Cash management: Banks embrace new correspondent-banking model

By:
Duncan Kerr
Published on:

Partnerships can enable global reach; Clients helping to drive this development

Although some big banks are looking to scale back their vast correspondent-banking networks to reduce risks and strengthen controls, others are looking to expand their client coverage and geographic reach by striking up new banking partnerships.

Correspondent banking – the provision by banks of services such as payments, cash management and trade finance to their customers via other banks – has been the primary channel to deliver cross-border banking services for many years.

But the onslaught of new financial regulation and compliance procedures since the 2008 crisis is making it more difficult and expensive to maintain such relationship networks, forcing banks to reassess and redefine this business.

JPMorgan’s move, reported recently, to re-evaluate its global correspondent-banking business after its anti-money-laundering systems were found to be "inadequate" by the Office of the Comptroller of the Currency, is the most recent high-profile example of a global bank looking to scale back in this area.

The US bank has at least said that correspondent banking will remain a core business.

Others could follow the US bank’s lead, but some big banks are also looking to selectively increase the number of global banking partnerships they have. Lloyds Banking Group’s partnership with Standard Chartered in Asia, announced publicly last month, is a fresh example of this.

Under the agreement, Standard Chartered will help Lloyds directly issue import letters of credit locally in some 20 Asian markets, including China, India and Korea. Lloyds says this partnership forms part of a strategy to strengthen its "international partner network" that underpins its ambitions for growth.

 Paul Simpson, global head of transaction services at BAML
Paul Simpson, global head of transaction services at BAML
Banks including Barclays and Bank of America Merrill Lynch have been engaging in similar strategies. BAML, for example, has had partnerships with Garanti Bank in Turkey and Abu Dhabi Commercial Bank in the United Arab Emirates for some time. Paul Simpson, global head of transaction services at BAML, says that the "number of conversations" he is having around strategic partnerships with other banks is increasing.

Colin Nutt, vice-chairman, financial institutions, at Barclays Corporate, says that side by side with the bank’s strategy of deepening its transaction banking business in home markets it is broadening its geographical coverage and "select partnerships with other banks are an important part of enabling us to do that".

In a special report written by McKinsey & Company for Sibos 2013, the management consultant summed up just why partnerships between transaction banks, even if they compete in certain products and markets, can be beneficial.

"Global partnerships can enable an individual bank to comprehensively serve the geographic and functional needs of its clients in a cost-effective way," McKinsey said.

Indeed, with banking revenues under pressure, many banks are questioning whether they can continue to try to offer all services to all clients in all markets. Combined with that are rising costs related to new regulations. For example, new and greater requirements by regulators for banks to hold capital locally and keep data in-country have pushed up costs.

One of the answers to this challenge is greater collaboration between banks through these partnerships, in a similar way to those forged in other industries.

"The airline industry’s multicarrier alliances have improved scheduling options and reduced operating expenses; automotive manufacturers have invested in shared manufacturing facilities to reach scale and improve profitability in a given market," points out the McKinsey report.

It adds: "In trade services, multi-player alliances that integrate operations and technology architecture would allow banks (and non-bank providers) to combine geographical breadth and local depth."

As much as this development is being driven by the challenges the banks face, banks’ clients are also a driving force, according to PwC, the professional services and accounting firm.

In a recent report, PwC said that although corporates are looking to become more independent from banks in terms of finance and operations, they are increasingly looking for regional support from their banking partners.

"Indeed, the traditional, global, ‘one-bank-fits-all’ approach is rarely pursued by large corporates, due to the inherent concentration of financial, operational and counterparty risks this entails. They now tend to want regional support from their banking partners," the PwC report says.

Partnerships have been around for a long time, but bankers say what is new is the transparency and openness around them and the spirit of collaboration between transaction banks to work together for clients in the markets where they need access.

In the cut-throat world of investment banking, these partnerships simply would not happen for fear that clients would be stolen. Transaction bankers are fiercely competitive too, but their pragmatism is helping to forge a new approach to servicing their clients and to redefine the correspondent-banking model.