When Cheryl McDowell began her career in Latin America two decades ago during the era of hyperinflation and massive currency devaluations, managing cash was often more than a full-time endeavor for corporate treasurers. “It was a tougher job,” says McDowell, who today runs Oracle’s treasury operations in the Latin countries where the California-based computer maker operates. “In Latin America back then, anything could happen from one day to the next.”
While she says currency management remains a big part of the job, she has time these days to turn her attention to streamlining collections, payment term structures and other treasury operations. McDowell – who worked for American Express before coming to Oracle three years ago – recalls once having 98 bank accounts at several banks where customers and suppliers had accounts at one point. Such an arrangement for payment and collection transfers was, and still is, relatively common in countries where electronic systems are inadequate.
McDowell now maintains only three or four accounts per country today and is in the process of further streamlining their management. She is folding Oracle’s Latin American treasury operations into the company’s shared service center located in northern California near the corporate headquarters and She will outsource payments and collections to a single international bank.
Oracle is not the only international company that has taken such an approach. María Eugenia Medina, finance manager for Bayer’s treasury operations in Venezuela, Colombia, Ecuador and Peru, is evaluating her options for adopting a single regional cash management platform using the Internet for cross-border cash pooling and other treasury management.
Regionalization that was simply not possible two or three years ago is emerging as a reality, she says, though governments and many banks in the region have been slow to respond to multinational executives clamoring for services on par with those available in the United States and Europe.
“The banks have realized that they have to think in a corporate manner, but some haven’t understood that up to now,” says Medina. She says she is reviewing electronic banking proposals by international banks and hopes by year’s end to install a regional platform that she can access from her computer in Caracas. She will still have to deal with multiple banks, but expects to reduce the number to two or three region-wide.
A first step in redicing the clutter in cash management often is account consolidation, says Nancy L. Russell, a former BankBoston executive who heads NL Russell Associates, a Boston-based consultancy. “Regardless of the situation in any particular country, there is a distinct opportunity to consolidate,” according to Russell.
She is working with one corporation that maintained nearly 400 bank accounts in more than a dozen Latin American countries. Russell is helping the company to halve the number of accounts it holds. She sees the opportunities in the region today as a step toward eventual migration from paper checks to completely electronic payment systems from payroll operations to paying suppliers and collecting money from customers throughout Latin America.
“As multinationals have delved into what improvements can be made they are pressuring banks to bring their service up to world standards,” Russell says. “The next logical step is changing the way you move money to become part of a truly global operation.”
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José Arnaldo Vieira, |
Bank consolidation provides obvious cost reductions and staff downsizing possibilities. And online systems allow corporate treasurers to track company money more closely, offering big improvements in the delivery of information – sometimes in real-time compared to daily or weekly reports that are the norm with traditional paper systems. And, if cash pooling takes off, they tout the risk mitigation and liquidity advantages created by possibilities such as inter-company lending.
Cross-Border Products
US and European-based banking giants that entered Latin America or expanded their presence there in the past decade are leading the way in creation of cross-border products. Yet experts say most countries also boast one or two local banks that compete aggressively. With the days of hyperinflation a fading memory, the local banks have learned to leverage their understanding of local marketplaces to attract corporate customers to fee-generating cash management services. The cut-throat competition for lucrative cross-border business is giving corporations more say in the types of services offered.
While electronic banking services need significant refinement, changes have virtually exploded in the last two or three years due to a myriad of interlocking factors. Claudio Migliore, who heads cash management and trade services for Banco Santander Central Hispano in Buenos Aires, says stability, technology advances and demands for global cash management products “ingredients [that are] all cooking together in a single cauldron.”
Like many of its competitors, Banco Río, the Santander-owned bank where Migliore works in Argentina, launched its first corporate Internet cash management product for the Argentine market in the late 1990s and continues to add features. Last year, the bank launched a regional version that allows corporate treasurers to view positions online in several countries from anywhere.
Some bankers and treasurers wonder whether emerging electronic options will mean the demise of existing treasury products. But FleetBoston Financial’s José Arnaldo Vieira thinks not. “The existing products will survive but they will need to become more Internet-enabled, faster and more flexible,” he says. His company, which inherited BankBoston’s Latin American presence in a merger last year, will launch a pilot Internet product this spring for making payments region-wide. The product, which will allow companies to outsource payment operations, was modeled on those developed elsewhere and adapted to the regulatory realities of Latin America. “One of the mistakes is to treat Latin America like Europe and Asia,” says Vieira. “Centralization is the future but you can’t do it in all Latin American countries today.”
FleetBoston’s new product will allow corporate clients to orchestrate payments via an Internet interface with Fleet. Payments can be made electronically or by check depending on the company’s preference and the options are available from country to country. Wherever possible, real- time information on payment status will be available, says Vieira.
However, experts say that a country-by-country analysis is key when assessing options for the region. Not only do the quality of banking systems vary, but the quality of cash remission policies, tax structures and local business practices varies. For instance, Brazil’s banking system is widely hailed as the most modern, efficient and transparent in the region, but its currency controls are among the most restrictive and the tax system complex. Meanwhile, Peru has liberal remission rules yet the electronic banking initiative is in its infancy.
