Published: June 01, 2010
Over the last few years, Argentina has witnessed a significant evolution and strengthening of its domestic financial system, and particularly a modernisation of its cash management environment. This evolution has been made possible thanks to the combined efforts of both public organisations, such as the central bank, and the private sector including significant investment made by banks.
Despite this, for those companies, transactions with individuals and SMEs, cash is still king, as a large proportion of these deals are actually cash settled. With a population exceeding 40 million, the number of current accounts in the whole system as of December 31 2009 amounted to 3.3 million, indicating that efforts towards motivating the population to operate banking accounts have not been entirely successful.
Over the last few years Argentina has witnessed a significant evolution and strengthening of its domestic financial system.
This situation has provided, for example, a good opportunity for non banking agencies to increase their volume of transactions. These agencies receive over 30 million collections monthly, a significant number compared to the 8 million cheques cleared through the national ACH in March 2010. A large part of the population still does not have access to bank accounts, or wishes to remain out of the system because of tax or social and economic implications. The tax on debits and credits (0.6% on each side), the significance of the informal economy and the lack of trust in the banking system are some of the aspects which have lead to this situation. Despite this, and the fact that regulations are still subject to continuous changes, corporations operating in the B2B segment or with counterparties holding operational banking accounts should be able to benefit from recent product evolution and improvements.
To summarise the recent developments, from a systems and product standpoint, and the impact for corporates:
The creation of The National Payment System was a great step forward with regard to cheque clearing, consolidating in one electronic clearing house what previously required physical manipulation of cheques between the 85 different nationwide clearing houses.
The immediate benefit was that cheques from different and distant locations, which previously required 48 to 96 (or more) hours to be cleared would be cleared on a 24-hour basis (next day).
In achieving this, as from 2008, cheque image transmission was implemented from 2008 onwards, replacing the physical delivery of cheques between banks for clearing purposes. This implementation had an important impact for corporations in reducing their float and their banking fees.
ACH also had an impact on Direct Debit transactions (used by corporates with a large consumer customer base), as it allowed the single consolidated transmission of debits, debiting banks in one go, instead of sending separate files to each bank for debits of each payer’s account. However DD is still very little used as people prefer to use credit cards to make payments (or channel them through non banking agencies).[[[PAGE]]]
In terms of high value transactions, two high value settlements systems are available in Argentina: Gross Settlement (RTGSS), and Net Settlement (RTNSS). The difference is that while in the RTGSS transactions are settled irrevocably and unconditionally on a gross real-time basis, the RT NSS maintains controls on net positions and still generates end of day debit or credit.
(a) RTGSS is available in Argentina through MEP (Medio Electronico de Pago) E, which integrates the Sistema Nacional de Pagos which is administered by the central bank. This system is mainly designed for Interbank transfers, but banks also provide transfer services to their main clients using this system (given the secured link between banks and the central bank). MEP is still a manual process and the cost of instructing MEP transfers is still relatively high. This is the reason for relatively low volumes (an average of only 100,000 transactions are processed monthly through MEP).
(b) RTNSS has been developed by a privately owned company, Interbanking (owned by a group of nine banks, including the state owned Banco Nacion).
Interbanking was designed to provide electronic banking services to corporations including account details at several banks through one single screen.
Interbanking was designed to provide electronic banking services to corporations, including account details at several banks, through one single screen (instead of having to use each bank’s platform). Because of its connectivity Interbanking provides for a secured link from banks to corporates enabling transfers within the network (Interbanking nowadays represent respectively 93% and 50% of banks’ and corporates’ deposits).
Interbanking fully complies with the Core Principles for Systemically Important Payment Systems, published in 2001 by the Bank for International Settlement’s Committee on Payment and Settlement Systems, and is also approved by the Argentinian Central Bank as a RTNSS. Interbanking VTN (Value Transfer Network) uses a model similar to that of CHIPS in the USA: transactions are processed only if pre-funded by guarantees or credit position in the bank´s account. Once approved, transfers are irrevocable and unconditional.
