Time and again, correspondent banking has been reported dead, as technology has advanced and we have moved into a brave new world. Yet time and again, it has demonstrated its enduring value.
Today’s geopolitical and economic landscape could even have been designed to give correspondent banking a new suite of purposes. In this respect, there are several key underlying points to consider.
First is the imposition of international sanctions. With the inherent complexity that arises from reconciling the demands of competing legal jurisdictions, correspondent banking has become familiar, or even commonplace.
Second, the movement towards increased sovereignty in the payments industry and other specialist sectors is a trend that we have seen being reinforced and accelerated by the spread of Covid-19.
Third, the enhancement of the role of the euro as a globally used currency for world trade and as an international currency reserve has given new purpose to correspondent banking.
And going forward, the future distribution of central bank digital currencies and the continuing development of international commerce show no shortage of roles for correspondent bankers in the immediate future.
Profound change
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 to be done. Today 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 same-day processing of international transfers (which means we have a commitment to process operations within 24 hours and not on the best effort, as before) to process optimization 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 organizational 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.
Despite the undoubted advances in technology, stability, reputation and trust retain a certain value.
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 euros 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, a function that 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, the end of the Brexit transition period at midnight CET on December 31, 2020, and the growth in fashionableness of sustainability, in sentiment if not in actual fact.
Banks, as well as 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 customers.
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.