Corporates looking to grow their businesses across Latin America have tricky foreign exchange and legal hurdles to jump. They need their banks to help them navigate their way across the continent, by bringing their FX services up to date, and helping the companies to operate within the differing and complex legal systems.
|Sibos 2015 special edition|
The founding of the Pacific Alliance in 2011 brought together Chile, Colombia, Mexico and Peru to help the flow of trade and greater co-operation between those countries. Across Latin America and the Caribbean region it accounts for 38% of the total GDP and 50% of total trade flows. The region’s largest economies of Mexico and Brazil still dominate but trade patterns are evolving.
The increase in trade across Latin America is driving higher demand for transactions denominated in local currencies. For a region that has commonly used dollars to trade, a lot of work is needed to update payments and FX systems to meet the requirements.
“While trade remains very US dollar-based there is an increasing need for banks to enable corporates to pay or receive cash in their local currency,” says Jon Richman, Deutsche Bank’s head of trade finance and financial supply chain, Americas. “We are increasingly embedding FX into our trade finance solutions to accommodate this need of our clients, customers and suppliers.”
The demand for simpler cross-border payment capabilities has come relatively late to Latin America. Only in the last few years has there been any traction from corporates and consumers alike for easier methods to transfer FX between countries. The banks have been scrambling to implement solutions that will meet these needs.
This evolution is being helped by the arrival of new technology in a relatively under-developed continent. Banks can introduce systems that have worked in other regions and adapt them to this new market.
Deutsche Bank has increased its product suite to meet the demand for more robust FX capabilities. It launched the FX4Cash Receivables in the Americas, which allows corporates to invoice in 35 currencies and receive payment in their chosen currency. As well as reducing risk in FX, it has mitigated the need for corporates to hold multiple bank accounts. In turn, this has created costs and time efficiencies.
Bank of America Merrill Lynch (BAML) has harnessed the progress in technology to help develop its FX services by releasing digital signature capabilities for use in Brazil. Clients who need to give their approval on an FX contract can now give their consent electronically.
To create the digital signature capabilities, BAML had to take into account the specific legal framework in Brazil, while the whole region is notorious for the complexity of local laws. The differences in the legal structures across Latin American countries present big challenges to develop systems that will work beyond the confines of one border.
Dealing with different tax regimes also poses a difficult task. Corporates face federal, state and municipal taxes that vary between jurisdictions. Furthermore, there are business taxes related to property, vehicles, customs, social security and VAT.
“Latin America presents a high level of complexity for banks introducing products for global companies operating across the region,” says Steve Donovan, treasury and trade solutions head for Citi Latin America. “Each country has different regulations and market practices and the challenge is to create the connectivity among all countries for companies with centralized regional treasuries and shared service centres.”
Citi’s virtual accounts system in Mexico enables corporates to identify and to reconcile all deposits, regardless of the method in which they were made.
| Latin America presents a high level of complexity for banks introducing products for global companies operating across the region|
Steve Donovan, Citi
The region’s companies are looking at how differences in tax laws and regulation in their home continent will affect their plans to move into new countries. Richman says: “Local corporates are becoming very international, with activities increasingly spanning all the major regions.”
Juan Pablo Cuevas, head of global transaction services in Latin America at BAML, says the role of the banks is vital in giving their clients knowledge of wider markets. “Corporates are looking to their banks for experience and advice,” he says. “They want to know what are the regulations and what impact will they have?”
The bank needs to treat any relationship with a client as a partnership, he says. “Latin America has big populations and relevant markets. The corporates want to be able to centralise and concentrate their operations.”
The shift to a homogenised way of operating across the whole region has brought treasury practices into sharper focus. The growing sophistication has also attracted the attention of senior executives.
“Working capital has become an important measure of corporate operating efficiency and, as a result, trade and supply chain finance is capturing the attention of the C-level,” says Deutsche’s Richman.
“Many multinational companies started centralizing their payments function and initially established payments factories,” says Donovan. “They are now incorporating new functions including collections and some have set-up full regional treasury centres also managing the financing function centrally.”