Correspondent banking: Transfer window closing

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Cutting ties with money transfer companies has deeper implications than many big banks are prepared to admit.

For countless countries in the emerging markets, remittances are a boon to the economy. In some cases, they are a lifeline.

For that reason, the United Nations included in its Sustainable Development Goals – a set of aspirational targets to meet by 2030 – the reduction of transaction costs on migrant remittances. The UN wants them to cost less than 3%, and for remittance corridors with costs higher than 5% to disappear altogether.

The looming crisis in correspondent banking could crush those ambitions. 

Development activists have noted with growing alarm that many large western banks have cut ties with money transfer companies in some of the poorest parts of the world, on the often unfounded assumption those firms may fall foul of money-laundering and terrorism-finance rules.

There is a glaring irony in having big banks, charged with everything from laundering money for Mexican drug cartels to dealing with state sponsors of terrorism, accuse these small companies of being perilous business partners.

More importantly, money-transfer companies depend on these banking ties. Without them, they risk losing the ability to conduct international transfers, reducing the number of transfer firms in business and driving up the cost of individual transfers. 

Duopoly

Already, Western Union and MoneyGram have a near duopoly over parts of Africa. This is especially worrisome for countries like Lesotho, Liberia and Gambia, where the reliance on remittances is high – in Lesotho, they are equivalent to a fifth of the country’s GDP. To take but one example of how expensive remittance transfers can be, those from South Africa to Botswana already cost more than 20%, according to the World Bank.

If rivals to Western Union and MoneyGram die out, migrants who cannot afford to pay the fees for the services of those two firms may increasingly resort to unregulated or illegal channels – anything from mailing cash to stashing it in their socks on trips home. That would mean financial institutions’ ‘de-risking’ policies would, absurdly, have resulted in far riskier methods of moving money to poorer parts of world.

If the trend is not reversed, there is a distinct possibility that, contrary to UN plans, remittances will cost more rather than less by 2030. If that happens, banks – and their regulators – should bear much of the blame.