LATAM payment problems

Here is a great trade that you could do in theory…

1. Go to the ATM and take out £10,000
2. Change your £10,000 for USD at the M&S on Oxford St. or similar
3. Fly to Argentina 
4. Exchange your USD for pesos at the black market rate (currently 487/492)
5. Take your pesos to a bank trading USD at the ‘official’ exchange rate (currently 260/273) 
6. Fly away with a nearly 80% profit

Unfortunately this wouldn’t work. Although you could complete the first leg of the transaction, Argentina’s banks would tell you to get lost if you tried to swap back into USD. 

However, it points to a couple of problems CFD providers face when trying to take payments in Latin America, a region which, along with Africa and Southeast Asia, has seen a flurry of activity over the past five years.

Payments is an area that seems really simple in practice. You hit ‘deposit’ or ‘buy’, wait a few seconds and then the transaction goes through. But the actual mechanics are much more complicated.

For instance, I remember listening to one of our legendary ops people at my prior company explaining why we stopped being able to do GBP/USD trades for US stocks during the meme stock boom. I still have no idea what happened but if you say ‘yea, basically the payment rails that connected us to the bank were overwhelmed’ then people tend to nod and think you know what you’re on about.

And that’s in the UK, which is very stable and with good banking solutions, and in one of the most liquid currency pairs you can trade in. When you throw in Latin America’s erratically applied capital controls and the mix of payment options on the table, things get even more complicated. At least that’s what I assumed.

“The fundamental problem with payments starts with the broker and their lawyers,” said one executive involved in the payments industry. “This is true of LATAM or any region. The problem is not the place they’re doing business, it’s where their business is registered. They will go to the quickest place to set up, which today probably means the Comoros Islands. 

“The lawyers don’t care because they just want their fee, but doing this immediately takes the number of banks that will work with you to close to zero. So what I’d say is if someone is complaining about how hard it is to take payments in LATAM, then it’s almost always because they didn’t bother to do the legwork previously and think about how where they’re registered would affect them down the line.”

Even if this is all true, brokers that are set up in more respectable jurisdictions are likely to face several problems. Capital controls, as highlighted in the case of Argentina, provide one example of this. 

One problem here is the skewed exchange rates they tend to create. Controls are typically introduced alongside an official exchange rate. Almost any kind of trading is going to ultimately involve a currency conversion to USD. But unless you want to get wiped out, you can’t offer your clients the ‘official’ rate as it is likely to massively overvalue the country’s currency relative to the dollar. 

The bigger problem is converting the local currency into USD – or whatever other currency you want – and moving it out of the country. Exchanging any significant volume at the official exchange rate is probably impossible and you will then struggle to actually move the money out of the country.

In the past, companies have found some ways around this problem. Typically you buy an asset (eg. a bond) that is denominated in two currencies (eg. peso and USD). You buy the asset in one currency, transfer it offshore and then sell it in the other currency. Brokers actually probably could do this but it would be a massive hassle. A more common method seems to be adding USD-T as a payment option.

“In several countries, regulations restrict individuals from holding foreign currencies such as the US dollar,” said Przemysław Wojtyna, Head of Payment Solutions at Match2Pay. “This limitation exacerbates the challenges faced by forex brokers and traders in accessing global markets. Cryptocurrencies provide an alternative avenue for holding and transacting in currencies.”

In some ways, providing stablecoin payments fits with one of the trends we saw recently when looking at Binance. The basic point there was that one of the only use cases for crypto seems, ironically, to be providing people in emerging markets with access to dollars via stablecoins. 

A survey by Mastercard carried out last year would backs this idea up. The payments company found that one in three people in LATAM have used stablecoins to make payments and more than half have used crypto in some form. By comparison, only about 6% of people in the UK own crypto. 

Offering payments in stablecoins also seems to solve a couple of the other problems that brokers face, namely transaction costs and speed. For example, one senior executive at a broker that I spoke to had been quoted fees for FX transactions in LATAM that, when combined, were (seriously) in double digits. 

At the same time, many of these services are terrible. A common theme speaking with broker executives seemed to be substantial time lags in getting money out of countries and poor customer service, with no updates as to what was happening with the transfer.

So as much as it pains me to say it, stablecoins genuinely appear like a better alternative in this instance, given that they settle in real time and the transaction costs are comparatively lower. This was a point that Wojtyna noted as well.

“Cross-border transfers are often a cumbersome and costly process for individuals in LATAM and Africa,” he said. “Many banks do not provide efficient cross-border transfer services, hampering international trading activities. Crypto payments offer a seamless solution, allowing for fast and secure cross-border transactions without relying on traditional banking systems.”

The final area that brokers seem to be struggling with in LATAM is, to be fair, one that applies everywhere. This is simply the nuances that exist in each country. 

For example, a large number of people in Peru pay for e-commerce transactions using an app called PagoEfectivo that lets you complete transactions in cash at a store. In contrast, Brazil’s central bank has developed a payments network (PIX) that can be accessed via banks and e-money applications.

In this instance, crypto solutions seem like both a positive and a negative option. Catering to local nuances in payments (and anything else) tends to mean you gain more traction, but it is also extremely time consuming and means you cannot ‘universalise’ by providing a standard payment option and then rolling it out across multiple jurisdictions. 

So there you have it, not only do you get a small snapshot of what’s happening in LATAM, you also get me saying something positive about stablecoins. What a week.