Progress in Latin American Payment Systems
Payment systems are an essential element of the economic and financial infrastructure of any country, particularly where the globalisation of markets and technological advances have led to an exponential increase in the amount and speed of payment operations. An effective payment system not only settles transactions, but also provides faster fund availability and reduces the costs associated with mobilising funds.
Currently, Latin America functions within a restrictive regulatory framework in which fiscal policy and exchange controls vary greatly from one country to another. Although domestic clearing systems have advanced significantly, the regulatory and fiscal structure of Latin America still remains very complex. It is relevant to note that the tax burdens imposed on financial transactions that certain countries, for example Argentina and Colombia, have adopted do not encourage the use of mainstream financial products or stimulate the use of cash. This results in higher processing costs and a less integrated system. In most countries, the percentage of citizens who are engaged in a formal banking relationship is close to 30%, which implies that there needs to be a greater effort from different agencies, businesses, corporations, and banks to provide technological solutions in order to promote electronic payment methods.
Even in this restrictive environment, various countries have adapted by providing technological innovations that improve efficiency and availability of resources while complying with local market conditions and regulations.
Throughout Latin America, the use of electronic commerce (e-commerce) platforms and the safe initiation of electronic transfers has risen steadily, but at a less significant pace when compared to the important growth levels experienced in the US. This increase is still relevant, especially in those countries where systems are becoming more secure while overcoming significant usage barriers. Mexico and Brazil are two countries where payments processed via the Internet have gained strong acceptance due to an increase in technology suppliers who, through their platforms, facilitate the payment of transactions using credit and debit cards at a lower transaction cost. These alternate processors, or merchant services, are increasing their market presence and experiencing strong transaction growth. In the case of Argentina, the use of Internet payments has also increased the use of reloadable debit cards with predetermined limits. For corporations, this combination of services has resulted in a reduction in invoicing and processing costs and provides a higher incentive to use the system.
In the quest to create standardisation, while reducing operating costs and improving efficiency, technology is an excellent ally and is being quickly adopted in Latin America.
Electronic payments through mobile technology are an example of a recent innovative solution that has quickly evolved in Latin America. Countries, such as Mexico, Peru and Colombia, are actively developing and implementing these solutions in order to have greater coverage in areas where there is a high level of unbanked citizens. This mobile technology increases transaction volume not only for the payment of phone services or topping up mobile phone minutes, but also by expanding services in the retail and commercial sector. Also, mobile technology encourages the use of reloadable charge cards, which results in a lower level of cash transactions.
Smart cards have also been successfully introduced in rural areas, especially in the agricultural sector, to simplify the collection process. Cards can be reloaded in full or in partial amounts, which adds value by reducing the quantity of cash transactions and increasing productivity while simplifying the supply chain cycle.
Another example of technology influencing payments in Latin America is the increase of new web-based platforms that efficiently manage payments by linking corporations to their customers and suppliers, facilitating the purchasing cycle and settlement of payments. These web-based systems allow corporations to initiate the bidding process electronically, review proposals from providers, make purchase orders and initiate payments in a simple and secure environment. If these systems are combined with supplier financing, the corporation has a true end-to-end solution to connect and add value to their providers.
In addition to the payment alternatives through mobile technology, other compensation systems have been developed in Latin America that favour payments in local currency. In October 2008, an agreement between the governments of Brazil and Argentina paved the way to launch the Sistema de Pagos en Moneda Local (SML), which aims to increase liquidity and market efficiencies, thereby eliminating the need to use a third currency, such as the US dollar, in order to pay transactions. This alternate payment mechanism facilitates the settlement of foreign trade transactions for both parties in their respective currency and reduces foreign exchange costs. Since its launch, some industrial sectors, such as textiles, furniture, machinery and tools, have been actively participating in SML. This objective, to facilitate cross-border commerce, is also being pursued by the ALADI agreement, whose members consist of the majority of counties in Latin America, and aims to achieve greater participation in foreign trade and intraregional development. This agreement allows importers and exporters who opt-in to this system to utilise different payment instruments such as letters of credit, documentary credits, payment orders, and endorsement letters, among others.
The central banks, maintaining the vital role of regulator and operator of the payment systems, are actively coordinating, implementing and promoting these cross-border mechanisms. In order for these agreements to succeed, the role of the central banks is essential as they offset the transaction values in the local currency between themselves and then transfer payments in the corresponding currency across the domestic commercial banking system. The benefit of cross border settlement in its own currency allows importers and exporters to increase intraregional trade while making savings in foreign currency costs, as these transactions are settled in their respective currencies.
In addition to these intraregional agreements and governmental support, Latin America shows continuing efforts to integrate into global markets through factors such as:
Gaining an understanding of the law, restrictions, culture and payment systems in Latin America allows us to gain a better comprehension of the complexity of some products that are developed and implemented in each country, under regulatory frameworks where liquidity remains the ultimate challenge.
Latin American governments still have to evaluate the effectiveness of their restrictive fiscal policies and embark on programmes that not only encourage the unbanked segment of society to obtain a formal banking relationship but that also support companies in their international expansion. Doing this will result in an increase in regional commerce, as well as in electronic payments. From this perspective, there are opportunities for improvement, as well as the chance to integrate payment systems, taking advantage of the initiatives being developed and adapted in different countries. Technology can play a key role in improving and standardising processes to help make efficient payment systems.