US retail giant Walmart wants to get on top of Mexico's fintech market with its Cashi digital wallet, yet analysts say its drive is strewn with potential pitfalls due to the proliferation of risky clients in the largely untapped market.
Walmart de Mexico (Walmex) in April said it had bought Trafalgar, a payment app, to compete in a market dominated by Grupo Salinas' Baz, Oxxo's Spin and MercadoPago of MercadoLibre.
Executives at the Walmart unit expect the deal to "unlock Cashi's potential," starting with transfers, withdrawals and remittances while keeping open the option of loans and other financial services in the future.
"We want to be the best financial services application in Mexico, and that requires constant investment," Marcelino Herrera, Walmex senior vice president of financial services, told Reuters.
The Walmex bet complements a drive by the US retailer to establish itself in the fintech segment, even as ructions in markets have fed jitters about newer forms of financing.
Walmex declined to say what it paid for Trafalgar.
Allocated Budget
The company has said it will allocate some $210 million to e-commerce and technology - including fintech - during 2023, or 14% of total investment in Mexico and Central America.
Walmart plans over $15 billion in capital expenditures for automation and alternate revenue streams in 2023, including its ad business, third-party marketplace, and deliveries.
The Bentonville, Arkansas-based chain expects these operations to contribute more to profitability over the next five years than its core brick-and-mortar retail business.
Cashi began in late 2018 but only inside stores of Walmex, Mexico's biggest private employer. The Trafalgar purchase should allow it to be deployed wherever digital wallets are accepted.
Herrera said low banking penetration in Mexico, where less than half of adults have accounts, was an opportunity for Cashi.
"We have five million customers visiting our stores every day and the vast majority don't have access to a financial product, never mind a formal credit product," Herrera said.
Still, analysts say that focusing on unbanked or underbanked Mexicans could cause Walmex trouble if it does opt to expand Cashi into a lending product.
"The niche of clients this type of fintech focuses on is very risky," said Rodrigo Marimon, a Moody's analyst for financial institutions, pointing to recent insolvencies at non-bank lenders Credito Real, AlphaCredit and Unifin.
Possible Risks
Jonathan Stahl, founder of financial and technological education website EduFintech, said risks would surface at Walmex if it gets into loans due to historical delinquency rates.
"The credit card would be an important change in strategy at Walmart," he said. "It would enter a riskier segment."
The ratio of non-performing loans (NPL) at the Mexican unit of Nubank, Latin America's largest fintech, was 12.2% in February, above the 11.4% average for microfinancing firms, according to official data cited by Brazilian bank Bradesco.
Nu Mexico's total consumer loans fell 1.6% in February, outpacing the 0.4% decline registered by the micro-financing industry as a whole, according to Bradesco's April report.
Synergies
Walmart has not defined fintech as a top investment priority but has poured money into it over the past year.
Walmart in March invested an additional $200 million in its majority-owned Indian fintech startup PhonePe to help it expand into new businesses such as insurance and wealth management. PhonePe has over 400 million registered users.
In the United States, the retailer last year unveiled plans to branch into digital bank accounts and provide financial services to its 1.7 million U.S. employees and legions of weekly shoppers through its majority-owned fintech venture One, with plans to expand into loans and investment products.
"We see synergies in financial services ... that are causing us to work more like a global company and, in some ways, more like a tech company, building tech products that can be leveraged across markets more so than we've done in the past," Doug McMillon, CEO Walmart said in December. "And I think that will be even more true in the future."
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