In the early 1990s after the end of the black decade, banks in Latin America began exploring solutions for their trade finance operations. Mexican banks that were following on the heels of their US outfits largely drove the activity. The proximity to the US helped because Mexican bankers were more willing to deal with vendors who did not possess local language skills and could only implement, support and train in English. At the same time, thousands of miles south, Chileans were experimenting with local solutions. Benefiting from a consolidated banking industry, Chilean banks needed automation to better compete and process the flurry of governmental requirements. For a while, Mexico and Chile were the only Latin American countries exploring trade finance automation.
Things changed in the middle of the ’90s when a new wave of automation swept the region led by banks in the former Andean Pact. A group of very aggressive managers at some of the largest banks, who clearly understood the benefits of automation, decided it was the right time to make some improvements. During these years, several banks automated with foreign trade finance solutions. Needless to say, it was not always easy because both vendors and banks were doing this for the first time. From the bank’s point of view, there were organizational difficulties and a misconception of the magnitude of the effort required. From the vendor’s point of view, there was a lack of experience on the local requirements as well as a lack of Spanish-speaking personnel. Nevertheless, once these hurdles were overcome, the benefits became clear. The banks soon realized that they were over-staffed and the quality of service rose dramatically. Turning around a letter of credit, which had taken hours or even days before automation, became a matter of minutes.
During the mid-90s, Argentina also began flirting with foreign technology. For years, the country’s only option had been a few local systems that provided some functional benefits and much needed local support and understanding. Unfortunately, the Mexican crisis and the Tequila effect had a negative impact on the Argentine economy and delayed the banks’ search for better technology.
Around 1996, largely in response to intensified sales activity by software vendors, Latin American banks throughout the region began looking for foreign automation technology. Application providers from many industries discovered Latin America and realized that there were a significant number of banks with significant financial resources and plans to better equip their enterprises. Every time a software salesperson met with a bank, he or she laid the foundation for the next one to come in. An educational process took place. Automation did not seem as complex and difficult as before and banks had more choices and thus more leverage to negotiate better deals. Banks from places as diverse as Bolivia, the Dominican Republic and Guatemala automated their trade finance departments. The solutions, as in the case of the former countries, were American.
At the same time, another new technological change took place in the region. Electronic banking, which had provided great benefits to retail banking, proved quite useful in providing competitive advantages. Thus, banks were eager to explore this route for trade finance. Banks such as Bancomer in Mexico processed some of the first electronic letters of credit in South America.
The late ’90s saw the opening of markets such as Argentina and Chile. Argentina had previously been closed to new technology as it was grappling with the Tequila effect, and also with the uneasiness of becoming accustomed to an open economy, a strong currency, and the removal of regulatory requirements. Charged with the peso, the Argentine banks bought some of the best technology. They did not have to worry about conversion rates or devaluation increasing the cost of their IT investments any longer. They also happened to be the most eager banks to buy state-of-the-art technology, snapping up trade finance Internet banking applications, imaging solutions to scan letters of credit, and multi-banking applications to process different brands.
Central America came last in the automation movement. As peace swept across the region, banks began thinking about newer technology to remain competitive in their growing economies. Attention turned towards Latin-made solutions better suited to compete in the price sensitive market, and with more experience dealing with smaller projects.
Today most countries in Latin America have experience with North American trade finance technology and seem to be reaping the benefits of their investments. Even Brazil, long a closed market to foreign firms, is beginning to show signs of interest. But the local practices of Brazilian banks and the many government requirements make any full-fledge automation attempt by a foreign company a formidable task.
No summary of the trends in Latin American trade finance automation would be complete without a reference to Banco Santander Central Hispano and BBVA of Spain. Indeed, their entrance in the market placed a lot of competitive pressure on local banks. The new technologies, as well as business practices introduced by these banks, forced many local bankers to take a hard look at their operations. They realized that technology was not just about direct short-term financial benefits, but also about ensuring customer loyalty and the continuity of their businesses.
The following are some of the trends likely to take place in the continent as a result of newer technologies and world events. Latin American banks are well poised to undertake these technologies as they can leapfrog other regions in IT investment.
Straight Through Processing (STP)
Until very recently, most banks were adverse to the idea of STP in trade finance, although they had high levels of STP in other areas, such as payments. Oftentimes the problem with the concept of STP was that banks were thinking in terms of an “all or nothing” proposition, rather than focusing on specific processes or functions to which to apply STP, such as import LC issuance, export LC advice, reimbursement claims and direct collections. Each one of these examples presents its own challenges and problems, and different levels of straight through processing can be expected for each process or function.
Self-Service Model and Web Enabling
Another idea that originally received a relatively unenthusiastic response was the opening of back office systems to customers through web enabling. But one try of the FedEx parcel tracking system through their website is usually enough to convince skeptics of the benefits of the self-service model. This is truly a win-win value proposition for both the customer and the service provider, where the customers get exactly what they need, when they need it, and the service providers improve their service while lowering costs. This same self-service model can be applied to the trade services area. For example, web enabling workflow management systems can allow customers to track the status of their transactions through the Internet.
Insourcing and Application Service Provider (ASP)
It seems that there are two separate models of outsourcing that are emerging for trade services-ASP and so-called insourcing. The ASP model is really not that different from traditional outsourcing of technology, whether hardware, application software or both. The difference is the use of the browser to connect to the ASP, which eliminates the need for dedicated communication lines between the ASP and the bank. The ASP model for trade services does not come without its challenges, such as interfaces to other bank applications, but many banks are looking to avoid the cost and effort to implement and maintain a trade finance application internally, and choose the ASP model instead.
Another model for outsourcing, often referred to as insourcing, includes the hardware and application software like in the ASP example, but also provides the personnel and expertise to actually process transactions on behalf of other banks. Globally there are a number of banks that offer this service, whether explicitly, where the corporate customers are aware that a second bank is actually processing their transactions, or non-explicitly, where the corporate customers are under the impression that their bank is processing the transactions. The biggest obstacle for this model is typically the fear (whether real or imagined) that the bank providing the insourcing service cannot resist soliciting the customers of the client bank. This has led to the recent formation of companies that are independent from any bank, and only in the business to provide insourcing services.
One of the banks looking to set up a separate entity to offer insourcing services is Banco Santander Central Hispano (BSCH). According to Carlos Siso, BSCH is planning to offer full insourcing services to banks in Latin America for trade finance, including a business-to-business exchange aimed at banks. This B2B exchange would allow the participants to electronically exchange data and documents, and the plan is to initially launch the exchange within the BSCH Latin branch network, and then extend the service to other banks within Latin America.
Bolero.net
Bolero.net, the cross-industry community moving world trade on the Internet, expects to sign Latin American banks as partners before the end of the year or early next year, most likely from Argentina, Brazil or both, according to Bolero’s Commercial Director Peter Scott. He also believes that they could possibly have some corporations from Latin America join Bolero.net even before the banks. Some of the examples that he mentioned include the Colombian Coffee Federation, and the Latin metal producers who participate in a business-to-business non-ferrous metal exchange called EMETRA, a recent Bolero partner. With the United Nations and World Trade Organization estimating that a whopping $420 billion is spent each year on paper related trade costs, the potential savings to both corporates and banks are enormous, with Bolero an obvious partner to work with.
The prospects for future trade finance automation seem uncertain, as many countries have to tackle new political and economic challenges. Yet, one thing is sure, the inclination for trade finance technology is now ingrained in the day-to-day business of Latin bankers.
Vladimir Ramirez is vice president of worldwide sales for CSI Complex Systems, Inc.nb