Before we talk about treasury and cash management and their market specificities, it is important to put the size and scale of Brazil into perspective. The surface area of Brazil is equivalent to 90% of the US, it counts 26 states and also a federal government and the population is approximately 200 million. In this way Brazil can be easily likened to a continent rather than a country, so when imagining Brazil one should imagine an area around the same size as the US. This is very important because distance, a decentralised tax environment and huge economic disparity between states are just some additional hurdles to business development and, de facto, to treasury management. The issues are also in part cultural; similar to any very large country, Brazil has developed its own norms, standards, systems and processes.
With the current growth environment and globalisation trend, Brazil is in a phase of transformation and adaptation towards more international convergence. Its adoption of the International Financial Reporting Standards (IFRS) in 2010 is a good illustration of this point.
Brazil also has a long history of financial ups and downs forcing banks, chief financial officers (CFOs) and treasurers to put in place robust systems to cope with extreme conditions such as hyperinflation. Brazilian banks have continuously invested in treasury and payment systems to a point where some of the processes found in Brazil are unique in terms of their efficiency.
This is certainly the case for real time gross settlement (RTGS) payments, which are settled in real time in everyone’s bank accounts (credit is processed in about 45 minutes). To gain time and efficiency banks have also integrated tax payments and reporting obligations into their processes. Today, banks continue to invest in IT infrastructure and operations with the view to reducing their back office and administrative costs. Electronic invoicing (e-invoicing) has been implemented in most banks and the boleto, a Brazilian payment instrument, has been dematerialised. A new single platform for the electronic treatment of boletos, called direct debit authorisation (DDA), was created and introduced two years ago with the hope that 30% of the 2 billion boletos in circulation would pass through DDA by 2014.
Cash Management in Brazil
It is clear that banks in Brazil are very efficient, cost effective and profitable, but how are corporates benefiting from all this? Surprisingly, they are not. Any European or US treasurer would be surprised to see how many employees are still needed in treasury back, middle and front offices. The reality is that a lot of the administrative burden remains with corporates and are not taken over by banks, as is the case in Europe or the US. The reasons for this are a mix of history and legal liabilities limiting the role of banks to certain functions.
Contrary to Europe or the US, banks don’t take on board a number of functions related to payments and collections and many tasks remain the responsibility of the corporate. For example, corporates still have to input all detailed payment instructions before they are sent to banks – Brazilian banks do not provide a system to handle any errors that arise and a simple little error on a code or on a payment instruction will result in an immediate rejection. The same goes for invoice reconciliations which have to be matched manually with boletos (which can be a cumbersome process when a single boleto is issued to pay for multiple invoices).
For foreign exchange (FX) transactions control and reporting obligations remain for the most part with the corporate and cash pooling, which can be to a certain extent completed by the banks and often requires some manual adjustments if a company has accounts pooled at different banks. All of the above can mean that cash management remains an expensive function for corporates in Brazil and optimising it is possible but remains challenging.
While the cash management banking environment is very concentrated, it also remains very competitive and offers clear leveraging opportunities for corporates. The local market is dominated by a handful of players, including: Itau, Bradesco, Banco do Brazil, Santander, Citi and HSBC. However, there are also two other strong private players: Votorantim and Banco Safra.
Each of the 26 states also has its own state bank which can be fairly large – for example, Banrisul in State of Rio de Sul. Itau, Bradesco and Banco do Brazil have an unrivaled network with local reach across the country with efficient processing capabilities integrating local specificities, including tax related payments, and any corporate can hardly work without one of the three or four local banks. Key international banks, such as JP Morgan Chase, Deutsche Bank and more recently Bank of America Merrill Lynch (BofA Merrill) also have a local presence and can provide added value to international corporate thanks to their international reach.
Technology: Leading the Pack
The financial system in Brazil is extremely advanced in terms of technology for payments and settlement of any type of financial transactions. As far as treasury systems and electronic banking (e-banking) are concerned the banks are at the forefront, having developed competitive platforms. Those platforms integrate specific local features such as tax payments, automatic calculation of late interest payments or penalties, for example. The three large banks (Itau, Bradesco and Banco do Brasil) have e-banking platforms which, among other capabilities, provides for cash management pooling and reconciliation, liquidity management, risk management, trade and electronic treatment of boletos. Those are domestic platforms with compatibility and format issues when it comes to integrating them in something more international. Santander, HSBC and Citi, the three big internationals present, offer platforms which are more convergent with international formats.
