A Bright Future for Commercial Cards in Latin America

by Kevin Phalen, Head of Global Card, Comprehensive Payables and Public Sector Banking and William Bonnin, Senior Product Manager, Bank of America Merrill Lynch

Corporate card programmes are now firmly entrenched in the DNA of many companies around the world. These corporate card programmes first began with a focus on travel and entertainment (T&E) expenses, and in North America, Western Europe and many countries in Asia, card payments have been more widely adopted for payments to suppliers and other B2B uses. In Latin America, corporate cards for T&E use are common, but the potential for improving B2B payments using a corporate purchasing card is growing for both regional and global payments.

Latin America is awakening to the benefits and possible applications of corporate cards.

The capabilities and benefits of commercial card programmes are well documented. Treasury departments have recognised that corporate cards can be an effective means of achieving an end-to-end electronic payments process and key treasury goals by driving a successful working capital management strategy. Indeed, if the appropriate card solution is chosen, it can be integrated seamlessly into the organisation’s payments process. The advantages of such an approach are not confined to the private sector; many government and educational institutions have also successfully implemented card programmes.

The benefits of a commercial card solution can be summarised as follows:

• greater control and visibility into payments;
• improved productivity and lower costs;
• reduced risk and improved fraud prevention;
• more streamlined expense management process;
• improved Days Payables Outstanding or DPO.

For the above reasons, commercial card programmes, particularly those involving travel cards, are mature in the US and other markets. However, corporate purchasing cards for B2B payments are now beginning to attract attention from Latin American-based large corporates, as well as multinationals with operations in the region.

The tremendous economic growth that Latin America has enjoyed over the past decade has resulted in a much-changed corporate landscape. Many multinational companies now have significant operations within the region, while at the same time many Latin American companies have expanded their operations around the world, well beyond their traditional regional markets.

In the case of Brazil, for example, this engine of growth in the region is benefiting from several years of sustained robust economic growth, macroeconomic stability, and an expanding middle class. Brazilian companies have benefited from high global commodity prices, leading many Brazilian companies—particularly in the mining and energy sectors— to expand globally, either through the acquisition of foreign firms or through organic growth. This growth has resulted in a parallel increase in commercial spending across a wide range of categories, ranging from the raw materials used in the production process to travel and entertainment (T&E) expenses and even office supplies. Datamonitor, for example, has forecast that by 2015, Brazilian business travel spend could reach over $30bn, which would represent a doubling of its 2009 level.

Despite this, many B2B payments in Brazil are still paper-based. For example, according to research carried out by Kaiser Associates in 2011, cheques account for an estimated 63% of purchases made by medium-sized businesses in Brazil, while cash accounts for a further 19% of purchases made by companies of this size. By contrast, cards were used for just 5% of purchases, implying that there is a huge potential to use corporate card programmes to achieve greater efficiency, visibility and control in the payment process. The same research concluded that total spending on commercial cards in Brazil was only $26bn, which is very low when placed in the context of overall commercial and government spend, estimated by MasterCard to be well over $2.7tr.[[[PAGE]]]

By implementing a global commercial card programme, the treasury department based at the Rio de Janeiro or São Paolo headquarters of a Brazilian multinational could see at a glance the spending details of their employees across the globe. Equally, multinationals with significant operations in Brazil would be able to easily keep track of the expenditure patterns of their local staff located in that country by rolling out a card programme.

Mexico is an example of another country in Latin America where a developing and maturing economy has led to an increased need for more sophisticated and efficient payment solutions. While many other countries around the world have struggled to post positive growth rates in recent years, Mexico’s GDP has grown by an average of close to 5% over the three-year period 2010-12. Furthermore, in 2012, the government legislated comprehensive labour reforms and has indicated that it is committed to prioritising competitiveness and structural economic reforms. The country’s economy is highly geared to the US, with over 80% of Mexico’s exports heading to its northern neighbour. In terms of B2B payment patterns, cards are currently only used for a tiny fraction of payments, amounting to just US$10bn annually.

Adapting card programmes to local conditions will be critical

It seems, then, that conditions in Latin America are ripe for a more widespread use of commercial card programmes in the payments space. However, the region is extremely diverse, with a range of vastly different types and sizes of economies, political considerations, government policies, stages of development and tax regimes. Companies contemplating the implementation of a card programme will benefit from working with a financial services provider with local knowledge of the Latin America countries in which they operate. Kevin Phalen, head of Global Card, Comprehensive Payables and Public Sector Banking for Bank of America Merrill Lynch explains, “It is imperative that any successful card programme rolled out by treasury incorporates, for example, all the ever-changing taxation policies that may impact them, such as the taxes on foreign spending that have been rolled out by both Argentina and Brazil over the past several years. In this way, a card programme can help companies comply with the requirements of the local tax laws.”

Merchant acceptance is crucial

Undoubtedly, merchant acceptance is a necessary element of any successful commercial card programme as it can impact cardholder convenience and satisfaction as well as compliance with company spend policies. This is particularly true in Latin America, where corporates issuing cards to their employees need to make sure that they have good merchant acceptance, not only in the large cities but also in suburban and rural areas.[[[PAGE]]]

Purchasing cards will make inroads in Latin America

Much of the anticipated increase in the use of card payments by corporates in the region is anticipated to come from the adoption of purchasing cards, otherwise known as p-cards. Among the key advantages of these cards, they allow organisations to save on costs associated with paper-based payment and reconciliation systems, streamline their procure-to-pay process and use detailed data captured to better negotiate discounts with suppliers. Because p-cards are already widely used by US corporates, banks that have experience in establishing p-card programmes for corporate clients in the US are able to apply that best practice in offering similar solutions to business customers in Latin America.

Corporates in Latin America may find significant benefits from implementing a commercial card solution in their organisation. The benefits that accrue to companies taking such a step are clear and proven. Success, however, will depend on the extent to which the implemented programmes in a particular country are tailored to local conditions, the level of merchant acceptance, and the extent to which they leverage the expertise of the financial institution involved.