The Puzzle of Collections in Latin America
Collection processes are probably the most challenging of processes within a treasury’s activities. For this reason, while many multinational corporations are able to centralise payments and liquidity management on a single bank per region, it is considerably more difficult to centralise collection processes, or even standardise them. This is probably even more the case in Latin America for a number of reasons that will be discussed in this article. In addition, this article will review the main collection instruments and services available and commonly used in this region, while also providing some tips for a successful collection strategy in Latin America.
Besides the obvious currency diversity, there are a few additional factors that combine to create an environment where it is difficult to deploy a common collection process at a regional level.
Latin America is an area with limited penetration of banking services. A significant part of the economy moves around in cash, from payroll to goods and services consumption. Electronic payment instruments are, of course, used in the business world, but only to a limited extent. As a consequence, a wider range of collection instruments are needed in Latin America compared to other regions in the world, in particular in certain sectors like retail or consumer goods.
Latin America still relies on cash and particularly cheques and other paper methods of payment as the main banking instruments, reflecting the strong influence of North American banks and corporations in the region’s business practices. The widespread use of cheques makes the automation of collection processes more complicated, when compared, for instance, with Europe (with honorable exceptions like France). In some countries digital cheque truncation is possible (Brazil, Mexico, Argentina), but in others (Chile, Venezuela, Colombia) this is not yet the case, and in any event this still involves a more complicated process at an operational level than a fully electronic payment method.
For a number of reasons (recent economic troubles, state funding needs, cultural context, etc.) several countries have relatively restrictive legal and regulatory environments, in particular credit/debit taxes and restrictions on the movement of funds. This makes it difficult to replicate the cash management practices we see in other regions, mainly cash pooling combined with collection processes conducted in parallel by different banks.
In combination with the factors mentioned above, Latin America still has a high reliance on retail branch networks. Most people prefer to pay their debts in person at a bank branch, although they could perfectly well use an electronic transfer, or in some countries even have their accounts directly debited.
Collection instruments can be classified according to different criteria. One obvious approach is to segment by the underlying instrument (cash, cheque, ‘boleto’, electronic transfer, direct debit, etc.). This classification, however, can be very general and does not capture certain features which are important when comparing collection processes. A useful approach to reviewing collection options is to think of where the collection process takes place:
The real challenge regarding collections in the region is due to the prevalence of these latter two situations. It is important to mention here that innovative solutions are already in place to facilitate a smooth migration to remote, electronic, collection processes, allowing a radical change in the collection processes of certain companies. For a corporate with on-site collection needs, some banks are offering automated solutions that change and expedite the collection process, allowing an improvement in cash management practices. These changes should allow a good number of corporates to review their collection processes and benefit from more efficient schemes.
Another way to classify collection options is whether the bank acts on a known or unknown receivables portfolio. In the first case, we consider these as ‘active’ collections, and in the latter case of ‘passive’ collections. Active collections are triggered with prior notification coming in from the corporate to the bank containing information from their ERP about new receivables, with details on collection process and options. Direct debits are the most obvious example of active collection, but direct debiting still only has limited usage in Latin America (the insurance sector probably has the highest adoption rates). Moreover, in countries like Brazil and Venezuela there is still no clearing house for inter-bank direct debits. However there are other widely used active collections services in the region, the most noteworthy being on-line receivables publishing for debtors which can be settled using electronic payments. Some banks also feed receivables files to their branch systems to enable active collection through their retail branch network. A key benefit of active collections is that they enable the bank to perform automatic reconciliation of payments, after which the bank can return to the corporate fully reconciled collection information.
Passive collections, still the most widely used in the region, are the classic collection services in which there is no prior notification from the corporate to the bank about receivables. The bank performs collections in a variety of ways, typically through their retail branches and ATMs networks, and records a reference of the receivable being paid. This in principle should allow the corporate to reconcile their receivables, but unless this is supported by a bar-coded bill or something similar (such as the Brazilian boleto), reconciliation can prove to be an impossible task, and in any case still has to be carried out by the corporate. Clearly active collection services are superior, but in some cases corporate ERPs are not yet ready to work with these schemes. In any case, this should be an important prerequisite for corporates when redesigning ERP solutions or receivables processes.
There is no general recipe for a collections strategy. The nature of the corporate’s business (and hence its receivables profile), together with its geographical footprint, will help determine the possible collection processes to be adopted. Very rarely will a company be able to collect receivables using just one mechanism, so a combination of instruments will typically be required. In addition, different multinationals will have different approaches as to their ERPs and back offices/ treasury centers. Therefore, different instruments, communication channels and protocols will result in the optimal strategy. There are, however, some tips that probably apply to most companies, in particular if they are present in several countries in the region.
Collections in Latin America is a fragmented process that requires a combination of geographical coverage, understanding of the local cultural and legal context and a powerful core banking operational platform. A comprehensive and efficient set collection services can only be offered by combining these three elements. Therefore, only banks with a strong retail presence will be able, at the end of the day, to provide the necessary resources to cover all collection options.
Banks that have a local presence in a number of countries can offer common communication interfaces and protocols to the corporate, in case a corporate seeks centralised or standardised collection handling. The underlying local collection instruments might have whatever specific features are needed in each country, but a common communication protocol can be designed jointly by the corporate and the bank based on open standards. As an example, EDIFACT DIRDEB and CREMUL provide sufficient flexibility to handle several different local collection instruments under a standard umbrella solution.
A global information system can provide standardisation of reporting despite the diversity of instruments that might be used at a local level. Regional banks can develop simple enriched coding beyond the basic SWIFT or BAI standards to provide sufficient detail of the instruments used in different countries.