Reconciling inclusive banking, economic imperatives and compliance: the complex equation of Correspondent Banking
Correspondent banking has undergone a profound transformation in recent years. International payments are more technical and more regulated, and have become increasingly complex to operate, prompting some players to cut back on this market. However, this trend must not be allowed to hold back inclusive banking efforts, at the risk of cutting off part of the planet from access to international transactions...
Over the years, the correspondent banking business has undergone profound changes. In particular, the level of demands made by regulators on international payment operators has been significantly raised. In fact, banks have become the armed wing of the authorities in applying international sanctions programmes, detecting fraud and money laundering, and combating the financing of terrorism.
To meet these challenges without compromising their operational efficiency, correspondent banks have had to invest massively in their systems for detecting illicit transactions and automated processing of compliance alerts. Those who have not managed to find the right economic equation have chosen to abandon this activity, either totally or partially. This inevitably leads to market concentration.
Competition from new players in cross-border payments
At the same time, new players have taken an interest in the international payments chain, both on the front end (with fintechs working directly with customers) and in the underlying infrastructures (with operators such as Visa and Mastercard, for example, seeking to set up alternative networks to Swift).
Fintechs have also been able to flourish because, at one time, they were less regulated than banks, in a move by the public authorities to encourage competition for the benefit of consumers. However, these players are currently facing two difficulties: stricter regulation as they grow, and a less favourable economic and financial context for raising funds, especially as many of these new entrants are not profitable.
In the short to medium term, therefore, we are likely to see a sharp correction and, once again, consolidation in the sector, with a few survivors and many disappearances.
Increased drive for operational efficiency
Against this backdrop, the traditional commercial banks are trying to win back the international payments that their customers are now entrusting to the new entrants: it is up to their correspondent banks to provide them with the services and prices that will enable them to regain the commercial ground lost in recent years. But there is no miracle. Only correspondent banks that have succeeded in lowering their own costs will be able to offer their customer banks the means to fend off the onslaught of fintechs...
To improve their competitiveness and operational efficiency, correspondent banks are automating their processes using technologies such as machine learning and artificial intelligence, starting by standardising their data and organising its storage, access and use. But deploying these transformations requires heavy investment, which is only profitable if the volume of payments managed increases.
At the same time, the gradual introduction of the ISO 20022 standard, designed to further harmonise and enhance the structured messages exchanged between banks and exchange systems, is a useful prerequisite for making better use of the data.
Promoting inclusive banking, a duty for universal banks
This quest for operational efficiency and profitability – which may lead us to turn away from certain riskier geographical areas – must not, however, be at the expense of inclusive banking.
This point was made by Christine Lagarde in June 2017 at the FATF plenary conference when she was head of the IMF. At the time, she urged banks to remain measured in their “derisking” exercise, so as not to penalise emerging countries by cutting them off from the rest of the world. The risk? The development of alternative, less regulated systems to replace the traditional ones, which is not desirable for anyone.
The major players in Correspondent Banking naturally have a role to play in this area. It is also a way for these institutions to demonstrate their social responsibility, which is an integral part of their ESG goals.
Supporting players in emerging markets in developing their skills
Correspondent banks can (and must) guarantee fragile countries and low-income populations access to international transactions, while remaining within the framework set by regulators and their own risk appetite. They have a duty to be inclusive.
One of the levers on which to focus is education, through training courses and the sharing of best practice designed to increase the skills of the various players in the market, particularly those in jurisdictions deemed to be exposed. For the past 2 years, they have benefited from a training programme based on the “BAFT respondents’ playbook”, the fruit of cooperation between Societe Generale and BAFT to promote financial inclusion.
In short, Correspondent Banking players are working on a number of fronts to streamline and automate their processes and, ultimately, lower their costs. But this quest for profitability has a limit, that of financial inclusion and access for all to international trade.