Notes from a Market Insider: Latin American Expansion for Financial Institutions
Alberto Roncajolo is Corpay’s Director of Financial Institutions and Enterprise Sales, focused on the Latin America and Caribbean region. In this article, Alberto describes the opportunities – and the challenges—for banks, financial institutions, and fintechs in the region’s complex and rapidly expanding banking sector.
The landscape
Latin America’s financial infrastructure is rapidly expanding as more US and global businesses look to the region for exchanging goods and services. Latin America boasts one of the world’s fastest-growing banking sectors, with the region’s biggest institutions located in Brazil, Mexico and Chile. At the same time, the region is often perceived as high-risk, which can limit banking players’ development. Unaffordable and inaccessible payment options can also pose hurdles for both regional and US financial institutions – as well as the businesses and consumers who depend on them to keep the local economies humming.
The region is also seeing a surge in fintech startups. One reason for this is the region’s historic dependence on cash (and distrust of banks) engendering growing interest in alternatives to traditional banks.
What could the future hold for payment and foreign exchange needs in the region? Connecting to a global payments ecosystem through a foreign exchange provider with diverse payment capabilities can help institutions better navigate the landscape – and help set them up for success.
We’ll outline the considerations for institutions when choosing a payments partner in the LACA region. We’ll also discuss the ways technology can help you gain better control over your payments, and how to better navigate the region’s complexity and stringent compliance standards.
The implications of bank de-risking, and a changing business environment
Because of heightened risk, many US banks are “de-risking” by withdrawing from the LACA region, or are scaling back regional operations. This can impede US banks’ ability to serve clients who trade with Latin America.
At the same time, many banks based in the LACA region are finding more local businesses needing a gateway to the US (and to more global markets) Often, though, they lack the capabilities or the resources to serve that need.
So on both sides of the equation, institutions need a trustworthy alternative to an intermediary or correspondent financial institution. That has jumpstarted growth in digital payments schemes—and contributed to a surge in Fintech startups. Last October (2023) Finnovista reported that 1,500 fintechs were registered in LACA1, due in part to greater cooperation with some countries’ regulators and financial institutions.
Increasing demand for global payments—and technology solutions
Many institutions are having trouble keeping up with demand for digital payment services. Developing the infrastructure to accommodate new technologies and payments systems is expensive. Aligning with changing regulatory requirements and complex compliance regimes across five countries, let alone 30+, is a huge challenge. Building out a digital payments platform that’s secure, reliable, and compliant with regulations etc. takes time and investment. Gaining access to SWIFT, SWIFT gpi, and even secure local payment rails is another high bar.
And let’s face it, a growing financial infrastructure and more digitalization means providers also need cybersecurity expertise – to build the systems as well as to monitor and maintain them to protect against fraud and other risks to safety.
The growing fintech ecosystem in the region has similar hurdles, including obtaining licensing and multi-currency capabilities that would help some of these companies grow more quickly despite the demand for digital payments.
Technology is a critical piece of the puzzle here. For financial institutions, challenges might include a lack of time, and perhaps financial resources, to build out a technology offering; partnering might be the best and most efficient way to go.
Consider what a provider offers and how it might complement what your institution already offers.
Do they have an online platform ready to go, and is it robust? If you have a more mature tech infrastructure, do they have an API suite that you can integrate, and do they have a development team that knows what they are doing? What about the support to troubleshoot, and evolve the solution as your business—and your clients’ businesses—evolves?
And we can’t ignore the basics: are the currency capabilities good? Or are they limited?
Navigating stringent regional compliance standards
Often American banks see the LACA region as high risk, and offer limited services as a result. That means many American correspondent banks don’t know about the intricacies of the local banking architecture. For example, in Colombia and Brazil, a letter has to be sent to, and approved by, the central bank, in order to send a wire out of the country.
In LACA it’s very common for businesses to use shell companies because their country’s controls are strict, or because they want to be closer to the American banking system.
Further, compliance costs are high, and many American banks don’t have the ability or the resource to make this investment.
Having a provider who can help you understand the regulatory landscape and the compliance regimes, whether you are a US-based institution or an institution based in the region, is a given. Economic sanctions—and keeping up with changes–are also a consideration. If you have a partner who has a developed compliance practice and who stays on top of that , all the better.
KYC (Know Your Customer)
The partner needs to be fully aligned with the institution’s risk appetite too. Knowing whom you’re doing business with when you onboard new customers, and understanding whom they’re doing business with, is part of a ‘know your-customer’ process. You can’t tell a bank that your clients are going to be buying farm equipment, only for them to actually start buying nuclear reactors. A bit of an extreme comparison, but it illustrates how closely providers have to collaborate with their banking partners and clients using their services.
Open banking; new models; and changing practices
As the global payments industry gets more digitalized, and banking participation in LACA grows, there is more interest in Open Banking and banking-as-a-service features. Nonetheless, progress is uneven:
“At the moment the only country in the region that has a robust Open Banking regulation in place is Brazil. Other countries, such as Colombia and Chile, are making important efforts through working groups where collaboration and transparency between FIs and financial regulators is key.
Despite this uneven landscape, there are banks in the region that have already taken the initiative to navigate the Open Banking waters.”2
In 2021, the World Bank’s Global Findex Database reported that, over the preceding decade, access to banking in LACA saw remarkable growth, with a notable push from digital channels. From 2011 to 2021, for example, bank account penetration in LACA rose from 39% to 74%. That’s an impressive increase, but contrast that to the US. More than 90 percent of US adults have had bank accounts over the last 10 years3, reaching 95% in 2021.4
Among the five largest Latin American economies in 2021, Chile and Brazil lead with 87% and 84% penetration, respectively, followed by Argentina at 72%. Colombia and Mexico lag behind at 60% and 49%. In Brazil, digital channels dominate the means of accessing financial services.
