Mitch Trehan, UK Head of Compliance & MLRO at Banking Circle, explores the findings of the bank’s latest research, and discusses how alternatives to traditional correspondent banking could bring global economic benefits.
Between 2011 and 2019, the number of active correspondent banks worldwide fell by approximately 22%, due, in part to big bank de-risking strategies. This has led to fewer options available to smaller banks and non-bank financial institutions (NBFIs), less competition in the market and nothing to challenge the rising costs of cross border payments.
With big banks rapidly de-risking, withdrawing from certain markets and geographies, smaller Financial Institutions (FIs) are facing fundamental threats that are causing a ripple effect in the industry.
Our latest research found that in the past ten years Tier 2 and Tier 3 banks as well as NBFIs have faced increasing costs from their growing network of correspondent banking partners. 77% of respondents have more relationships now than they did ten years ago – most feel they have too many – and 80% have seen correspondent banking costs rise in the same period.
While most have had to take on additional relationships to remain competitive and keep serving diverse customer requirements, many report that they had found themselves let go by their banks – often with less than two months’ notice. Much of the time, the reasons given for ending the relationship included no longer meeting eligibility criteria (61% of those who were let go by their banks). Banks and NBFIs found that having fewer relationships has led to difficulties offering international payments, and costs have risen still further.
The Banking Circle research set out to examine how the de-risking trend is affecting FIs across Europe – the doors it is closing, and the ones being opened.
Banks have of course been executing de-risking strategies for decades, to reduce and remove risk. However, the past decade has seen the level of activity increase dramatically following the 2008 financial crisis which brought about a shift in the political agenda and that of the regulators. As a result, regulators began to work with banks to tackle financial crime.
In 2012, HSBC paid US Authorities $1.9 billion in a settlement over money laundering, sparking the de-risking movement that is still affecting the industry today. To protect themselves banks had to introduce new measures or remove clients perceived to represent a higher risk. Such banks often found it simpler to de-risk clients, sectors and regions that sat beyond their new risk appetite.
Unfortunately, that left smaller banks, Non-Bank Financial Institutions (NBFIs) and businesses without correspondent banking partners, which can lead to financial exclusion for underlying customers. This situation remains today, and for some it has gotten worse. Smaller banks and NBFIs are facing a fundamental threat to their operations that could have global societal and economic risks.
The results of our latest research, published in a white paper, show that banks and NBFIs are dissatisfied with the traditional correspondent banking solution. We believe the increasing number of correspondents banking relationships is a reaction to de-risking, with smaller banks and NBFIs protecting themselves from the impact of de-risking by spreading their own risk.
However, this is a heavy burden. Our research revealed that correspondent banking costs have increased for 80% of the banks and NBFIs we surveyed, and the real-life impact of this is that 3 in 4 believe they have lost customers due in part to a lack of access to fair priced correspondent banking partners.
Some of the financial institutions we spoke to have proactively reduced the number of banking relationships they have, and half of these did so for cost reasons. In cases where the bank or NBFI was let go by their bank, the main reason given was that the customer no longer met new eligibility criteria. Those who have reduced the number of relationships have since experienced difficulties in offering international payments, and costs have risen.
A solution must be found to overcome these challenges, helping increase financial inclusion among businesses and consumers around the world. Less than half of the respondents to the Banking Circle study believe there are any good alternatives to traditional cross border payments, and 71% feel that an alternative would benefit the global economy.
The frustrating and surprising truth is, there is no ‘real’ alternative at all. Access to cross-border payments requires a bank at the top of the chain, with direct access to clearing. There is no getting around this fact, so instead we need to take a new approach to correspondent banking, and that is just what Banking Circle is doing.
We are taking on a job that very few banks want to tackle – investing in integrating a vast network of local clearing and payments schemes to build a unique super-correspondent banking network.
Avoiding a sector or region that appears high risk may be the quick-win option, but this can easily exclude customers and impede the progress of businesses that could be highly valuable to the economy. Even the highest risk emerging market can include customers that are low risk. Through an external partner like Banking Circle, even the smallest banks and NBFIs can capitalise on the opportunities.
Banks and NBFIs can provide their business customers with secure, lower cost cross border payments, connecting to clearing via the Banking Circle payment rails, rather than the outdated and expensive traditional correspondent banking network.
Banking Circle is a fully licensed next generation payments bank that is designed to meet the global banking and payments needs of banks and NBFIs. As a technology-first bank that reduces the cost of using technology, we connect financial institutions to 25 of the world’s major currencies and enable them to move funds efficiently – delivering fast, low-cost payments to their underlying customers.
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