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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.

Few banks have branches in U.S. neighborhoods where migrants live or in their hometowns back in Mexico. Even when branches are available, their business hours are often too brief for migrants who work 12 hours a day. Instead, migrants turn to money transfer companies, like Western Union, DolEx and Intermex Wire Transfers, which often offer their services through travel agencies, convenience stores and bodegas that are open long hours in migrant neighborhoods. "Most migrants prefer to send money home through these 'ethnic stores' where their language is spoken, their needs are understood and minimal identification is necessary," says Kai Schmitz, executive vice president of Microfinance International Corp., a Washington-based private company that provides financial services to Latin Americans both in the U.S. and in their home countries.

Ethnic stores and the large money transfer companies behind them demand much less paperwork for remittances than banks do -- often no more than a name and address. "Because most Mexicans in the U.S. are undocumented, they don't want to provide the detailed information that banks require," says DolEx executive López. Still, what undocumented immigrants might not know is that neighborhood shops -- much like banks -- offer no guarantee of anonymity. "Government officials have access to those records," says Manuel Orozco, an expert on remittances at Inter-American Dialogue, a think tank in Washington. He emphasizes, however, that he knows of no instances of the government using financial records from a money transfer company, ethnic store or bank to locate illegal immigrants.

The fees that migrants pay to send their remittances reflect the costs charged by the various agencies involved. In the case of a typical $300 remittance sent from a New York City bodega through a money transfer company and collected at an HSBC branch in Mexico, a migrant will pay a $15 fee: $5 goes to the bodega, $6 to the money transfer company and $4 to the bank.

"The money transfer company controls the pricing," says HSBC's Lavalle. "It would be cheaper for migrants if they used only a bank."

Fees for a $300 remittance that moves directly between banks across the U.S.-Mexico border can be as low as $5 at HSBC and Wells Fargo. If the clients have active accounts at those banks, the remittance fees may be reduced or waived because clients would almost certainly be charged for other financial services.

Migrants who use banks exclusively to send remittances tend to be more educated, better paid at jobs with regular business hours and computer-savvy enough to handle online banking. They are also likely to have legal immigrant status, or even citizenship, and to be members of families who have lived in the U.S. for many years. The disparities between these migrants and more recent arrivals are evident in the Mexican community of New York City. More than 80 percent of the roughly 300,000 Mexicans living in New York hail from the state of Puebla, and many of those from the Sierra Mixteca. According to Robert Courtney Smith, a sociologist and author of Mexican New York, the first Sierra Mixtecans arrived in the city during the 1940s after failing to get jobs as farm laborers in California and other border states. "They were members of a family from Piaxtla, and they ended up creating the entire migration chain to New York," says Smith. Typically, Sierra Mixtecans worked in restaurants as dishwashers and busboys. More recently, they have also found employment in laundries, flower shops and food markets.

Benito, 24, who declined to give his full name because he is an illegal migrant, arrived in New York from his native Tulcingo del Valle five years ago. He works 72 hours a week for about $7 an hour in a Manhattan dry cleaner, ironing and delivering clothes. He hasn't seen his parents since he left Mexico. But he wires them $3,200 a year in eight or nine separate remittances through a travel agency in Queens, which is owned by a family from Tulcingo. "My family knows [the owners] -- my mother sends me sweets and other gifts through the agency," says Benito. He will fly home this spring, a trip paid for by New York friends who will load him down with gifts for relatives. Benito plans to return to the U.S. the same risky, painful way he entered in 2001 -- packed into a container with other illegal migrants and driven across the Arizona border.

Jesús Pérez Méndez, 35, also from Tulcingo, arrived in New York a generation before Benito and leads a life that seems light years removed. Enjoying dual U.S. and Mexican citizenship, he works at Brooklyn College as the academic adviser in charge of the retention program. "That means making sure students graduate in four years," says Pérez. His ties with Tulcingo remain solid. He started a Web site, Tulcingo.com, to keep migrants in New York abreast of news in their hometown. Pérez also uses the Internet to wire money from his HSBC branch in Brooklyn directly into an account he has set up for his grandmother in the HSBC branch in Tulcingo -- thus saving himself the remittance fees charged by a travel agency or bodega.

WHEN XICOTENCATL AND GOMEZ, THE PUEBLA-based bank executives, arrive at noon at the HSBC branch in Tulcingo, its lobby is crowded with clients the age of Pérez's grandmother. The branch, part of the original Bital bank, opened in 1999 to service Tulcingo's 8,500 inhabitants and an equal number from outlying villages. "Some of the employees in our Puebla headquarters were from Tulcingo, and they told us about the growth potential of this area -- especially, the big increase in remittances," says Gómez.