This means that there is an opportunity for FX specialists, and fintechs, to fill in the service gaps that US and regional banks cannot.
Building a bridge to broader adoption with more efficient payments
There are lots of reasons why US banks are de-risking and leaving high-risk countries—or countries perceived as high risk. A lot of countries, like many in LACA, have less developed—or developing—financial infrastructures. The lack of resource required in order to invest in compliance is another deterrent for US banks.
Manual payments processing can also be a challenge. Without a secure and developed online solution or digital processing capability, costs for sending and processing payments in the region can be high.
And even in a digital age, it comes back to customer service. If the banks don’t have FX specialists who know and understand the region and the market dynamics, who can ‘speak the language’ in more ways than one, it’s a detriment to doing business locally.
Speaking the same language: cultural considerations
In many cases, the biggest challenge for U.S. businesses and banks collaborating with partners & other counterparts outside U.S. is understanding local culture, the country’s norms, local language, the type of activity… These are all things that take time to learn but are critical in succeeding if you want to grow abroad.
Often, banks don’t invest in learning about the region that they are expanding into. For example, Latin America is made up of over thirty countries, all very different from each other. You can’t look at the whole region as “one country”. It won’t work out. Culturally, people like to know who they are doing business with. You have to know each one, go there and visit, talk to banks and learn about their specific local challenges to build a trusting relationship for the long term.
Top considerations for banks and corporates choosing a global payments partner
There are common themes among questions from US banks minimizing risk, LACA banks serving customers trading across and outside the region, corporates in the US, and US subsidiaries of LATAM companies.
These include infrastucture and technology, of course, but there are also softer considerations, including understanding the market and its nuances and how to operate as a trusted partner.
Here are some key considerations that could factor into how institutions and fintechs evaluate a potential global payments partner:
Capillarity – How robust a network does the provider have? How many currencies can they trade in? And what about its licensing? Do they have correspondent banking relationships or are they using intermediaries, which can increase the cost of the transactions and the time it takes to process them?
Compliance – How knowledgeable is my provider in compliance, and in regulatory alignment? Do they have a robust enough compliance capability to keep up with the changes and the complexities of the market and in other jurisdictions? Protection against fraud is also part of this.
Technology – Does my provider have a robust enough technology offering to provide institutions and businesses with secure payment options? Do they have a stand-alone payments platform that a bank or its customers can connect to easily and securely? Or can they offer a flexible embedded solution via API? And this should be obvious: how user-friendly is the system?
Support – this is a big one. Does my provider have a team that I can work with in case I need to resolve compliance issues or operational cases? Do they speak my language—and do they understand the dynamics of the region?
Reputation – This is a softer measure, but also an important one. Is the provider reputable, both in the region and in other jurisdictions? Do they have good brand recognition? Private or publicly traded? And (again this is also an important consideration): do they invest in building their own payments solutions and infrastructure? What about their compliance and regulatory functions? Do they have their own practitioners, or are they heavily dependent on outsourcing to other partners’ teams?
Why consider Corpay?
Corpay can offer its solutions to banks because we take what we do very seriously. We are not a bank. Instead, Corpay Cross Border is a payments company, and that is our strength. We live, breathe and sleep payments, so we invest in people, compliance, technology, and we do it continually. This investment helps us gain the trust of hundreds of correspondent banking partners globally. It tells them that we are good at what we do, and we understand our responsibilities to our banking clients and their customers.
As a partner to institutions in the region and abroad who are finding it challenging to do business in LACA, Corpay Cross-Border can fill the gaps. We have the global footprint and the established banking relationships around the world to be an effective alternative to a correspondent bank. Because of our size and our technologies, we can offer competitive pricing on foreign exchange, and we have a growing number of local payment rails designed to expedite payments and keep costs in check.
Our emerging markets practice supports our development in LACA, building relationships in the region with governments, regulatory bodies, supra-nationals, and institutions who leverage our own local rails for their payouts.
And we’re setup for compliance with local regulatory rules. Our global compliance teams have the expertise to navigate the complexities of the different regulatory regimes and stay on top of changes.
We’re a fintech, basically, but we also offer dedicated, personalized customer service and account management support.
We have the resources to invest in our products, our infrastructure, our technologies, and just as important, our people.
And that’s a wrap.
Interested in learning more? Listen to the podcast:
Get in touch: Connect with Alberto on LinkedIn!
1 Hontanilla, Cristina: The unstoppable rise of the Fintech ecosystem in Latin America and the Caribbean. What to expect in 2024? (https://www.finnovista.com/en/the-unstoppable-rise-of-the-fintech-ecosystem-in-latin-america-and-the-caribbean-what-to-expect-in-2024/), Finnovista, 27 October 2023. 2https://www.openbankproject.com/blog/9-open-finance-challenges-latam-regulators/. A 3 Nov 2023 article last accessed on 8 May 2024. 3https://www.clevelandfed.org/publications/economic-commentary/2022/ec-202207-unbanked-in-america-a-review-of-the-literature. A 26 May 2022 article last accessed on 8 May 2024. 4 2021 FDIC National Survey of Unbanked and Underbanked Households: https://www.fdic.gov/analysis/household-survey/index.html#:~:text=An%20estimated%2081.5%20percent%20of,above%20nonbank%20transactions%20and%20credit.
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