000 residents was prohibitive, thereby 
restricting coverage where many of Mexico's remittance 
recipients live.  (According to the National Institute of 
Statistics, 35-40 percent of the population lives in 
communities smaller than 30,000 residents). 
 
¶14. (SBU) Attempting to overcome their poor reputation among 
many in rural Mexico, some banks are offering services that 
do not require opening an account.  Juan Lavalle of HSBC 
described a new program which offers a debit/credit card to 
anyone (not only account holders) receiving remittance funds. 
 Lavalle informed Econoff that while HSBC will not reap a 
large amount of revenue from this program, its value lies in 
tracking recipients' spending habits, in order to market 
additional services to this growing sector in the future. 
Realizing that migrants' reluctance to frequent banks in the 
U.S. is also an important prohibitive factor, HSBC is 
utilizing outreach programs in areas of high migrant 
populations.  There are clear opportunities for the 
traditional banks, especially as more migrants begin to 
utilize banking services in the U.S.  Due to a limited client 
base, however, the banking sector may not be an huge driver 
of economic growth in Mexico's rural areas in the near future. 
 
NEW GOVERNMENT PROGRAMS 
----------------------- 
 
¶15. (SBU) The issue of utilizing remittance income to spur 
rural economic development has been a central issue for the 
state government of Michoacan for a considerable period of 
time, given the state's position as the remittance leader of 
Mexico.  In 1990, Michoacan became the first state to create 
an Office of Migrant Affairs (there are now equivalent 
offices in 26 of 32 states), which is tasked with providing a 
variety of services to migrants, such as notarial services. 
Considering accessibility to low-cost electronic transfers in 
rural areas as a humanitarian and social issue as well as an 
economic one, the Office of Migrant Affairs initiated the 
first government subsidized financial transfer program in 
Nahuatzen, a small, underserviced farming community in 
northern Michoacan, in January, 2006.  Alejandra Contreras, 
director of remittance services in the Office of Migrant 
Affairs, explained to Econoff that this pilot program 
provides a platform for migrants in the Washington, DC area 
to make a transfer to a government operated cashier in 
Nahuatzen for a flat fee of three dollars, far below the 
average cost.  Contreras also stated that the program was 
just beginning but so far had exceeded all of its benchmarks, 
and that her office was considering opening two additional 
branches by the end of the year.  However, some view the 
concrete effects of such a program as being limited, while 
potentially undercutting private financial institutions and 
being counterproductive in the long-term.  Regardless, this 
program illustrates that ensuring low-cost financial services 
and encouraging subsequent economic development in rural 
areas is an important issue for local and state policy makers. 
 
COMMENT 
------- 
 
¶16. (SBU) The challenge of ensuring access to financial 
services in rural areas in order to harness the incredible 
economic power of remittances will be one of Mexico's biggest 
economic and social challenges in the immediate future. 
While there are a number of positive trends, such as the 
increased coverage and competency of cooperatives in 
underserviced areas, new programs by banks to attract 
migrants and their families, and greater attention to this 
issue by local and state governments, many obstacles remain. 
While credit union chains such as CPM are continuing to 
expand and recruit clients, it will take time (and marketing 
finesse) to overcome a strong reluctance in many areas to 
utilize financial services.  In addition, many of the 
financial products obtained are used for basic daily 
consumption, instead of long-term economic investment. 
Although new services offered by the banking sector should 
enable less expensive, more convenient financial 
transactions, many of these services will probably still be 
restricted to a relatively small percentage of the population 
in the near term.  With the amount of remittance income 
likely to continue to grow at a strong rate, some economic 
development should occur in many rural areas.  However, this 
growth will probably occur at a slower rate than could be 
 
MEXICO 00002097  005 OF 005 
 
 
expected given the explosion of remittance income to 
Michoacan and Mexico. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
KELLY