Independent treasury management system (TMS) providers are also slowly making their way in the market, either independently or supporting Brazilian or other banks. Technology vendors such as SAP TRM, Sage XRT, SunGard or Wall Street Systems are already present and providing non-banking solutions. Bloomberg has also started to provide FX and risk management platforms to corporates. The TMS market in Brazil is not as developed as in other parts of the world, mainly because of some local practices as well as legal liability issues surrounding payment and collection operations. In terms of format Brazil is also migrating to an MX/XML format and although SWIFT is present on the market there is still a limited penetration on local names. However, SWIFTNet is being rolled out in a number of multinationals co-ordinated by corporate treasury headquarters.
Tax in Brazil
It is impossible to talk about Brazil without mentioning that the tax environment which is multi-level, multi-geographic, complex and expensive. There are series of different taxes on financial transactions and instruments, and a close and thorough look at this can help make substantial savings. There is a general tax on financial transaction called IOF which taxes nearly all financial transactions at a rate of 0.38%. There are also a number of other taxes such as Pis and Coffins or ISS, which are levied on commercial operations. Specific taxes also apply to some financial instruments including derivatives, leasing or some placement instruments. Financial tax planning is a must do and a prerequisite to any financial decision.
With a local reference interest rate (SELIC) at 12.25 % (July 2011), financing operations in Brazil is a challenge. Local financing is very expensive and long-term bank funding is not a common instrument (very few syndicated loans are done in Brazil) as corporates have been heavily funding themselves on the bond market in the past five years. The only true provider of long-term funding is the state development bank, BNDES, but availability is subject to approval and priority is given to infrastructure projects and exporters. Most, if not all, multinationals are funding themselves offshore either with intercompany loans or bank financing. In order to further reduce massive US dollar inflows, the Brazilian Central Bank established new rules for external funding in May 2011. All offshore loans with tenors of less than 720 days are now heavily taxed with IOF of 6% payable on the amount of the loan.
Dividend Payments and Repatriation: A Straight Forward Process
Dividend repatriation is a relatively straight -forward exercise when the investment has been originally duly registered with the central bank and dividends can be paid evenly on quarterly basis. FX and remittance, including regulatory reporting obligations, is handled by the banks, although Brazil also has another way to remunerate shareholders with interest paid on capital (at a maximum rate set by the regulator). Dividend payment and interest on capital can be cumulated meaning interest on capital is deductible, as any interest payment, but is limited to 50% of retained earnings. Interest on capital is not taxed when paid offshore but is subject to Pis and Coffins taxes when paid domestically. Excess cash can also be used to proceed to capital reduction.
Sao Paulo: The Centre of Excellence for Regional Treasury?
Brazil has also become the regional centre of expertise for treasury. Most of the multinational companies have located their regional financial headquarters in Sao Paulo, though a few have been established in Rio and very little in Argentina, Chile or Uruguay. Sao Paulo is serving today as the regional centre of excellence on treasury and cash management. Despite a higher cost of living, as well as an increasing lack of financial executives, it looks as if multinationals are still not keen on moving to other places in the region.
In parallel with the emergence of regional treasury and financing functions, new organisations are being created such as the Latin American Treasury Association (LATA) last year, which regroups chief financial officers (CFOs) and treasurers across the region and counts a large number of Brazilian members.
As outlined, cash management in Brazil is a vast subject area and international treasurers from Europe, the US and Asia can find it difficult to approach and understand. This is not only because local practices, products and habits can be tricky to integrate into an international cash management framework, but also because state of the art technology still exists alongside a heavy administrative, bureaucratic and cumbersome work process.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?
The benefits of an in-house bank are increasingly evident, but some treasury departments still hesitate to take the plunge. This article offers a step-by-step guide.
While GDPR and Europe’s revised Payment Services Directive (PSD2) are not contradictory, the fact that the regulators and many banks work on them in silos is problematic, AccessPay executives argue.