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An employee demonstrates the Sr. Pago device during a Nextel de Mexico press conference in Mexico City, Mexico, on Tuesday, March 3, 2015. In January AT&T announced the purchase of NII Holding Inc.'s Nextel Mexico business for $1.88 billion. In January AT&T announced the purchase of NII Holding Inc.'s Nextel Mexico business for $1.88 billion.Susana Gonzalez/Bloomberg

In Mexico city, known for its sprawling street markets, consumers are shunning cash and opting for credit cards they swipe on merchants' smartphones to pay for everything from shoes to tacos.

"People will always ask, 'do you take cards?', and if you do, they'll go 'I want this, I want that,'" said Jorge Preciado, who promotes and recruits vendors to sell their wares in markets across Mexico, such as Bazar Condesa. "Cash will always circulate, but paying with a card is going to become the norm," he said in a phone interview.

About 29 million people, or more than half of Mexico's workforce, operate in a gray economy that's neither taxed or regulated. New mobile-based payment methods like one offered by startup Sr. Pago lets merchants conduct business without having a bank account and redeem the cash earned at one of more than 12,800 Oxxo convenience stores. Sr. Pago, available as an app on Nextel smartphones, and falling mobile-service prices are allowing more Mexicans bypass banks.

Prices for mobile-phone service have dropped 17 per cent since last year's second quarter after a telecommunications overhaul eliminated charges for operators to connect to America Movil SAB's network, the most used in the nation, the telecommunications regulator reported last week.

That's helping place smartphones in the hands of Mexicans at the second-fastest pace in all of Latin America after Brazil, according to eMarketer.

Nextel Offer

This week, Nii Holding Inc.'s Nextel started offering a monthly plan for 450 pesos ($29 U.S.) that includes a smartphone and unlimited access to Sr. Pago's mobile application. It targets clients in the informal sector who couldn't afford more expensive plans.

"We saw this opportunity and managed to package something according to their needs that is affordable," Paola Ortega, Nextel's Strategic Marketing Director, said in an interview in Mexico City.

The screen allows the business to receive online payments using either credit cards or debit or prepaid ones that consumers swipe on a small terminal attached to the phone. It can also process cash payments made at any store owned by Fomento Economico Mexicano SAB's Oxxo, among other retailers.

"While much of Mexico's population works for the informal sector, it's a country with 119 million debit and credit cards issued, almost one per person," Sr. Pago's Chief Executive Officer and co-founder Pablo Gonzalez said in an interview.

"Many employers are handing out salaries through prepaid cards, which doesn't necessarily mean the employee has a bank account."

Oxxo Stores

With so many types of cards in circulation, including credit cards and the prepaid versions given workers without bank accounts in lieu of checks or automatic bank deposits, there's significant potential for fees, Gonzalez said.

And Oxxo stores, where merchants can redeem cash earned through Sr. Pago's mobile sales, are more likely to see a boost in business and brand loyalty with a new influx of visitors, said Ruben Lopez, an analyst with Grupo Financiero Ve Por Mas SA.

Mexico's consumer confidence rose to 90.3 in February from 84.5 a year earlier, according to data from the national statistics agency.

The nation's culture of street vendors and open-air markets dates back to prehispanic times, when vendors sold clothing and commodities at a tianguis – a word still used today for itinerant markets that pop up once a week in different Mexico City neighborhoods.

Card Fees

While government officials have attempted for decades to move people to the formal economy, including clearing streets of vendors, the practice remains entrenched. The informal economy accounted for about 25 per cent of Mexico's $1.3-trillion gross domestic product in 2013, according to the latest data from the national statistics center.

Sr. Pago, which is targeting 50,000 clients by the end of this year, charges about 3.6 per cent per transaction. Banks charge businesses an average rate of 2.4 per cent and various other fees for a credit-card purchase, according to Bank of Mexico data. Other mobile payment competitors in the country, such as Clip and PagoFacil, charge similar fees to Sr. Pago. Hiring payment terminals from banks usually carries additional fees, including affiliation and monthly rental costs.

While some merchants don't want to make time to open a bank account and deal with the paperwork or other formalities, Sr. Pago can be set up in one day and used immediately from different locations, Bazar Condesa's Preciado said.

"People would tell me, 'we lost some sales because we couldn't charge by card,'" he said. "It's a tool that has supported us a lot."

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