Correspondent banking is alive and well and has a key role to play in the future of international payments
Time and time again, correspondent banking has been reported dead as technology has advanced and we have moved into a brave new world. Time and time again, it has come back to life and demonstrated its enduring value.
Today’s geopolitical and economic landscape might almost have been designed to give correspondent banking a new suite of purposes. In this respect, the key underlying points to consider include:
the imposition of international sanctions - with the inherent complexity that arises from reconciling the demands of competing legal jurisdictions - has become almost commonplace;
the trend towards increased sovereignty in the payments industry and other specialist sectors, a trend that we have seen being reinforced and accelerated by the spread of Covid-19;
the enhancement of the role of the euro as a globally used currency for world trade and as an international reserve currency reserve;
the future distribution of central bank digital currencies;
the continuing development of international commerce.
For the past five years, the niche market that is correspondent banking has been undergoing profound change. This is a result of the pressure exerted by the needs of customers in terms of tracking, price and transparency, the challenges that a growing number of financial technology firms are presenting to long-established banks, and continuing calls by regulators globally for lower prices for the end-customer.
The banking world has taken up the gauntlet and worked hard to address the issues, but there is still much work to be done. Today more than ever there is no room for complacency or self-satisfaction. We must all work harder. Upgrade, upgrade, upgrade is a powerful mantra. Services, service, quality, is another.
The evidence of the work being done is everywhere, from the SWIFT gpi initiative for tracking payments and service level agreement for the same-day processing of international transfers (this means that we have a commitment to process operations within 24 hours and not on the best effort as before) to process optimisation with SWIFT’s Case Resolution to ensure the fast release of a payment.
The significance of scale
We do not make any immodest claims to perfection. Larger banks, by the very nature of their size and organisational complexity, are almost inevitably slower than microscopically small financial technology start-ups in certain respects. That lack of speed is, however, offset by a far higher degree of robustness and resilience in the building of industrial-scale solutions and in reach and liquidity when offering those solutions to end-customers.
Established major banks offer a breadth and depth of service provision that new arrivals will long struggle to match. There is evidence available to back this claim. The surge in the sale of British pounds in exchange for euro when the result of the UK’s vote to leave the European Union became known set a test for the liquidity of fintech firms.
The more recent collapse into bankruptcy and disgrace of Munich-based payment services provider Wirecard serves as another reminder that size, strength and reach remain important factors in the international correspondent banking equation. Post-Wirecard, fintech firms will surely face greater regulatory scrutiny and constraints.
Despite the undoubted advances in technology, stability, reputation and trust retain a certain value.
What happens now?
What, then, lies ahead? We expect to see continuing advances in the delivery of innovative solutions, including new ISO 20022-based formats that are expected to go live in 2022, more new services and the further enrichment of information within messages, driving up the rate of genuine straight-through-processing. The international correspondent banking network is an essential component of that future vision.
We expect to see SWIFT continuing to evolve to cope with the increase in the volume of low value cross-border payments, which has now become firmly established as the fastest-growing part of the payments market. Traditional banks need to work out how best to grow their share of that tranche of the market in a profitable way. And should the research projects that are currently being undertaken by central banks bring fully fledged digital currencies into existence alongside of, or in replacement of, traditional fiat currencies, we need to be ready.
Our industry has changed, and will continue to change, as it reacts appropriately to the lasting impact of Covid-19.
Banks, as well acting in the capacity of a trusted third party – bolstered by an increasingly enterprising SWIFT network – are well placed to remain at the centre of the international corporate payment industry, and even to explore successfully other segments with higher growth potential such as retail and SME payment needs.
We all need to change accordingly and never lose sight of the needs of the most important stakeholders in local, national and international systems alike: our clients.
We see a future full of promise as backstage activity injects new capabilities and vigour into international banking systems. We expect to see further concentration and a short-term sacrifice of revenue. The winners will be those who have the capacity and the strength of will to accept the heavy ongoing long-term investment that will need to be made if we are to continue anticipating and satisfying client needs.