Interbanking, with more than 2 million transfers (growing at a rate of 10% per annum), is widely used by companies to make same-day interbank funds transfers, and since 2005, the Federal Tax Bureau (AFIP) has made its use compulsory, for corporate tax payers, to perform their tax payments (a decision which forced a lot of small and middle sized companies to incorporate themselves as Interbanking users).
On the corporate side, Interbanking provides for the initiation of transactions, but also gives access to online real-time information on balances and movements. Corporates download their banking information, including statements of accounts, collection and payments information directly from Interbanking so as to generate automatic bank reconcilements.
Given the size of the country, 2.5bn km2, collection is a real issue. Most of the important private banks in Argentina provide collection services through their banking network. Electronic Banking Collection would be a third party depositing cash or cheques into a special corporate collecting account, which would include detailed information on the transaction (invoice number being cancelled, customer’s name and number etc.), such information being available online at any time, allowing real-time tracking. A simplified version of this is in place (at a lower cost) where funds and details of the collection are available on the following day (much used in the B2C segment, given a lower amount of average collections).
Branch network, quality of service, accuracy and timeliness of information combined with good pricing should be considered when selecting a collection bank. Several corporates utilise more than one bank for geographical coverage purpose.
The banks’ role in the collection process in Argentina is relatively passive as compared to other countries such as Brazil, which uses the Boleto system, as banks would not take any action for their clients if payments are not honoured.
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In recent years, some corporates have incorporated new features such as Electronic Bill Presentation where their customers can obtain information on balances and unpaid invoices, and even directly generate their deposit slips for payment at a branch. This feature was also adopted by some banks (mainly Rio, Frances and Citi), improving transfer efficiency. It enables a customer not only to review its pending items, but also to execute an electronic transfer payment (banks have also developed interfaces with Interbanking, which acts as the paying engine). This recent integration could be a further step in streamlining payments with fully integrating invoicing and collection processes.
Corporations with a large number of clients paying small amounts (such as utilities) would generally collect through the above-mentioned simplified collection, direct debit (either in bank accounts or credit cards), or the non banking agencies. These services, where information and/or funds are made available in 24 or 48 hours, result in lower costs per item than standard electronic collection.
Due to processing cost concerns versus price, banks barely receive simple collection flows (except from their own clients). Those are captured by non banking institutions specialising in this business. Currently, 50% of consumer collections from public services and taxes are paid through these agencies, with monthly volumes ranging between 30 and 35 million transactions. The use of this collection system has expanded to other types of payments given its low cost/easy to use features.
The existing ATM networks (Banelco and Link) also provide collection services for B2C transactions (including internet facilities such as Pago Mis Cuentas, developed by Banelco, which currently processes over 9 million monthly transactions). Banelco is a private ATM network owned by banks.
The recent authorisation from the Tax Bureau (AFIP) allowing electronic delivery of invoices deserves attention for the potential benefits that its implementation may generate. Several companies (cable TV, social security, public services, etc.) are already taking advantage of the feature. While invoices can be generated and transmitted directly by the company, this service can also be outsourced to third parties (such as Interbanking and GIRE (a company owned by HSBC, Citibank and Banco Santander which provides non banking cash management services to corporates), avoiding development and processing costs.
In summary there is no single way to collect in Argentina, and usually corporates would have more than one process in place, depending on the type of customer, the amounts involved, the geographical area, its purchasing power, etc. Opportunities exist to optimise processes and reduce costs through a thorough review of existing architecture.
A mature and efficient payment system, but tax and bureaucracy are still around
The recent authorisation from the Tax Bureau (AFIP) allowing electronic delivery of invoices deserves attention for the potential benefits that its implementation may generate.
As with other countries in the region inflation has influenced payments and collections techniques forcing banks to become more efficient in the way they move cash. With the exception of salary payments, corporates have chosen cheques as their principal means of payment as they provide longer terms of clearing than electronic transfers (while an electronic transfer is debited on the same day, a cheque has a longer clearance cycle, often over 24 hours, as many of them are not deposited immediately). The creation of the deferred payment cheque (cheque de pago diferido) in the late 90s strengthened this position with many corporates in Argentina paying with longer tenors (e.g., supermarkets).
