Cash VS. Credit Cards in Mexico
As many of you know, I enjoy looking at the Financial Markets from an outsider's perspective and like to think outside of the box. So I recently saw a blog post discussing the benefits of using cash versus credit cards and thought I would share my thoughts on the subject as it relates to Mexico.
The following was part of the post from someone in England…. Gives you something to think about.
Why should we pay cash everywhere with banknotes instead of a card?
- I have a ￡50 banknote in my pocket. I go to a restaurant and paying for dinner with it. The restaurant owner then uses the note to pay for the laundry. The laundry owner then uses the note to pay the barber. The barber will then use the note for shopping. After an unlimited number of payments, it will still remain a ￡50, which has fulfilled its purpose to everyone who used it for payment and the bank has jumped dry from every cash payment transaction made..
- But if I come to a restaurant and pay for dinner digitally - Card bank fees for my payment transaction charged to the seller are 3%, so around ￡1.50 and so the fee will be ￡1.50 for each further payment transaction or owner re laundry or payments of the owner of the laundry shop, or payments of the barber etc..... Therefore, after 30 transactions, the initial ￡50 will remain only ￡5 and the remaining ￡45 became the property of the bank thanks to all digital transactions and fees
The author made some valid points about the use of Credit Cards and how the CC companies make a small percentage off of each transaction. While the numbers the CC takes may not be 100% accurate, nor the number of transactions required to consume the initial $50 pounds, we do get the concept that the banks and credit card companies eventually get their pound of flesh from the money circulating via their system.
At the end of the day, Mexico is more of a cash economy, more so than credit card or debt-based. While many larger merchants do accept credit cards, most of the smaller family-run businesses don’t so they keep more of the proceeds from each transaction. Something to consider is how much more revenue and sales these merchants would make if they did accept credit cards, but that is a data point I don’t have. But at the end of the day, many of these small merchants may not even qualify to accept credit cards, so for the most part they will stay as a part of the cash economy here in Mexico.
These smaller merchants operate on thin margins in the first place, so many may not justify the additional 2-3% cost charged by the CC processors. Also, much of their customer base may not even have credit cards and I suspect the use of credit cards is not as prevalent here in Mexico versus Canada, US, or Western countries. In fact, it is much more difficult to get credit here in Mexico as a consumer and if you do qualify, nonpayment of balances is very costly because interest rates are much higher here, especially for credit cards. While much of the population back home live off their credit cards, Mexicans can’t afford to do so because of the higher cost of borrowing and nonpayment.
So for the most part, even thou larger merchants do accept credit cards here, the credit card companies and banks aren’t making as much interest income as they would in heavily indebted western societies. It is nice to see Mexico and its population not laden with debt, but sadly we live in a world where debt is money... but eventually, the piper has to get paid and I think we are at that point now.
So as a new business owner here in Mexico, do you decide to accept credit cards or not as a form of payment? That really depends on your market, however, from my observation even the Expats who live here don’t use Credit Cards from back home as a method of payment, and the exchange rates charged by these companies are outrageous. The tourists here may use credit cards as a form of payment and some businesses need to accept credit cards or make it mandatory in the case of hotel bookings, car rentals, or airline ticket purchases. I guess the choice of accepting credit cards is highly dependent on the nature of your business and who your market is.
So this brings me to now looking at the use of Debit Cards here in Mexico. As an Expat who now lives here, I was able to open a bank account and the debit card I was issued does act like a credit card such as Visa. While I don’t have actual credit here, it is comforting to know this does act like a credit card in those instances when one is required for a local or online purchase. The fees for debit transactions paid by merchants are significantly lower, so the banks and credit card companies aren’t profiting as much as from credit card use. So as an entrepreneur and business owner whose market is mostly Expats, it does make sense to accept debt payments. Many Expats don’t like to carry large amounts of cash here, so larger ticket items paid via debit cards do make sense. Understanding your market, and their buying and payment behavior goes a long way in growing your business, accepting credit cards or debit cards can be wise as an owner if your market warrants it.
While I do understand the convince of having a credit card and why merchants would accept it, I do enjoy the simplicity and anonymity of paying by cash. I would rather see a few extra percentage points going into small business owners' hands versus the banking system. Everything eats away at the bottom line for many of these small business owners, so the more they retain the better.
The cash economy here in Mexico will not go away soon, but will it move more towards debit card use, or will it jump directly to Central Bank Digital Currencies (CBDC)... this is yet to be seen. CBDC is on its way, even the US Fed is rolling it out soon and is in trial use of it. The Mexican Gov’t also has plans to issue a CBDC soon, so I wonder how it will be accepted in the actual Mexican economy. For the most part, the small business market may remain Cash-based, but things are changing and the world of Finance and Money is transforming towards digital currencies, digital ledgers, and payments… Mexico won’t be left out in this new brave financial frontier known as FinTech. While Cash remains King, will it get dethroned by CBDC?
I would love to hear your comments below on Mexico's Cash Economy and how it will fare in the world of electronic payments. Also, feel free to join our Facebook Group where I share lots of info and comments that relate to Finance and Mexico.
Cheers