The use of money needs to be digitized in Mexico: Mastercard

Money equivalent to 19.2 percent of the national GDP is mobilized in the informal economy, according to recent studies by Mastercard.

The use of money needs to be digitized in Mexico: Mastercard
Mastercard credit card: Imagen de Yannick McCabe-Costa en Pixabay

The Mexican economy traditionally functions largely outside of the digital financial system. This, without resorting to the use of digital cash, such as credit cards, debit cards, transfers, online payments, electronic purses, mobile money, or CoDi.

According to Mastercard data, more than 70 percent of consumer transactions in Mexico are made with cash. However, the low percentage of use of electronic payment methods facilitates evasion. It also makes tax collection more difficult and reduces the effective tax base.

According to recent estimates by EY and Mastercard, the cash-based informal economy in Mexico accounts for 19.2 percent of GDP. The economic activities that are hidden from the scrutiny of authorities are about 4.6 billion pesos annually.

The loss of tax revenue from the existence of a cash-based informal economy represents 2.6 percent of GDP. That is about 620.5 billion pesos.

This figure is equivalent to 10 percent of the Federation's 2021 Expenditure Budget. Almost all of the budgets for the Secretariats of Welfare, Health, and Public Education. The loss in the collection could also represent 19.4 percent of the tax revenues reported by SAT in 2019.

Therefore, the Mexican Institute for Competitiveness (IMCO) stated that the government should implement actions to encourage the adoption of electronic payment methods. Also to reduce the size of the informal economy and increase tax collection.

Among the recommendations to be established is the adoption of electronic payment methods by the government itself as an efficient and easy-to-use alternative for everyone.

All levels of government in the country should encourage the adoption of electronic means of payment for suppliers, public works contractors, payroll, and distribution schemes for social programs.

Tax incentives for consumers are required, such as benefits, exemptions, and cost reductions for the use of electronic means of payment such as bank cards.

Develop tax incentives for businesses: reduction of fiscal and operational costs for accepting electronic payments in businesses, subsidization of devices such as point of sale terminals, and tax deductions for income reported in electronic means of payment.

Generate greater acceptance of electronic means of payment: promote the acceptance of electronic payments and installation of devices such as point of sale terminals.

Promote electronic payments of salaries and labor benefits: requirement of payment of payroll and other contributions via bank transfers.

Policies should also be implemented to increase competition in the banking system and payment systems. In conjunction with regulation for financial technology companies, it is necessary to adopt standards such as Open Banking to increase the diversity of financial services.

Estimates by EY and Mastercard indicate that if these measures are implemented simultaneously, tax revenues could increase by as much as 0.58 percent of GDP. Considering the 2019 GDP, these resources represent almost 140 billion pesos and are equivalent to 2.2 percent of the Federal Expenditure Budget 2021 or 4.4 percent of the tax revenues reported by the Tax Administration Service (SAT) in 2019. Such additional net resources could finance the entire budget allocated in 2021 for the senior citizens' pension program (135 billion pesos).