Those remittances have visibly improved the lives of the relatives left behind by the migrants who moved to New York. The HSBC clients in Tulcingo dress in the traditional style of the central Mexican countryside, but their clothes are new and well-made -- cotton shawls and sandals for the women, striped pants and tightly woven straw hats for the men. "Most of them are from nearby villages," says Abraham Reyes, the branch manager. "They come into town for the day to exchange some remittance dollars into pesos at the bank and do some shopping before heading back home."

Reyes would dearly love to turn more of those remittances into savings accounts. Last year only $1.8 million in remittances were deposited at his bank -- a fraction of the money sent by Tulcingo migrants in New York. Much of the money is spent on the construction of new homes, which migrants hope to occupy someday if they return to the Sierra Mixteca. HSBC would like to offer them mortgages. But because the properties are on communal lands, it is almost impossible for the bank to repossess a house if the owner defaults. Instead, HSBC tries to nibble at the margins of the booming residential market: Under a plan launched late last year, migrants in the U.S. are offered HSBC debit cards to order building materials from Apasco, a Mexican cement producer, which are then delivered to relatives overseeing the construction of their future homes. The debit cards can lead to other financial services and additional fees for the bank.

It's the sort of cross-selling evolution that makes Rafael Morelos, 38, married with three children, the ideal client at HSBC's Tulcingo branch. Morelos spent 14 years in New York, mostly working in restaurants, before returning in 1998 to his village, Huaumuxtitlán, about 20 miles south of Tulcingo. He thought of starting a restaurant but opened a pharmacy instead.

"People in my village were still used to eating only at home," says Morelos, while waiting in line at the bank. "But they needed medicines, and they had to travel all the way to Tulcingo to get them."

He accepted an HSBC debit card to regularly replenish stocks at his drugstore. Since then he has moved on to a credit card, a loan to buy his pickup truck, an insurance policy and a savings account. "I feel a lot more secure about keeping my money at the bank than at home," says Morelos. Robberies and kidnappings are on the rise even in this quiet corner of Mexico.

Unfortunately for HSBC, Morelos is still the exception. Getting people to use financial products is tough in Tulcingo, even with an HSBC branch. There is not another bank along the entire 30-mile spur running south through the Sierra Mixteca from Puebla's main highway. The closest banking rival to HSBC is in the town of Chinantla, a 40-minute drive north of Tulcingo. In adjoining Piaxtla there is no bank connection of any sort. The town's 1,600 inhabitants rely on three stores -- acting as agents for money transfer operators -- to collect remittances sent by relatives in New York. It's hard not to notice the near total absence of men and women between 18 and 40 years of age in Piaxtla.

"Only the old people are left," says the mayor, Dr. Armando Aquino Carrera, 48. "We have to figure out a way to make this area more productive." The mayor thinks vegetable exports to the U.S. could revive the fallow cornfields around Piaxtla. But even modernized farming would be hard-pressed to compete with wages across the U.S. border.

With its leafy central square and renovated 16th-century church, Piaxtla is a sleepy place -- except on early Wednesday mornings. Then, as they have for decades, ranchers from Puebla and several neighboring states congregate on a riverbank behind the church to buy and sell livestock in entirely cash transactions. The prize animal on a February day is a gargantuan Brahman bull whose hump peaks more than six feet off the ground. The owner, a muscular fellow wearing a Tim Duncan basketball jersey, brags about the brute's breeding potential and asserts he's a bargain at 12,000 pesos -- somewhat over $1,100.

"I'll give you 8,000 pesos," says the only bidder, rancher Robles, dressed like an aging cowboy dandy in tight-fitting gray pants, a satiny shirt and soft leather boots. The bull's owner snorts in disdain, and the rancher walks away. Robles traveled here from his modest ranch more than 120 miles away, in the adjoining state of Guerrero. He is building up a small herd for his son, who each month wires him a portion of his paycheck from waiting tables in New York. "The best deals are made right before the fair closes," says Robles. "The owner gets pretty desperate by then, and his price comes down."

At the 8:00 a.m. closing time, the bull's owner agrees to part with his bull for 9,000 pesos. Behind a truck surrounded by several of his ranch hands doubling as bodyguards, Robles peels off 90 crisp 100-peso bills from a large money roll wrapped with a thick rubber band. Asked later if a bank might be helpful in financing his son's career as a rancher, Robles replies, "I can't imagine how -- I know ranchers who got foreclosed on."

