Citi Perspectives Fall 2023: Transforming Treasury

Steve Donovan Head, Latin America, Citi Treasury and Trade Solutions | 31 The future is instant: How partnerships and purpose are driving Latin America’s payments revolution issuance like Brazil, who has been exploring the feasibility of a digital Real, and Uruguay which is also working on a pilot for the e-peso, a digital currency powered by its Central Bank. Elsewhere a number of countries across the region are exploring similar paths. Tokenization already exists in varying forms, however now systemic CBDC (Central Bank Digital Currency) architecture supporting one technological framework is under serious consideration, says Donovan. Opportunities Despite the rapid financial markets progress of recent years, there is still much to be done to develop the digital economy. Most important is developing a new financial market infrastructure with the proper incentives framework to drive financial inclusion, reduce costs and dependency on cash. “Persuading small shops to ditch cash payments will require careful carrot and stick,” says Donovan. According to the World Bank’s Global Findex report, six out of ten people who remain unbanked in LATAM say that financial services are too expensive. Moreover, banked people remain slow to use digital payments. Despite having bank accounts, an estimated 81 million adults across Latin America continue to pay for their utilities in cash while 150million banked adults made cash only payments to merchants in 2021, including more than 50million adults in Brazil and 16million adults in Colombia. “The other side of the coin is that the informal economy accounts for about 70%of employment depending onwhat country we are looking at. Many of the people in this part of the economy who use cash at the point of sales either don’t have access to a bank account or receive higher value from the small shop owners when using cash,” adds Donovan. Another pain point is managing corporate clients’ expectations regarding the slow and often tough journey to achieving real-time payments. With the miniaturization of payments and the fast-growing digital economy, corporates want “immediacy, visibility, control, reliability and security” but this won’t happen overnight, he says. Upgrading the enterprise infrastructure to a modern API stack and building a platform business is key but it requires a coordinated effort across the treasury and the commercial area of the corporate clients. “What we are seeing in this newmodel is a merge of vertical business processes that allow for direct interaction with the end consumer,” he says. “This is a significant digital transformation shift of the corporate traditional businesses model. On the other hand, ensuring robust cyber security and digitalized KYC (know your client) remain enduring challenges for financial institutions who have this in the highest priority of technology investments.” The cost of instant payments also needs to fall as the newmarket infrastructure becomes mature and adopted, Donovan adds. Still, any frustration at the pace of change is outweighed by the opportunity. The growth of fintechs in the region who are connecting the last mile to the unbanked, is bringing significant flows from the informal to formal economy, increasing banks’ liquidity, credit and reducing the cost of cash handling. These developments along with the modernization of the financial market infrastructure, more digital processing opportunities to benefit companies looking to span efficiencies, full transparency, and control will bring in a whole new customer base. For Latin America’s social economic prospects, digital payments offer the holy grail for growth and improving lives of millions of people, Donovan concludes. Originally published by Treasury Today in May 2023.