Digitization of payments in Mexico saves billions

The Mexican government is saving an estimated US$ 1.27 billion per year, or 3.3 percent of its total expenditure, on wages, pensions and social transfers. How? By digitizing and centralizing its payments.

The Mexican government’s reform is the story of a sustained effort over time driven by successive, committed Ministers of Finance and Treasurers who were sure of the ultimate benefits of electronic payments systems. This process and the resulting lessons have been examined by the Better Than Cash Alliance in an in-depth case study entitled, Sustained Effort, Saving Billions: Lessons from the Mexican Government’s Shift to Electronic Payments.[2]

The Better Than Cash Alliance is a partnership whose members are committed to moving away from cash to digital payments. Housed at the United Nations Capital Development Fund (UNCDF), the Alliance is uniquely positioned to bring together a broad cross section of governments, multilateral and bilateral donors, UN Agencies, international NGOs and companies. The Alliance is funded by the Bill & Melinda Gates Foundation, Citi, the Ford Foundation, the Omidyar Network, USAID and Visa Inc. It operates both globally and in country, providing diagnostics, toolkits, technical support and case studies, like the present example from Mexico.

Of course, Mexico’s savings did not happen overnight. As Richard Allen has pointed out: “…the process of reforming budgetary institutions is difficult and slow largely because it is driven much more by institutional and political economy factors than by technical ones.”[3] The same is true for implementing electronic payments systems.

So, how did Mexico do it? First, we’ll look at where they started. In the mid-1990s, Mexico’s Treasury Department (Tesorería de la Federación, also known as ‘Tesofe’) was wiring funds to the banks of each federal government agency (called Dependencias). This may sound simple, but the money had a very complicated, decentralized journey with ample opportunity for delays and confusion. First, Dependencias had to hand-deliver paperwork showing they were entitled to the wire transfer; Tesofe then had wide discretion on the timing to execute transfers. After the transfer, the funds sat in the Dependencias’ bank accounts until being disbursed (usually by checks), at which point the Dependencias would report their actual expenditures back to the Ministry of Finance. However, Tesofe had no means to assess how the money was actually spent.

It was time for a change that would benefit everyone. The first major transformation came when Tesofe engaged in an ambitious project to centralize payment by processing all federal government expenditures using a single IT platform. This allowed Tesofe to make payments directly to recipients following authorized requests by Dependencias, thus bypassing Dependencias’ accounts. Changes in the legal framework from 2007 onwards underpinned this change and the subsequent reforms.

By the end of 2012, about half of federal salary payments and the vast majority of pension and supplier payments had been centralized in Tesofe. Furtherprogress needs to be made in other areas, such as social transfer payments, where to date less than four percent of payments are being disbursed centrally. The benefits of digitization arise not only from the electronic payments themselves but from a much wider re-engineering of the related business processes.

The Mexican case yields a number of important insights relevant for other countries looking to shift toward electronic payments:

1. Changes in law can create momentum, but the effort must be sustained over time by senior political and technical champions. The transition to electronic payments is a sustained, long-term effort. Mexico’s 2010 budget decree mandating that certain government departments move to centralized electronic payments was not the beginning of the shift. Over the previous decade, the effort had been supported by Ministers of Finance across three different presidential administrations, including a change of governing party.
2. Having the legal and technical infrastructure in place before digitizing is critical to a coordinated effort. The Ministry of Finance successively created the legal framework to enable centralized payments and then built its own IT system for the authorization and processing of government payments. In addition, the Central Bank developed a national payments system to enable rapid, cheap transfer of funds to any bank account in the country.
3. Shifting in stages rather than immediately to all types of payment has worked in the Mexican context, and should prove successful in other countries. Tesofe started the process with centralizing government-to-business supplier payments, before moving on to government-to-person payments from 2008. Pensions were also a relatively easy target. The process of shifting social transfers under the main federal programs has made good progress in urban areas. However, most state-level expenditures have not yet been centralized.
4. Focusing on creating both a centralized and digital payments platform delivers higher efficiency and other benefits. It is possible to shift towards electronic government-to-person payments without necessarily centralizing the payments through a Treasury Single Account. Indeed, the move towards electronic transfers was well underway in Mexico before the 2010 decree accelerated the process. This patchwork approach resulted in some cases in higher, not lower, costs in the short- to medium-term.
5. Not everyone benefits from digitizing. Identifying the winners and losers in advance so as to design appropriate incentives is a key part of a successful change strategy. Examples of “losers” in this case are those large banks that were accustomed to holding lucrative government deposit floats under the decentralized process while payments cleared. Such banks opposed the changes initially and now have to compete for the business of the recipients of state salaries and pensions. These beneficiaries have been freed of the obligation to use a bank chosen by a government department to receive their payments.
6. Carefully designed incentives have helped to persuade end recipients. In Mexico, the law required that the government obtains the consent of workers before shifting their means of payment. A recent example of shifting all high school teachers in Mexico City to centralized payments suggests that a well-planned process, minimizing any inconvenience to the recipient, goes a long way to overcome resistance.
7. While financial inclusion goals didn’t drive the reform, they are important outcomes of the digitization of social benefits and rural payments. During the past three years, Mexico’s government has ramped up its commitment to promoting financial inclusion among the poor and other excluded classes. The digitizing of social cash transfers clearly has the most potential to advance financial inclusion, but most beneficiaries today do not yet have access to a mainstream bank account, another area where more work is still required.

[1] Managing Director, Better Than Cash Alliance.

[2] A summary of the study described in this article can be found at: https://btca-prod.s3.amazonaws.com/documents/132/english_attachments/Mexico-Highlights-English.pdf?1456238845. For the full version, see https://btca-prod.s3.amazonaws.com/documents/19/english_attachments/WEB-UNCDF-BTCA-Mexico-LongVersion-English-20150624.pdf?1438251994.

[3] Richard Allen, Public Financial Management and Its Emerging Architecture, Ch. 14 “Challenges of Reforming Budgetary Institutions in Developing Countries” (International Monetary Fund, 2013).