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With its craggy buttes and cactus-spiked hills, the Sierra Mixteca is a frontier of Mexican banking. Ramón Gómez and Oscar Xicotencatl, executives at HSBC Mexico, have driven here from their offices in the city of Puebla, several hours north, to spread the gospel of savings accounts, debit cards, personal loans and mortgages to farmers and villagers who have always dealt in cash and avoided banks. "It's a big potential market for us," says Xicotencatl, assistant director for HSBC in four central Mexican states. "But it's also a real challenge," adds Gómez, who is the bank's director for the same region.

The potential and the challenge are in full view in this southern corner of the state of Puebla. Traditionally one of Mexico's poorest regions, the Sierra Mixteca is being transformed by millions of dollars in remittances sent home by young locals who have moved to New York, mostly as illegal migrants. In small towns like Tulcingo del Valle and Piaxtla, fast-food pizzerias and cybercafés crammed with computer stations have replaced pulquerías, those old-time saloons with swinging doors. Instead of ancient adobe hovels, new brick-and-concrete houses are everywhere, with satellite dishes sprouting from their roofs.

But despite swelling purchasing power, local people see no advantage in using financial products such as credit and debit cards or loans. Their homes sit on communally owned property -- part of the ejido farmlands created by agrarian reform after the Mexican Revolution of 1910­'21, which makes it legally and financially difficult for HSBC Mexico, a subsidiary of HSBC Holdings, to issue mortgages. According to the bank, more than 70 percent of all commercial transactions in Mexico are in cash -- compared with about 30 percent in the U.S. But in the Sierra Mixteca, more than 90 percent of all transactions are in cash.

"I've never even seen a check around here," says Arturo Robles, a rancher on a visit to the weekly Piaxtla livestock fair to buy a stud bull. For payment, he uses a thick roll of pesos -- amassed from the monthly remittances wired by his son, a restaurant worker in Manhattan.

Remittances from the estimated 9 million Mexicans living in the U.S. reached $20 billion in 2005, according to Banco de México, the nation's central bank. That's too much money for HSBC and other global banking giants to ignore. Of the total, about $2 billion was carried as cash to Mexico by returning migrants. The remaining $18 billion was sent electronically. But in most cases, the only fees the banks collected came from their role as clearing agents for money transfer operators, such as Western Union, MoneyGram and DolEx. "Banks partner with us because we have many more outlets than they do" near Mexican immigrant communities, says Cynthia López, Mexico City­based assistant director of international business for DolEx. "Also, they still haven't learned how to reach out to Mexican customers in the U.S." That hasn't kept banks like HSBC from wooing those customers with other financial services. "We are trying to add value to those tremendous remittance flows, both for the beneficiaries and for ourselves," says Juan Lavalle, Mexico City­based director of remittances and international products at HSBC Mexico.

Squeezing more profits from remittances is part of a broad global strategy by the big banks to increase their earnings from the increasingly affluent working masses in developing countries. With the saturation of banking services and the graying of customer bases in developed nations, banks are looking to Brazil, China and Mexico for future growth. "You have to start downmarket if you want to keep those customers when they move into upmarket segments," says Sandy Flockhart, chief executive officer of HSBC Mexico.

HSBC, which styles itself "the world's local bank" -- it's also the third largest by market capitalization after Citigroup and Bank of America Corp. -- is not the only one pursuing this strategy in Mexico and elsewhere. In 2005, Citi's Grupo Financiero Banamex subsidiary -- the biggest bank in Mexico -- accounted for 7.8 percent of Citigroup's $24.6 billion in net income. Grupo Financiero BBVA Bancomer -- the country's second-largest bank -- contributed 31 percent of Madrid-based BBVA's net income of $4.7 billion last year. HSBC Mexico, the third-largest Mexican bank by deposits, accounted for 4.4 percent of HSBC's record net income of $15 billion. That makes Mexico the fourth-biggest contributor to HSBC earnings after the U.S., Hong Kong and the U.K., the bank's home market. But fees directly linked to Mexican remittances accounted for less than $100 million, a tiny fraction of HSBC's total income in 2005.

