Breaking barriers: How better cross-border payment technology can help small and medium-sized businesses in Latin America
In Latin America, small and medium-sized enterprises (SMEs) are a critical business segment. They account for 99.5% of all companies and 25% of GDP.
And that number is slated to grow even more in the near future. In countries like Mexico and Brazil, roughly three-quarters of SMEs surveyed say they are planning to source more suppliers, partners and workers across several countries to diversify against risk, according to the report.
But right now, cross-border payments can be challenging for business leaders like Germán Torres, sales director at Mexico-based HVAC Latam. Ventilation and air conditioning system unit sales are generally low margin deals. So it's crucial that Torres strategizes to maximize every penny, especially when dealing with international payments.
German Torres, second from left, at a ribbon cutting for a demo launch in the HVAC Latam offices.
Torres buys products from Spain, Italy and China and then sells them to customers in Central America, Mexico and the United States. On the best of days, he loses as much as 1% of his already slim margin to exchange rates. On the worst of days, a small typo can cause a foreign bank to hold funds for up to two months, creating problems with everything from payroll to inventory.
“The uncertainty is very problematic and generates a lot of stress because you don't have anyone to ask for a solution,” says Torres.
Lack of access to digital tools
Torres, and entrepreneurs like him, fall into a gap in current payments infrastructures in Latin American countries. Consumers now have access to better cross-border payments tools thanks to digitization efforts by banks and fintechs, while large corporations have the in-house payments expertise and stronger banking relationships needed to navigate cross-border complexities. SMEs are somewhere in the middle and their needs are not being adequately met. They require more than what is offered to consumers but they usually aren’t big enough for a bank to dedicate personnel to help meet their cross-border payments needs.
SMEs in Latin America are adopting more digital solutions, which is encouraging and could help ease their cross-border payment headaches. According to Mastercard’s 2023 Borderless Payments Report, approximately two-thirds of SMEs in Mexico, Colombia and Brazil currently use an app when moving money internationally.
“Yet, this also suggests large usage of personal accounts. This is because the money movement tools currently available are often designed for consumers or for large businesses, so they are either too simplistic or overly complex for SMEs,” notes Walter Pimenta, Executive Vice President, Commercial and New Payment Flows for Latin America and the Caribbean at Mastercard.
Kash Baghaei, Chief Product Officer of Jeeves, a financial platform providing flexible payment and expense management services for businesses, believes there is a great opportunity for banks and fintechs to provide this growing market with new and better solutions.
“The demographic is young, ambitious and dynamic,” says Baghaei.
The need for fast and reliable cross-border payments
The typical cross-border payment process for an SME in Latin America involves a local bank in one country working through a network of correspondent banks to transfer funds internationally. Funds can get stuck for weeks due to errors or issues at the intermediary banks. What is more, the SME may not know the exact amount the receiver will be credited by their bank, which can create a lot of reconciliation issues for the receiving entity.
“Right now, a transfer could take 10 hours, or it could take 84 hours,” says Imer Vigil, CEO of Happy Tours Travel Agency, Inc. “This has been incredibly stressful for us.”
Vigil’s travel agency specializes in trips for Hispanic immigrants visiting friends and family in their countries of origin. With offices in both the U.S. and El Salvador, Vigil transfers up to US$120,000 per month from the U.S. to El Salvador to fund operations and payroll. But because of uncertainty around how long it takes to receive funds, the company has had to adjust internal processes, like cut-off times for commission payments to travel agents, which has a knock-on impact on revenue and growth.
“I call it a hidden tax on small and medium-sized businesses,” says Vigil. “Because you have to hold on to working capital that you could be using just to make sure you can cover any issues that come up with cross-border payments.”
Imer Vigil, sixth from left holding the child, with his Happy Tours Travel Agency team in El Salvador.
Baghaei sees his customers struggling with similar problems. “Our customers need simple, fast, inexpensive and reliable transactions. Unfortunately, there are not many options in Latin America.”
Leveraging cross-border platforms
But developing these kinds of digital platforms can be a complex task for a single bank to tackle. Many banks simply do not have the resources to take on such tasks. That’s why partnering with a company like Mastercard makes sense.
Mastercard Move, Mastercard’s comprehensive portfolio of money transfer solutions, provides a one-stop solution for banks looking to ease cross-border payment friction for customers. It provides end users with transparency and choice, by enabling trackable payments, visibility of fees and estimated delivery times. Across the world, Mastercard Move’s reach spans more than 180 countries and more than 150 currencies, with end points including card, account-to-account, mobile wallet and cash payout (all subject to specific market availability).
“Companies like Mastercard have been at the forefront of fostering partnerships with banks and fintechs to provide broader networks and enhanced capabilities in cross-border payments,” says Pimenta. “Our expertise in navigating regulatory environments and our deep understanding of local market dynamics means we can provide banks and fintechs with solutions that help them comply with both local and global regulations.”
With local banks leveraging game-changing solutions such as Mastercard Move, SMEs can make payments to a supplier in China or a travel agent in El Salvador in near real time through their bank’s website or app with competitive rates and without having to set up a separate account in local currencies.
“When we started our business in 2008, we were transferring about US$5,000 per month cross border,” says Vigil. “A tiny fraction of the money we move now. Working across country lines has been a big part of our success. With banks providing us with new solutions, our growth is only going to accelerate.”
For further information about Mastercard’s money movement solutions, visit the Mastercard Move website.
