Rethinking Latin America from a Global Banking Service Perspective

Presence still matters for MNCs evaluating banks for a region, but one bank cannot be everywhere.  

The LatAm Treasury Peer Group (LatAmTPG) met for its 2017 H1 meeting in Miami to assess what impact US policy under the new administration would have on the region. Fortunately, it appears that the impact will not substantially affect a return to economic growth for at least two of the three major economies. This allowed the member discussion to focus more on evaluation of banks used in the region and how US tax reform may change their international treasury operations. Here are three key takeaways:

1) Bank “presence” may come from strategic alliances and technology. One of this group’s mandates has always been to encourage the members’ global banking partners to build and maintain their presence in this region and link it to their respective global banking and treasury platforms. Citi is the main player of significance when it comes to maintaining its own geographic coverage in the region (see below). However, Bank of America Merrill Lynch made a compelling argument that strategic alliances with local banks supported by service level agreements, innovation and technology integration could deliver for MNC clients in Latin America. Global bank alliances with local banks, of course, are nothing new. However, the realities of global banking and new regulatory and related cost constraints on building and maintaining full geographical coverage in any region make investment in strategic alliances look more responsible, and advances in technology make it more viable. The question is if and when banks can get it right. Accordingly, one of the LatAmTPG‘s mandates now includes encouragement of succeeding with this option for regional banking services.

2) More possibilities to bring global treasury trends to LatAm. Latin America tends not to be where global banking innovations get implemented first. However, members were keen to follow up with more detail on Bank of America Merrill Lynch’s run-through of pooling and centralized payment services options, including POBO, for countries in the region. Trade-finance use-cases in Brazil, and elsewhere, to supplement supply-chain finance programs, were also highlighted, and BAML will bring the lessons from recent pilot programs using Blockchain technology for LCs to the region.

3) Transformational pieces of proposed US tax reform don’t look as likely. An expert from PwC presenting on US tax reform proposals and their probability suggested that the border adjustment tax and curbs on interest expense deductibility are less likely to come to pass. And, even if, say, the border adjustment tax came into being, the impact on the region starting with Mexico might not be as severe as feared. Some tax changes, including an end to deferred tax treatment of foreign earnings and a deemed repatriation to tax them in transition, is still likely, according to PwC. Thus, members will watch tax reform developments closely and work with their treasury and tax colleagues on “no regrets” planning (see box), meaning tax planning that will not cause ill effects should tax reform not come to pass.

Redefining Bank Presence, While Pain Points Drive Bank Rationalization

To help the regional bank evaluation discussion, BAML presented an overview of its roadmap for the region to the group. A main component of this roadmap is to emphasize the key pillars of top bank providers: People (who deliver advisory services, have the support of senior management and are accountable and committed to clients); Operations (having the end-to-end lines of business to support client needs); Service (from efficient onboarding and implementation to ongoing support); and Innovation (showing activity and investment in core areas, growth areas, and experimental areas of the business). The second component is to pursue responsible investment in the region using new technology and strategic alliances with local banks backed by service level agreements. And the third component is a focus on the MNC client segment, which the bank sees as a growth engine for Latin America. NeuGroup then presented the results of the pre-meeting survey and engaged the group in discussion.

Key Takeaways

1) Presence and service are global banks’ biggest shortcomings. Per the pre-meeting survey, the two main global bank shortcomings for the region were:

• Representative consistency: ”no real global contacts” or “local communication instead of global treasury communication”; “capabilities and offer differ per country.”
• Presence: “pulling out of the region”; “they want to pick and choose the countries they want from us”; “lack of interest”; “don’t take risks.”

The discussion with members underscored further how local presence and coverage are critical. “A local presence is a non-negotiable requirement,” said one member, when describing how he evaluated banks to work with in the region. However, in response to the BAML road map, there is more open-mindedness to that local presence coming through an alliance partner.

2) Can local banks be fully integrated into partner bank platforms? A key success factor for global bank strategic alliances with local banks is to have them fully integrated with their platforms, e.g., Cash Pro in the case of BAML. SWIFT connectivity will help here, but ultimately global banks will need to invest in making these connections, plus training and other resources to support local banks in extending and supporting their platforms in more countries. Payments control and visibility from the global platform is key and should be a focus for global banks. Pricing should also be consistent.

