The basic idea: send money from your home-country Paypal account to a Paypal account in Mexico, convert the money to Pesos, then withdraw it to your Mexican bank account.

Mexican Paypal

First, you need to set up a Mexican (MX) Paypal account, at the website Paypal MX - you can switch the site to English. To verify the account (like you would verify a US Paypal account) you need to use a Mexican card, for example your Bancomer peso debit card. Make sure the postal address you use for Paypal exactly matches the address the bank has, even if that address is wrong. Also link the MX Paypal account to your Mexican bank account (so you can send money both ways).

After you've set up and verified your MX Paypal account, go into the currency options and allow it hold balances in both US dollars (or your home currency if it's not dollars) and Pesos.

If you already have a Paypal account in another country (such as the US), the terms and conditions of Paypal don't allow you have another account, unless one is business and one is personal. In practice if they're in different countries there does not appear to be a problem. You need to use a different email address for each account.

Getting the money in

So, if you have another Paypal account in another country, get money into that (from your bank account, or from ebay sales or whatever). Send that money (generally US dollars) from that Paypal account to your MX Paypal account. Be careful to do this in a way that avoids most fees - as a personal payment, or a business mass pay for $1.

Another way to get money in is to simply link your MX Paypal account to your US bank account. That way, you don't need a US Paypal - just bring money into the dollar balance direct from the US account. (if you do already have a US Paypal account, you can't link the same bank account to both the US and MX Paypal accounts).

Converting the money

So, you've now got a US dollar balance into your MX Paypal, generally at no cost. Next, you need to turn it into pesos.

Within Paypal, you can convert any part of your US dollar balance into pesos, at a rate that varies daily. Exchange rates on Paypal seem to be around 2.5% either side of the commercial rate, which is better than many banks. On a given day in April 2009 for example the commercial mid-rate was 13.207, Paypal buys Pesos at 12.854 and sells at 13.53.

Withdraw it

Now that you have some money on the peso balance in the account, you can withdraw it to your linked Mexican bank account, from Paypal. There is no fee charged (apart from for very small withdrawals).

All the above is basically instant any time you want to move money around, except this final step. You can expect to see the money in your Bancomer peso account in around 3 to 5 business days. You can then draw it out locally in pesos with no ATM fees, or use it pay CFE or Telnor online.

Bancomer does not charge a fee to receive the money. Paypal does not charge a fee to withdraw the money. Paypal does not charge a fee to transfer a personal payment between accounts (or $1 from a business account with mass pay), nor do they charge a fee to bring the money in from your US account, and the US bank should not charge a fee (other than maybe a domestic transaction fee if you're charged them).

End result: a transfer from the US (or any other country), with a reasonable exchange rate you can check in advance, to your Mexican bank account, at no cost.

Apart from the initial setting up of the Mexican Paypal account, it's faster to do it than describe it.