The Incredible Growth of the Latin America Payroll Market
With Latin American economies (in particular Brazil) continuing to show strong growth in the first part of 2012, and Central and South American currencies providing some of the strongest global showings against the U.S. dollar, the region is attracting both attention and investment (and not just from tacky tourists!). In fact, a February 2012 article on the prepaid card site PartnersinPrepaid.com captures the sentiment about as succinctly as you can; stating, “To say that Latin American markets are catching the attentions of the U.S. payments industry is an understatement”. And, if there is one particular area that is taking in a lion’s share of this activity upswing, it’s payroll—most notably through the use of prepaid payroll cards and the continuing emergence of regional multi-country payroll outsourcing services.
The Introduction of “South of the Border” Payroll Outsourcing
Interestingly though, while the bulk of the Western world may be well-adjusted to the concepts and practices of outsourcing (after all, we’ve had both eponymously-named movies and TV shows come out within the last 5 years), the management of a business’s payroll function by a 3rd-party provider is still a relatively young concept in the Latin American region. Still, with a combination of services for the “home” regional market and service centers attracting customers on a global scale, research firm Gartner has laid down their prediction that the Latin American business process outsourcing (BPO) market as a whole will continue this expansive phase through 2015. While obviously we’ll have to wait to see how that prediction goes, one thing that is certain is that this has not been an overnight development.
In all actuality, many see this slow start as an indication of embedded preconceptions about outsourcing—a sentiment echoed by the Managing Director of Colombia-based provider Enlace Operativo; who notes, “In our business activities, we found that there are still managers who are not naturally receptive or comfortable with the idea of payroll outsourcing”. It would seem that for our neighbors to the South, the giving up of control over this key HR function requires something of a culture shift—movement that BPO providers are encouraging by positioning their services as a strategic management tool rather than authority delegation. By emphasizing strongly the benefits that can accrue from allowing a specialist company to handle payroll, the region’s organizations are beginning to leverage the possibilities of being able to focus on their core businesses, but a larger question remains. Is the reticence we’re seeing in this region tied to simply organizational culture issues that can largely be managed through development and change activities? Or is it something larger and more socio-culturally driven that gives Latin Americans pause about outsourcing?
Setting aside the culture issue for now though, the needs of Latin American customers for payroll outsourcing have a great deal in common with other global outsourcing customers. For example, underpinning the offered service is the requirement for strong payroll software that can operate across several geographies and handle the necessary language differences (broadly speaking, Latin America tends to carry out business in two languages which do carry some similarities, making this aspect less of a challenge than say, Europe). Equally though, the software must be able to navigate the complexities of differing national legislations—which can quickly escalate a solution’s complexity. Indeed, Graham S. Beachum III of Dallas-based Implicit Solutions has been quoted as saying, “to start in a complex country, such as Mexico, there is no other like it in terms of payroll; you simply have to see all the complications there are in fiscal matters”.
Finally, mirroring the rest of the world, web-based SaaS solutions are experiencing a growing popularity for payroll outsourcing in the Latin America region. A March 2012 news item from Gartner stated, “SaaS revenue in Latin America is forecast to total $419.7 million in 2012, up from $331.1 million last year.” While the payroll market is only a part of that growth, the general trend is indicative and 3rd-party provided payroll managed in the cloud is clearly the current direction the region is moving.
The Payroll Via Prepaid Card Culture
On top of the growth that outsourcing is experiencing within the region, another major push within Latin America is the use of prepaid payment cards; driven in large part by the fact that approximately 70% of the region’s population do not use the banking system. Interestingly though, The World Bank places the average cost of basic financial services in Latin America at 5-10% of the minimum monthly wage—making the system in general less attractive than in other (read “cheaper”) regions of the world. As such, both governments and businesses are seeing the use of these prepaid cards as a major strategy in getting more people financially involved in the system—regardless of whether they have a personal bank account. Much of this governmental impetus comes in the form of social benefits cards. Mexico for example, has legislation aiming to pay all social security benefits via electronic means by 2012; the exact type of strategy and state backing which is driving up card usage in ways unseen elsewhere in the world. Naturally then, employers and payroll providers are grappling for a piece of this pie; interested in tapping into the trend and leveraging this easy (and often more cost-effective) payment method.
As to the potential size of this market that is attracting such interest, analysts differ in their opinions but the figures are rarely modest. Brian Riley, for example, director at U.S.-based consultancy TowerGroup, sees the Latin American prepaid card market (including payroll cards) expanding from US$20 billion in 2011 to US$110 billion in 2021. Richard Speer, on the other hand chairman of consultancy Speer & Associates (also U.S.-based), is more bullish—predicting an overall market worth US$150-175B by 2015 (with around 10% of that figure accounted for by payroll cards).
Final Thoughts on Latin America Payroll Market Growth
The strong economies of Brazil, Mexico, and other global players are driving an ever-increasing external interest in the entire Latin America region. At the heart of these attractions though is the need to overcome local payroll complexities and create a payroll market with a broader range of outsourcing options. Couple this with the fact that the main driver for the prepaid card market is socially-based and state-backed (meaning that its growth may be more assured than that in North America) and it’s easy to see why the Latin America region is receiving so much warranted attention. Though a long way off from being able to compete directly with established markets, Latin America nevertheless has broken through a least one barrier; namely that customers are beginning to finally recognize the region as a viable and lucrative option.
The giving up of control over this key HR function requires something of a culture shift, a shift that providers are encouraging by positioning their services as a strategic management tool rather than a ‘risky’ delegation of authority.”