Factoring and Trade Finance Services Continue to Increase in Latin America
In numerous meetings with bankers across Latin America, I have seen how local companies are no longer producing exclusively for their own markets but now are fighting for global presence and market share. Bankers all over the region point to the fact that their local customers are looking to export as well as import and, in fact, most banks in the region are heavily investing in trade-related technologies and processes as they see a significant increase in the demand for letters of credit (LCs), collections, pre-export financing and factoring.
While factoring is a highly established business tool in a number of Latin American markets, such as Brazil, Chile and Mexico, many countries, banks and financial companies are nevertheless still fighting to throw off the negative image of factoring projects. It is apparent from discussions with bankers in the region that more countries, financial institutions and banks are looking to offer factoring and reverse factoring services. It is clear that domestic factoring services will be complemented with related international services, allowing exporters to improve access to funds while selling to importers through trade only on open account. The factoring business, in general, offers an attractive growth opportunity for Latin American banks and financial institutions in a sector where companies seek to translate discounted receivables into improve cash flows. Currently factoring options come at a time when banks and financial institutions in the region are looking to reinforce, add additional services and increment their presence in the global markets through its factoring offering. At the present moment, most banks and financial institutions that are in the business of factoring, do not have an advance degree of automation. In fact, the lack of specialised applications would eventually hurt a financial organisation’s future growth.
In terms of trade finance banking products and practices, Latin American companies still depend heavily on LCs. This is a result of the need to mitigate risk, as well as the need for immediate access to funds. For many years, exporters as well as importers relied heavily on trade-related loans to finance their working capital needs and it still is a common practice in Latin America for most LCs and collections to be converted into trade-related loans. Other improvements in the Latin American trade finance market include greater automation, compliance, anti-money laundering (AML) initiatives and Internet banking. I have found that many regional banks have started the process of either improving or implementing automated trade finance departments and factoring. Currently, banks are investing heavily in technology thanks to the fall of import and export barriers and the need to enhance systems comparatively with their North American and European counterparts.
Latin American banks now realise that in order to compete globally, the need to improve their banking technology is important, as is the need to adopt new technologies in order to be considered a market leaders are fundamental requirements. Today, most banks in the region have an advance degree of automation ranging from specialised applications, to in-house developments to trade finance modules derived from the bank’s core banking platforms. This includes trade finance Internet banking, which is a result of Internet automation at banks worldwide. In Latin America, penetration of trade finance Internet offerings is becoming standard practice for banks to support their corporate clients in the region. Banks across the region understand that in order to compete locally, regionally and internationally, they need to differentiate themselves from their competition. Customers are becoming more and more sophisticated and knowledgeable, and are demanding superior trade services at a lower fee per transaction and improved processing efficiency.
I have seen a growing number of regional corporations, as in Europe and North America, refusing to work with banks that do not provide Internet-based trade finance technology. A number of countries, including Argentina, Panama and Costa Rica, are beginning to catch up, while countries such as Bolivia, Uruguay, Paraguay and El Salvador remain sluggish in offering these products, with both banks and corporations seemly reluctant to undertake the required changes. I am confident that trade finance and factoring will continue to play a significant role in Latin American economies. Each country has specific trade finance requirements, but there is a common bond of social, political and economic drivers that ties the region together. Trade finance and factoring technology is needed as the potential for Latin America’s international trade continues to grow.