When talking about payments in Argentina, tax is high on the agenda. Corporates are obliged to withhold certain federal and provincial taxes on certain payments, and deliver receipts on amounts withheld (for the suppliers to take corresponding tax credits). In practice, this means that payments comprise not only the delivery of the payment instrument, but also tax and other supporting documentation, generating a rather cumbersome process which adds costs to the transaction. However, the payment system is relatively well managed and organised and banks offer a wide range of services including full outsourcing (issuance and delivery of payment instruments and supporting documentation), ERP connectivity, risk control processes and centralised platforms for transmission of payment instructions.
Private banks have developed services effectively tackling all issues regarding payment to suppliers, including EB and platforms enabling beneficiaries to access, via telephone or internet, the status of their payments and, electronics confirmation advice, upload and download facilities allowing corporate interfacing and integrating of their ERPs to achieve a fully automated payment process. In addition, control and security features have been incorporated to minimise the risk of mistakes and fraud.
With regard to cheques, Argentina has some specific features. There are two types of cheque: normal cheques and deferred cheques. The regular cheque is an ordinary on-demand payment order. The deferred cheque has a future payment date, therefore it’s a deferred payment instrument that can be exchanged and traded until its strike date. Banks are issuing and managing those types of cheques, which are legally accepted.
Deferred cheques were created in order to allow beneficiaries (usually SMEs), to access short-term financing for their working capital needs, with banks agreeing to discount those cheques at attractive rates for the SMEs, given the credit standing of the issuer (generally a large corporate). Usually, these banks are the same that outsource the payment transaction. [[[PAGE]]]
There is little change in this area. Accounts are available in ARS, current and savings. USD savings accounts are also available but are not that popular, given the low remuneration and the relatively little protection they provide in case of devaluation. Amounts are always at risk of being ‘Pesified’. Regulation does not impose any limits on the amounts of withdrawals in savings accounts but they are also subject to the credit/debit tax (in fact for corporates they were renamed Special Current Accounts so that they can fall within the tax boundaries.
Zero balancing between a cheque and a savings account is offered by some banks (no tax will apply to transfers between accounts of the same holder), but the inability to earn interest on savings accounts (a recent decision of the central bank), unfortunately makes this tool not worth putting in place. Cheque accounts are still not available for non-residents.
Non-resident corporates are only allowed to maintain Savings Accounts (now denominated Special Current accounts), which they can operate via MEP transfers. However, locally established corporations can have non-resident signatories, following a series of procedures which sometimes may be cumbersome (this is important for regionalised treasuries with non-resident signatories).
While by the end of the last century over 100 banks operated in the country, only 66 are left with 10 of them holding nearly 80% of total deposits as of January 2010.
In terms of optimising idle funds, alternatives are scarce or non-existent. The minimum tenor for time deposits (in any currency) is 30 days, which limits placement possibilities (in December, fewer than 60 million time deposits were placed in the whole system by corporate clients). No shorter tenor placements or options are available. The inability to obtain interest on sight deposits as of April 2010 (the only available alternative up to that date), has forced corporations to re-analyse their cash management strategies, including tenor and periodicity of their payments to suppliers.
Restrictions still exist for operating in FX with a 2m monthly limit for the purchase of US dollars and a 30% cash reserve requirement when incoming US dollars exceed that amount (both applicable to financial transactions, not related to trade operations).
The collapse of the country’s banking system in 2001 resulted in the reduction of the number of banks, some disappearing, some merging by the end of that year. While by the end of the last century over 100 banks operated in the country, only 66 are left with 10 of them holding nearly 80% of total deposits as of January 2010.
Foreign banks such as Bank Boston, Lloyds, Banco de Lavoro, Scotiabank and Credit Agricole either left the country or were acquired by local groups. HSBC continued its expansion, buying Banco de Lavoro, Standard Bank bought Bank Boston and very recently Banco do Brazil acquired Banco Patagonia.
Within this environment, companies operating in Argentina, including multinational companies with local subsidiary operations, should be able to benefit from the opportunity of reviewing and re-assessing their in-country cash management operations, to ensure that they are taking advantage of the most efficient payment and collection methods available, and performing a review of their local banking partners to confirm that their service copes with its needs and expectations, with the best cost/benefit ratio available in the country.
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