China is a notoriously challenging jurisdiction for foreign payment service providers to operate as the nation prioritizes local industry leaders. Gradually, however, and with a focus on expanding access to digital financial services, China has begun to open up its market to non-Chinese PSPs, with PayPal having recently become the first foreign PSP to launch in the country through its acquisition of China-based GoPay, completed late last year.
While China continues to slowly open up its financial services market to foreign participants to drive competition in areas like mobile payments and banking, when it comes to B2B payments, the market remains dominated by Chinese traditional banks. For foreign payment service providers looking to facilitate cross-border B2B payments into China, the correspondent banking model often remains the only route to facilitate clearing and settlement.
It's not without its drawbacks, however.
In addition to dwindling correspondent banking relationships, this model to move funds across borders limits visibility into a payment's progress, and often means lengthy transaction times.
According to Harbour & Hills CEO Rahul Tripathi, relying on correspondent banking relationships can also create volatility and service disruptions.
"I always say, 'You cannot build your empire on somebody else's infrastructure,'" Tripathi recently told PYMNTS. "Getting correspondent bank accounts is the biggest challenge every payment service provider is facing. If you have an account, you never know if the bank may decide to change internal policies and shut you down."
The M&A Route
China's gradual easing of barriers to foreign financial services players means banks and PSPs have tried their luck at applying for licenses from the People's Bank of China, though approval is far from a guarantee.
"With these bigger banks, we have been rejected many times," Tripathi said of Harbour & Hills' previous attempts to secure a correspondent bank account in China.
Instead, like PayPal, Harbour & Hills recently went the M&A route to launch its B2B payments gateway in China, announcing earlier this month the acquisition of payments processor Global Envoi. The deal enables Harbour & Hills to process payments across a variety of currencies to all major banks in China via the nation's central clearing system, thanks to Global Envoi's Metrobank China partnership.
The takeover means the company does not have to depend on the correspondent banking model to clear cross-border transactions.
"We're not dependent on those correspondent banks for this particular corridor," explained Tripathi. "We can clear it locally."
While this elevates efficiency and reliability for Harbour & Hills, he also highlighted the benefits to corporate end users of this capability.
Timing And Control
One of the most striking benefits of shifting away from the correspondent banking model and retaining the payment clearing process independently is the speed of clearing transactions, said Tripathi.
With traditional correspondent banking, it can take 24 hours for funds to reach a beneficiary's account, and as those funds move, there is limited visibility into where the money is at any point in time. Local clearing enables the company to complete the process within a matter of minutes.
While the acceleration of payments can be beneficial to end users, in B2B payments, it's not necessarily the speed of the transaction that is so valuable, but rather the control with which Harbour & Hills and corporate payers can gain when moving money to a beneficiary in China. Defining one's own routing rules provides greater visibility and liquidity management to corporates, said Tripathi, allowing businesses to decide when and how they want the money to move.
With China such a vital exporting market to the world's B2B trading ecosystem, the ability to move funds quickly means the ability to move goods quickly and more frequently – a vital function in today's market.
Correspondent Banking Disruption
Strict financial regulations aren't the only factor driving PSPs and other financial service providers to turn to M&A to enter into new markets. Greater control and faster payments capabilities are motivating firms like Harbour & Hills to strike acquisitions or open up subsidiaries in other markets around the world, rather than relying on correspondent banking to move money.
But while some innovators are turning to various routing channels and infrastructure like blockchain to bypass the correspondent banking network altogether, Tripathi predicted that as the cross-border B2B payments arena evolves, new innovations will continue to focus on improving the existing model.
He highlighted emerging innovations in areas like anti-money laundering (AML), risk analysis and routing that can introduce greater efficiency and security within the framework.
"RegTech will be especially important in the B2B space, given that B2B payments volumes are huge, and are considered even riskier by banking partners," Tripathi added, noting that faster transaction timing and lower fees will be driving forces of competition in global B2B payments, via correspondent banking or otherwise.
Correspondent bank relationships remain a "critical backbone of the entire global payments ecosystem," he said.