Correspondent banking searching for modernization
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Correspondent banking searching for modernization

Correspondent banking is becoming a prohibitively expensive business for lenders, given onerous regulations, but new initiatives are in the offing to reduce costs, including data-sharing and even blockchain.

The rising costs and heightened operational risk of correspondent banking has seen some of the largest global banks retrench from high-risk markets in Latin America and Africa. 

Banks are now exploring alternatives to reduce costs and conform to beefed-up know-your-customer (KYC) and due-diligence requirements.

Shahrokh Moinian-160x186

Shahrokh Moinian,

Shahrokh Moinian, managing director and head of global solutions for trade finance and cash management for corporates at Deutsche Bank, says: “Many of these markets are regarded as high risk already and to have banks pulling out will exacerbate that image." Tier-two banks and local lenders are now filling the payments gap.

Robert McKay, executive vice-president product at Accuity, a transaction-banking consultancy, says: “If a global bank exits a relationship with a downstream correspondent, it’s rare to see another global bank picking up that business. 

"Rather, it is the next tier down, the super-regional banks, which are looking to grow their portfolio who get into that position. They’re looking for stronger participation at local level and taking the role once dominated by the western-based money-centre banks.”

Lenders are assessing how to modify their practices to keep costs to a minimum. 

PwC’s report 'Correspondence course: charting a future for US-dollar clearing and correspondent banking through analytics', points to the greater need for automation and use of data analysis, stating increased levels of collaboration between banks would also reduce the burden of KYC. 

PwC calls for model-based approaches to KYC to pool resources, as seen with the Swift KYC Registry and the Markit/Genpact KYC service, to reduce costs and streamline the procedures.

Accuity's McKay says: “There is currently quite a bit of attention on the possibilities that a utilities model can lend for driving KYC costs down. Ultimately, to be successful, a utility must have reach and a depth of information that would be worthwhile to the global bank and ultimately represent information they did not currently possess.”

Transferring funds

The arrival of new banks and shifting KYC patterns have not eased the problems around how funds are transferred. Swift has stepped up by devising a service to improve cross-border transactions. The global payments innovation initiative will be implemented at the start of 2016, when Swift will announce the names of the banks involved.

The key features of the initiative include the ability to implement the same-day use of funds and to bring about greater transparency on the amount transferred, with clarity on fees. Banks will also have a clear indication of when to expect payments to arrive.

Blockchain has also emerged as a potential solution. 

McKay says: “We’re at the most intriguing point in history for interbank correspondence and regulatory pressures. Blockchain offers the possibility of completely changing the narrative on correspondent banking, even making it obsolete.”

However, there is still a lot to assess before it is considered as a viable option. 

Deutsche’s Moinian says: “The banking industry is in the early stages of assessing the potential of blockchain. We will have to see in which product and process areas it will start to unfold, based on concrete use cases, of which none are public today. Moving to blockchain would require new investments, and emerging markets may not want to move until it becomes standard.”

Swift has said it will further explore using blockchain as part of the global payments innovation initiative.

Robert McKay-160x186

Robert McKay, Accuity

Although moving to blockchain is a possibility, McKay says it would likely be a number of years before it gained substantial global traction. “There needs to be enough participating institutions in blockchain for it to achieve critical mass to be viable," he says. "Moving money or assets only works if both parties are in the network.

"The legal and the regulatory frameworks are still lagging. It has not been identified what technology like blockchain could mean to performing robust KYC and regulatory checks, nor has anyone tackled the issues around revocation or recovery when transaction disputes arise.”

Moinian says: “I believe we will see first commercial use cases of blockchain technology in 12 to 24 months in the developed markets. But I don’t believe that this is something which in the next five years will be dominating or taking significant shape across emerging markets.”

He adds that while some of the global banks have been exploring the possibility of blockchain, emerging markets might not have started to consider the potential.

“Through internal tests we now have a good view on the potential of the technology – tackling legal and regulatory hurdles are part of what we as an industry need to do," says Moinian.

"Even five years ago a number of the emerging-market banks were not even using Swift or able to offer Swift for corporate capabilities. It is a long way off a technology like blockchain being used ahead of traditional correspondent banking or Swift’s systems.” 

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