Both Banamex and BBVA Bancomer are banks with strong upper-income and middle-class franchises that have only recently tried to recruit lower-income customers. By contrast, HSBC's operations in Mexico began in 2002 with the $2.3 billion purchase of Grupo Financiero Bital, a family-owned bank with a largely blue-collar clientele.

Today HSBC Mexico has 6.8 million clients. About 2.8 million are payroll customers, who normally use the bank just to collect their paychecks. And half of these payroll customers earn no more than $350 a month. But HSBC has induced many of its blue-collar clients to sign up for other banking services. Under a program launched in February 2005, customers who pay a $5 monthly fee are given a debit card, allowed up to ten checks and ten cash withdrawals a month at no charge and offered investment funds and insurance policies. Nearly 700,000 have signed up for the program.

But HSBC's efforts to introduce similar cross-selling products to its remittance clients haven't been nearly as successful. Since late 2002 the bank has offered so-called Efectiva debit cards, which allow beneficiaries in Mexico to use the bank's ATMs to collect remittances sent by their relatives in the U.S. "The idea is that a beneficiary will only withdraw a small portion of those remittances at a time and leave the balance in a savings account at the bank," says remittance chief Lavalle. Savings accounts earn annual interest rates of 5 to 8 percent. From there a beneficiary might be enticed into accepting personal loans, guaranteed by future remittances.

But in three years only about 50,000 Efectiva cards have been issued. HSBC Mexico executives are convinced the biggest obstacle to expanding the card program -- and the profitable bank products it would deliver -- is the wariness of Mexicans working in the U.S. Undocumented Mexicans, who account for perhaps 7 million of the 12 million or so foreigners living illegally in the U.S., tend to shun "official" institutions like banks. "No matter how often a bank tells a migrant that it has no ties to the U.S. immigration authorities, he still doesn't believe it," says Gómez, the HSBC director in Puebla.

Migrants are well aware that the issue of illegal immigration deeply divides Americans and is heating up. The U.S. Census Bureau forecasts that at present growth rates, more than 100 million Latinos -- most of them of Mexican descent -- will be living in the country by 2050. Many of them will begin life in the U.S. as undocumented immigrants. But even after legalizing their situation, large numbers of them are likely to continue sending remittances to their relatives in Mexico.

In April the U.S. Senate's efforts to pass new immigration legislation crumbled. That bill would have granted most undocumented aliens a chance to eventually become U.S. citizens. It would also have created a guest worker program to meet the needs of businesses while supposedly tightening border security.

Defenders of illegal immigrants point to evidence that they take jobs that Americans consider too burdensome or too low-paying. Hundreds of thousands of migrants and their supporters demonstrated in U.S. cities in April. But in the wake of heightened fears of terrorism after 9/11, a large constituency of Americans, especially conservatives, favors sealing off the border with Mexico and criminalizing undocumented aliens. In December 2005 the House of Representatives voted 260-159 to build a wall along large sections of the 1,950-mile U.S.-Mexico border. The plan has angered the Mexican government and public and has also aroused the ire of the Latino community in the U.S.

The growing backlash against illegal aliens has left many Mexican migrants ever more distrustful of banks and any other institutions seeking information about them. Despite these hurdles, some analysts feel banks share a measure of blame for the disappointing growth in their remittance business. On the U.S. side of the border, banks began to show serious interest in the remittance market only five or six years ago and have yet to demonstrate proficiency at wooing undocumented Mexicans.

In recent years banks have agreed to provide services to anybody with a matrícula consular -- an ID granted by Mexican consulates to any Mexican citizen living in the U.S., legally or not. About 750,000 migrants have opened bank accounts at Wells Fargo & Co. using the matrícula consular, according to Daniel Ayala, the bank's senior vice president in charge of global remittance services. "The majority are active accounts, and we have had a fairly positive experience with cross-sales -- primarily checking, savings and debit cards," says Ayala, who is based in Concord, California. But Wells Fargo doesn't disclose how many of these account holders use the bank to send money home or the total value of these remittances. Without branches of its own in Mexico, Wells Fargo has forged alliances with other banks, especially BBVA Bancomer and Banorte, to distribute remittances from the U.S.

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