3) Smaller countries are a challenge. “It’s particularly hard for global banks in the smaller countries,” noted one member who said her company shot themselves in the foot by picking a local bank that Citi recommended that could not deliver as promised. In some of these countries it is hard to compete with local banks that have longstanding historical franchises. There are also certain banks that are strong in sub-regions. For example, Scotiabank is strong in the Caribbean and BAC in Central America. Plus, just a few Latin American countries represent 90% of total regional GDP so it can be difficult for global banks to be profitable operating everywhere. Therefore, as one member noted, “there seems to be a paradigm shift in bank structure in the hard countries toward the better-connected alliance banks instead of establishing an actual presence.”

4) Switching headaches and account administration costs. The other main obstacle to strategic alliances working is the strong current embrace of bank rationalization. The fewer accounts the better is practically a treasury mantra. Regulations, compliance and the lack of standard (and digitized) processes for account opening, closing and ongoing administration has made adding local banks and especially switching banks a headache that few want to undertake.

5) RFP for real. Given the reluctance to switch banks, several members questioned why they continue to RFP for regional banking solutions, since they would almost never switch. Conversely, one member has a dedicated team that benchmarks its banks and ranks them. Generally, it gives its business to the better ranked banks and will do an RFP for real, meaning it will switch to a bank that offers a better solution, has better service or better pricing—even with the headaches. This keeps banks honest about improving their services, solutions and pricing.

Outlook

Both banks and their MNC customers will continue to work out how to best work with one another as the global banking landscape changes. The four pillars that Bank of America identified in their road map presentation are clearly important but they cannot ignore presence. Innovation and technology are helping to mitigate the importance of being on the ground with a full-service branch network, as are alliances, but presence is still clearly a factor in bank selection and evaluation. The trick for banks without actual presence is to seem present to customers even when they are not.

Trends and Possibilities

A team of advisors and regional product heads from Bank of America Merrill Lynch highlighted some of the key trends the bank is seeing across client treasury operations globally and how these play out in the region. More sophisticated and mature centralization using evolving technology in search of greater efficiencies is the main theme. Three items caught members’ attention.

Key Takeaways

1) More countries for cross-border cash pools. BAML showed the group a chart with the countries it has vetted as being viable to participate in multiple-entity cash pooling. Mexico is the most significant country that can participate in notional cash pools as well as physical pools. BAML presented on a sweep structure it has in place for Mexico that allows USD to be pooled in the US (or elsewhere) and target balances needed for Mexico funded from that pool. More countries are opening up to the possibility of becoming eligible for pooling. The Dominican Republic is likely to be next. Argentina, Brazil, Colombia and Venezuela are restricted. However, one member noted considering bringing Argentina into their pool. Generally speaking, the pooling landscape in the region is improving, albeit still challenging.

2) POBO benefits, but not quite yet. Several members had a keen interest in learning more from the bank about pay on behalf of (POBO) structures working in the region. POBO is available mainly in Mexico, but even there it is highly dependent on your legal entity structure. Given the complications, MNCs are more likely to get most of the benefit from a strong process and centralizing payments and forgo POBO and the need for tracking intercompany payments.

3) Trade finance innovation. BAML also suggested members consider innovative use of trade finance products. For example, trade finance regulation in Brazil allows banks to offer unique trade finance products. These allow Brazilian entities to get financing for exports of up to ten years and also long-term financing for imports. Trade finance can be used to complement or supplement supply chain finance in Brazil as well as other countries in the region. Trade finance is also often less of a compliance hassle since it involves clear commercial flows rather than financial. The bank is also pursuing proof of concept projects using Blockchain technology including smart contracts to streamline LC processing. It presented two recent examples: 1) a bank-to-bank commercial LC between BAML and HSBC utilizing IBM technology and a network created by the Development Authority of Singapore and 2) a corporate-to-bank standby LC with Microsoft, utilizing Microsoft’s Azure cloud platform.

Outlook

While BAML noted that advances in financial technology will take longer to come to Latin America than other places, they are coming. Thus, members should keep asking their banks to see what innovation is possible. Members are interested to see the advances happen, but are wary of different standards emerging that make straight through processing, integration and switching banks more complicated. For example, even with BAML’s Blockchain pilots there were question about whether the IBM technology was compatible with Microsoft’s. Thus, banks should invest and test responsibly to ensure common standards and systems platforms that talk to one another.