Back in Tulcingo, Reyes, the HSBC branch manager, spends a good deal of his time trying to figure out ways to convince local business owners of the advantages of using a bank. One of his prize converts is his own father-in-law, who has a furniture store just down the block from HSBC. "We help him with his accounting and suggest ways to build up his business," says Reyes. Taking up an especially useful suggestion, the older man is traveling in the northeastern U.S. with photo samples from his store to show migrants who want to furnish their new homes back in Tulcingo. They can make monthly payments for the furniture through HSBC. But much to the chagrin of Reyes, most of his father-in-law's clients continue to use money transfer operators instead -- sending cash to their relatives to pay for the furniture.

"There just aren't enough conveniently located bank branches," says Reyes. Nor is it likely that there ever will be.

A bank away from home: Reaching Mexican expats in New York

Some banks aim to profit from the billions of dollars in remittances sent to Mexico from the U.S. by offering migrants an assortment of financial services back home. Other banks are betting that many, if not most, migrants won't be returning to Mexico -- and that profits are more likely to be made by getting them to use banking services in their adopted home. J.P. Morgan Chase & Co. falls into the second category.

On a recent Friday evening on Manhattan's Upper West Side, Frank Amarante, manager of a Park Avenue branch of the banking giant, hosts a seminar for migrants who want to start their own businesses. About 20 of them show up at Casa Puebla, a community center on the corner of Broadway and 104th Street that caters to people from the state of Puebla, birthplace of at least 80 percent of New York's Mexican population. An informal poll of the participants -- men and women from their early 20s to their late 40s -- indicates that most crossed the U.S. border illegally.

But Amarante doesn't believe that should dissuade the bank from wooing them. "We aren't an immigration agency," he says. "We have to find ways to help individuals without proper documentation to start a business." If a green card or proof of U.S. citizenship is lacking, the bank will accept a tax identification number or a matrícula consular -- an ID that Mexicans, whether or not they crossed the border legally, can obtain from their consulates in the U.S.

At 6:00 p.m, Amarante decides to delay the seminar because the participants put in 12-hour workdays and have to travel another hour to get here. The room is decorated in traditional Puebla style, with large ceramic urns and a mosaic of the Virgin Mary in colored tiles. But the men and women drifting into Casa Puebla are dressed in the style of their adopted city, with Yankee baseball caps, work boots and Gap jeans. The types of businesses they are hoping to launch are the same ones that employ them now: restaurants, flower shops, laundries and convenience stores.

In fluent Spanish, Amarante starts by explaining such basic concepts as cash flow, working capital and revolving credit lines, as well as how to lease property, buy insurance and apply for an initial business loan. "The range of loans will be from $10,000 to $250,000, depending on the needs of the business," says the banker. "Restaurants tend to require the most money."

Felix, a 35-year-old illegal immigrant who has spent a dozen years in New York as a busboy and waiter, wants to start a small taco restaurant near Wall Street. "You know, really authentic chicken and beef with guacamole in good-quality tortillas," he says. "And very hot -- Americans nowadays really like spicy." He is particularly interested in Amarante's explanation of why it's important for restaurants, no matter how modest, to allow patrons to use credit and debit cards. Whatever money the owner might save from not paying the credit card companies is a fraction of what gets lost when diners crimp on their orders because they don't have enough cash on hand, says Amarante. And J.P. Morgan Chase is offering point-of-sale credit/debit card machines for free, so long as the novice entrepreneurs agree to contract the bank to process the payments.

If his taco business gets started and survives in New York, Felix would like to return someday to Acatlán de Osorio, his hometown in Puebla, and open a restaurant there. He hasn't visited Acatlán since 9/11 because it has become tougher to cross the border back into the U.S. His two preteen children, born and bred in Brooklyn, have no desire to live in Mexico, so maybe, says Felix, they could take over his New York eatery if he were to move back to Puebla.

For Amarante, it is a familiar story. "A lot of migrants dream of eventually moving back to Mexico, keeping a business here and starting a subsidiary down there," he says. But for aspiring entrepreneurs, the pull of the northern side of the border tends to be stronger.

A case in point is Jaime Lucero, president and founder of Casa Puebla and a formerly illegal immigrant from the town of Piaxtla. With the help of bank loans, he built a single-truck garment delivery service in New York into a thriving women's apparel business in New Jersey. Now a U.S. citizen and a millionaire, Lucero, 48, inaugurated a factory in his native Puebla in 2001 and announced he would open five more plants around the state. But he shelved those expansion plans, he says, "because so many young people have emigrated to the U.S. that we can't find enough labor to set up another factory in Puebla." -- J.K.

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