Technology Limits
While regionalization has become a buzzword in cash management, some doubt that it will truly take hold. Paulo Silvestri, head of DaimlerChrysler’s treasury operations in Latin America, remains skeptical. He says technology improvements have provided significant cash management boons, principally by improving timely information flows regarding check clearing and other account information.
The advances also open the door to improvement and cost reductions in internal communication between subsidiaries and the home office. For instance, DaimlerChrysler’s retail financing system for consumer car sales has also been converted to electronic systems, allowing the company to increase sales volume in several countries.
Yet Silvestri has doubts about just how much can be managed remotely. “We still have to have more or less a strong presence in every country because the local country currencies still have importance,” says Silvestri.
“The currency markets and currency systems have been deregulated but one thing is still important – being present in the market and developing knowledge at the country level,” he says. “I don’t think currency markets can be managed by the head office,” says Silvestri, who heads a small staff of US-based planners with most employees working from the company’s Latin American offices. He spends about a third of his time traveling the region.
“We tend to compare changes in the US and Europe to changes in Latin America. But the truth is that the technology developments are just reinforcing the development gap,” Silvestri believes the region has a long way to go if treasury management models developed elsewhere are to work in the region. While companies such as Oracle and Bayer are already beating the drum in support of shared service centers and regional cash pooling, they remain a pioneering minority, bankers say.
Antoine Arts, a senior vice president for Latin America with ABN AMRO, points out that despite liberalization in the region “moving money is not as simple as it is in the United States and Europe. There are still some bottlenecks.”
Experts say regional decision makers at multinational companies – under pressure from their home offices – are clearly propelling the regionalization push to increase liquidity and efficiency and to reduce costs. Yet Arts says government policymakers must turn their attention to modernizing tax and financial systems in several countries if regional and global systems are to take hold as they have in other parts of the world.
Most companies that ABN AMRO works with are launching modest online menu items such as banking consolidation, electronic procurement and electronic bill presentation. “Shared service centers are not a trend yet,” says Arts. “We are going to need another year or two before it becomes a trend. We need some success stories first.”
A New Kind of Customer
Another significant development in the region is reflected in the different kinds of banking clients seeking electronic cash management. At one time multinational corporations operating in the region were the main users of cash management tools. But that is changing.
Russell, of NL Russell Associates, says her clients fall mainly into two categories: multinationals with a long presence in the region, and newer corporate heavyweights, many of which have taken advantage of the past decade’s market liberalization and privatization initiatives to buy into telecommunications, banking and other sectors.
Vieira says he has found some small to mid-size firms entering Latin American for the first time are often better prepared and motivated to move to electronic banking systems than large multinationals with more experience in Latin America.
ABN AMRO’s Arts says consumer-oriented companies with large sales volume predominate, seeking to add value by centralizing treasury functions.
Yet the new technology isn’t without tradeoffs. Privately, bankers acknowledge that it will take a few years to work out the bugs in the new systems. “In order to make this work as a whole, we have a few years ahead of us,” says one banker who didn’t want to be named. “We are working on harmonizing practices and services.”
Just as in more developed regions, security concerns remain enormous for corporate treasurers and bankers embroiled in centralizing operations. Bankers say they are subjecting their products to months of security testing before piloting them with customers. Corporations say security is one of the chief factors governing the online systems they implement.
And implementing corporate online systems can often be unpopular internally since the process can lead to layoffs. Oracle’s McDowell, who is incorporating the company’s Latin American subsidiaries into a shared service center, has sent some managers to work in corporate headquarters, an adjustment that has worked as a perk for some employees. Yet executives say headcount remains a thorny issue.
A Change in Culture
More intangible than the number of staff reductions or bank account consolidation are the changes to the business culture. While Migliore says it is difficult to generalize, he sees “ad hoc and personal relations” that characterized Latin American business relationships for decades giving way to more formal relationships built around standardized systems of payment and collections.
The technology is fueling some other surprising changes, as well. “Banks used to have more technology than their customers,” and dictated the software formats and standards, Migliore says. “Now the customers hold the standards. The banks now have to be able to read these standards. It’s having a big impact on products.”
He says the very concept of cash management and the branding and marketing of the products have been refined in the last few years. Services, which used to be a free part of the relationship between banks and their corporate clients, are now the fee-generating mainstays of the industry. To compete in this new arena, strong differentiation and market segmentation is fueling both globalization and localization of products to meet the needs of specific business customers and also broaden the base of customers.
“Cash management used to be a very arcane and specific service relationship,” says Migliore. Today, “there is a new name for cash management, it’s e-commerce.”
But, he says, companies cannot focus exclusively on the region and neglect the local markets “Increased competition is forcing us to do a lot more,” says Migliore. “But, the technology – the Internet and better local payment systems – makes it easier to provide products and services.” LF