US president Barack Obama’s visit to Cuba in March is the surest sign yet that the Caribbean nation is being welcomed back in from the cold after nearly 60 years of communist rule and economic sanctions.
The White House and Cuban president Raul Castro said they would begin normalizing ties between the two countries in 2014, with the latest step seeing the restoration of commercial air traffic between the two for the first time in half a century.
But as travel and trade restrictions are lifted amid a thawing in relations, what of Cuba’s singular banking and payments infrastructure?
One nation, two currencies
Since 1994, Cuba has functioned with two currencies, a two-tier system designed to protect local workers while maximizing tourist income.
The Cuban Peso (CUP) and the Convertible Cuban Peso (CUC) are both legal tender but neither can be converted on the international foreign exchange market. Tourists are obliged to turn hard currency such as sterling or euros into CUC on arrival.
The CUC is pegged to the US dollar, while the CUP – in which locals are paid – is worth a fraction of this.
Cash is very much king in Cuba, but MasterCard and Visa are widely accepted at tourist-facing businesses such as hotels, car-rental agencies, restaurants and shops. In total around 10,000 locations can accept card payments.
Card restrictions lifted
Until last year, credit and debit cards could be used in Cuba as long as they were not issued by a US financial institution.
But as relations improve, the banking system is playing a key role and 2015 saw the first US issued cards accepted in Cuba.
MasterCard announced it would lift restrictions for US issued cards. ATM transactions wouldn’t be available until 2016, but Americans could use their credit and debit cards at point-of-sale (POS) terminals nationwide.
To facilitate this, Florida’s Stonegate Bank announced the first deal to establish a correspondent account in Cuba with Banco Internacional de Comercio S.A. Correspondent banks are essential for international trade as they allow financial institutions to transact across borders and move client funds abroad.
“This is another step in terms of normalizing commercial relations between the US and Cuba,” commented Dave Seleski, president and chief executive officer of Stonegate Bank. “The ability to move money easily between the two countries will only increase trade and benefit American companies wishing to do business in Cuba.”
Stonegate had already been working with the Cuban Embassy in Washington, which had previously been forced to transact in cash because no US bank would work with it.
Issuers take note
Both American Express and MasterCard said they would lift the block on cards in Cuba, but finding US issuers willing to work in Cuba is another matter.
Stonegate is the first US bank to take the plunge and it’s going to be closely watched. It’s not without risks. Cuba was among several nations labeled high-risk in 2014 by the Financial Action Task Force, an international organization that monitors money laundering.
Jason Marczak, deputy director of the Atlantic Council’s Adrienne Arsht Latin America Center, believes big banks will want to see how Stonegate gets on.
“This bank is dipping their toes in the water and if the water is the right temperature, then other banks might seize the opportunity as well,” he told the Wall Street Journal.
The deal is a key step towards normalizing relations. Not only will it make life easier for tourists, who won’t need to carry large amounts of cash, but it creates the foundations for proper business links between the US and Cuba, and therefore helps open the island up to other international markets.
As Cuba becomes more open and re-enters the international scene, having fit and proper banking and payments systems is essential. But we’ve got a long way to go before domestic transactions go beyond cash.