Regulators are starting to ask more questions about cross-border payment flows, which is forcing banks to have more nuanced conversations with their networks of correspondent banks.
In recent years, SWIFT has endeavoured to attract more buy-side clients (corporates and asset managers) to its annual SIBOS conference and exhibition, which will be held in Singapore in a week or so’s time. There are now more than 10,800 banking organisations, securities institutions and corporate customers in over 200 countries connected via SWIFT’s financial messaging network. However, the bulk of the organisations on the network are still banks, with corporates and fund managers making up the minority.
The SIBOS conference and exhibition is one of the few opportunities the banking community has to come together to discuss the business of the day or issues that are likely to impact it in the coming weeks, months and years ahead.
But given that pundits were predicting the death of correspondent banking just a decade or so ago, particularly in the wake of the single currency’s introduction in the eurozone reducing the need for banks to maintain as many banking relationships, the fact that thousands of banks still attend SIBOS every year and continue to use SWIFT’s IP-based messaging network suggests that rumours of correspondent banking’s demise were somewhat over-egged.
However, that is not to say that the cosy relationships that traditional correspondent banks once enjoyed with one another—you give me your payment flows in such and such a country and I’ll direct my payment flows to you in this country—are not being challenged.
Historically, correspondent banking wasn’t something that was really spoken about. It was something that just happened in the background and that most people—banks and customers—took for granted. Most bank customers didn’t really ask how a bank handled their cross-border payment flows. They just expected their payments to reach the beneficiary’s account, no questions asked.
However, regulators are starting to ask more questions about cross-border payment flows, which is forcing banks to have more nuanced conversations with their networks of correspondent banks. SEPA or the Single Euro Payment Area started the ball rolling forcing banks to streamline cross-border payments (credit transfers and direct debits) within the eurozone.
But with the SEPA project largely done, this year at SIBOS the debate is likely to focus more on other forms of regulation such as Know Your Customer or KYC, which has changed how banks look at their correspondents, particularly in higher-risk markets where insufficient due diligence could attract a hefty fine from the regulators or where the cost required to meet KYC requirements may not be warranted by the level of business the bank does in that market.
Some banks are exiting high-risk markets altogether, yet other banks see it as an opportunity to expand and to fill the gap left by those banks.
There is no doubt that correspondent banking is under greater scrutiny than ever before, but it still doesn’t detract from the fact that banks’ customers still need to send payments internationally and not all banks are able to maintain a direct presence in markets where their customers want to do business, hence the need for correspondent banks remains.
But it is likely to be a different type of correspondent bank or banker that addresses those needs in future. It is not just regulation that is changing the face of the business, but also technology and evolving customer expectations. The advent of same day clearing or real-time payments is likely to put more pressure on correspondent banks and payment networks to be able to accommodate the move to real time and to meet evolving client expectations around the tracking and delivery of payments.
Distributed ledger technologies such as the blockchain also have the potential to transform correspondent banking, perhaps for the better. So it seems that correspondent banking will survive to see another day and another SIBOS. But the correspondent banker of tomorrow will need to think a lot more differently and innovatively than their cohorts did in the past.