New horizons beckon for payments providers

“Brazil has the most state-of-the-art electronic payment system in the world,” asserts Florent Michel, founder and managing partner of corporate finance advisory firm Latina Finance. Prior to the mid-1990s, changes in the Brazilian payment system were largely driven by the need to cope with high inflation. Since then an era in which GDP growth has largely overshadowed inflation has seen significant technological progress. With a focus on accelerating transaction processing, the Banco Central do Brasil introduced the Sistema de Transferência de Reservas (STR) in 2002, which enabled interbank transfers to be settled in real time and on an irrevocable basis.

Today, all large-value funds transfers, including customers’ orders, are settled in same-day funds, typically a few minutes after they are initiated. STR is the ‘hub’ of Brazil’s payment system with all transactions settled in central bank money. In addition to STR, there is also a domestic hybrid settlement system that facilitates intra-day fund transfers (SITRAF), operated by CIP (Câmara Interbancária de Pagamentos), an industry-owned market infrastructure.

Payments progress While few payment systems in the region may equal the sophistication of Brazil’s, other Latin American countries have made considerable progress in upgrading their payments infrastructure over the past decade. ACH Colombia, which is owned by 18 financial institutions, not only provides standard services such as debit and credit transfers, but also offers a payments service for online transactions, which allows buyers to use their existing bank account details; a real-time payments service similar to the UK’s Faster Payments initiative (local banks, however, have been slow to adopt this); and a streamlined, centralised solution for helping companies pay a myriad of different social security (health care, pension funds) benefits.

“Making social security payments in Colombia was very difficult,” explains Gustavo Vega, president of ACH Colombia, “as companies had to pay social security for six different sectors of the economy using paper forms and cheques. But the government, banks and companies developed a better method, which enables companies to use one website to pay for all forms of social security. ACH Colombia debits the account of the company and credits the account of the social security company.”

For countries that have effectively implemented robust automated clearing houses (ACHs), the next step is real-time clearing. Upgrading the local payments infrastructure has already sparked something of a revolution in electronic payments in some of the region’s biggest markets, such as Colombia, Chile, Brazil and Mexico. “Having an electronic system that ultimately replaces cash and cheques is a common thing in a lot of countries,” says J.P. Cuevas, head of global transaction services for Latin America and the Caribbean at Bank of America Merrill Lynch.

Official support The increasing use of electronic payments (e.g. credit transfers, direct debits, cards) is being driven by a number of factors. “A lot of multinational companies based in the United States or Europe who are coming to the region want the same kind of sophisticated systems they have elsewhere,” explains Cuevas. “There is also a push by governments in each country championing the creation of electronic payment systems to promote transparency in financial systems.”

In Colombia, the number of electronic payments is increasing as the government encourages consumers and companies to pay taxes and social security online (see graph). ACH Colombia offers a wide portfolio of services to financial institutions and near real-time batch processing of debits and credits based on five processing cycles per day. All transactions are settled via an account the ACH maintains with the central bank. Two years ago, ACH Colombia developed a real-time payments service, but Vega says bank adoption has been slowed by concerns about risk and fraud implications. “We’ve invested a lot of money in the [real-time payments] system and we need as many banks as possible to use it. It is an opportunity for the banks to charge higher fees for services,” says Vega.

As electronic payment volumes across the region rise, cheques are declining significantly. In 2009, the Bank for International Settlement estimates that cheques were only 7% of total payment volumes in Brazil, while credit transfer and payment card were 40% and 29% respectively. “In Brazil in the B2B space, cheques are not used,” says Cuevas. “Corporates that bank with us do all their payments electronically.”

In some Latin American markets, mobile payments are also expected to become an important retail payment channel, particularly for the unbanked. Mexican regulators are asking all banks to support the initiation of payments through text messages. Bank of America Merrill Lynch already offers mobile payments to Latin American customers through its CashPro Mobile solution, and the bank is making technical adjustments to enable wider adoption by corporates in the region, says Liba Saiovici, the bank’s head of product management for global transaction services in Latin America and the Caribbean.

Crossing borders A growing number of sophisticated multinational companies are setting up regional payment factories in countries such as Costa Rica, Panama, Brazil and Mexico in an effort to manage payments in the region on a more consolidated basis. But this concept has yet to catch on with domestic companies, says Cuevas. As volumes grow, particularly from a cross-border perspective, it is inevitable that international standardisation of payments messages and processes begins to pick up speed. A number of banks in the region now support XML. “We’ve seen a lot of interest in ISO 20022 XML,” remarks Saiovici, “particularly on the corporate side.” ACH Colombia is looking at supporting the latest ISO 20022 XML standards, which carry more financial information than local payment formats and could enable the clearing house to facilitate more international or cross-border transactions. “The first step was to ask the financial institutions if they would agree to move to ISO 20022,” says Vega. “They agreed. Now we need to define the standard in terms of fields.” SWIFT connectivity is also slowly gaining traction in the region. Brazil’s CIP joined SWIFT back in 2009 leveraging its Alliance Lite solution to provide a low-cost interface for low-volume financial institutions and corporations. ACH Colombia also has similar plans.

At this stage however, Cuevas says there is no real impetus within the region to develop pan-regional clearing and payment infrastructures. This is primarily because most payment flows within Latin America are still largely domestic and there is no integration of laws and taxes, which are different in each country. In the past, central banks in the region have tried to integrate payments, says Cuevas, but this was largely unsuccessful as countries were more passionate about improving their payment systems individually rather than collectively. “Most of the economies are still very independent and have their own currencies. If they need to do international transactions they go to the dollar.”

A few years ago, Vega led a campaign to develop a pan-regional standard to interchange transactions, however, he says many of the ACHs within the region were new and were focused on domestic standards. Having said that, different countries continue to share best practices and ideas via the Latin American ACH Association. One area of particular focus is increasing financial inclusion.

“The number of people with banks accounts in the region is growing,” says Cuevas, “but not to the extent that everyone has one. Governments are on the right track but they will need five to 10 years more to create a generation that are used to electronic transactions and don’t know about paper (cash, cheques).”