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Piecing Together Latin America’s Fractured Treasury Flows

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The world economy is becoming increasingly globalized as industries evolve and businesses expand into new markets. 

Unfortunately, the flow of funds across international borders has struggled to modernize alongside the rapid pace of globalization. Smaller businesses in the Latin American region have been particularly burdened with challenges associated with expansion, particularly around opening and managing treasury accounts in other countries. Liquidity is vital to the success and development of a business, but the current methodology of sourcing liquidity to open new treasury accounts is a heavy toll on smaller enterprises.

In this piece, we’ll explore the fractured process of cross-border treasury flows, the specific challenges and limitations in Latin America, and the financial players that are especially disadvantaged by the current system.

Flaws in the System

Moving money across borders, treasury or not, can be an expensive, opaque, and time-consuming process. 

Today, there are trillions of dollars worth of trapped capital in nostro and vostro accounts around the world. While large financial institutions (FIs) may have the resources to maintain operations and services as additional funds sit in foreign treasury accounts, it is still a cumbersome responsibility to forecast when and where the capital will be needed, and of course, freeing that capital would provide the FI greater flexibility. These hurdles are insurmountable for smaller enterprises (SMEs) that heavily rely on precious capital resources to meet their business needs.

FIs are also able to carry the responsibility of identifying and managing financial requirements for foreign treasury accounts which can vary from country to country. SMEs, on the other hand, don’t always have the capacity to dedicate an entire team to proactively respond to these requirements and are often surprised to discover the lengthy process of opening an additional account.

Moving treasury funds into foreign accounts is often accompanied by high cross-border transaction fees—another unwelcome surprise for expanding businesses—which can interfere with business growth. The marginal cost of cross-border capital flows carried out by SMEs tends to be much larger than costs for FIs that have the opportunity to leverage large volume wholesale treasury deals. Slow transaction times—on average 3-5 business days—and a lack of fee and FX transparency are prevalent regardless of business size, and may even risk customer satisfaction and loyalty should there be extensive delays like those caused by COVID-19

While FIs continue to eat the cost of this antiquated system, prefunding destination accounts to enable treasury flows between countries is not only an unrealistic, expensive undertaking for non-FIs, it ultimately hinders them from more fully participating in the global economy.

Particular Challenges in Latin America

Latin America has one of the highest rates of intraregional treasury flows in the world. The region is comprised of 17 countries all with different and frequently changing FX rates, processes, tax regulations, and banking structures. As noted in the previous section, additional resources—generally unaffordable to SMEs—are required to organize this extensive information and administer a proper course of action for the business.

Historically, international banks have moved in and out of Latin America at a rapid pace, responding to factors which make running a bank in this region so expensive like the need for physical branches and adapting to rigid financial infrastructures. These sudden closures force businesses to scramble to find another bank and open a new treasury account, costing time and resources which inevitably impact the business performance. In addition, Basel III’s liquidity coverage ratio (LCR) advises banks to adhere to a minimum 100% LCR which may limit the types of customers they choose to do business with, potentially ruling out SMEs that are unable to source liquidity for foreign treasury accounts. 

Suffice to say, it’s extremely difficult for SMEs to meet regional market demand and grow their business with the existing system for opening and managing multiple treasury accounts.

Compounding these vulnerabilities, World Bank evidence states that only 45% of small enterprises in Latin America have access to credit—a major component of liquidity sourcing—from formal financial institutions, versus larger companies’ access at 67.8%. Fiscal policy also plays a large role in supporting SMEs during stages of currency devaluation and volatility. It’s a constant balancing act for policymakers to reduce inflation while protecting the most vulnerable. The war in Ukraine has recently impacted the region’s response to inflation—exacerbated by the pandemic—as economies around the world respond to supply shortages.

Seizing Opportunities

Ongoing volatility challenges expressed previously have primed Latin American financial players to evolve and adapt to rapidly changing circumstances. Adoption and access to digital financial services increased in response to the difficulties faced during the pandemic—millions opened first time bank accounts. In addition, the number of Latin American startups is growing and investment in business is skyrocketing.

Prioritizing innovation and modernization is key to growing and even sustaining a business in this region. A number of Latin American countries eager to streamline treasury flows are responding to this pressure by introducing annual seminars and workshops for leaders to discuss ways to improve capital management. 

Nations have also been brought together through formal gatherings like the Pacific Alliance, founded in 2011, to enable free trade—an industry which involves many of the same difficulties as treasury flows—and streamlined FX between Chile, Colombia, Mexico, and Peru which comprise about 50% of trade in the region. Various leaders across Latin America attend as observers with the hopes of integrating into the Alliance in the future. In 2016, the Alliance made strides to enable progressive trade by reducing tariffs on 92% of goods, providing capital to new businesses, and establishing a path for public-private partnerships to create innovative solutions for SME export capacity.

So, while strides have been made between individual countries, incorporating the entire region in overall financial reform is vital to enabling interoperable capital flows within the region. These efforts can also establish Latin America as a united force in the global economy, build investor confidence and allow for expansion into new markets. 

Ripple’s New Value report found that 87% of respondents at financial institutions in Latin America believe blockchain will have a massive or significant impact on business in the next 5 years. The region is clearly keen to see results, and exploration and adoption of new fintech solutions is a profitable next step toward streamlining and advancing this fractured system. 

The legacy payment rails that enable cross-border treasury flows have continued to stymie growth for the majority of financial players in this region, especially SMEs. While larger financial institutions have the capital advantages to invest in research and development projects like technology innovation, SMEs have the opportunity to leverage the technical and financial expertise as well as affordable lines of credit provided by fintech companies, allowing businesses of all sizes to integrate these solutions into their operations.

Ripple’s crypto-enabled payments solution provides businesses the opportunity to send money across borders without the need for pre-funding destination accounts. Simple, inexpensive, real-time transactions provide efficiency and transparency to focus on maximizing the value of resources and scaling businesses big and small.

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