More money crossing borders digitally. Fewer correspondent banks to move that money. And the hallmark of that money movement — a lack of transparency and speed. What might replace a clunky system in a world where payments are becoming ever more global?
The Bank for International Settlements (BIS) said in a recent report that the number of correspondent banks — where banks and financial institutions (and domestic payment systems) are linked together — slipped 3 percent in 2019 vs. 2018 and declined a significant 22 percent from 2011 to 2019.
The BIS found that decline is even more pronounced in emerging-market economies and smaller island nations. For instance, the number of active correspondent banks fell about 23 percent in advanced economies, but as much as 41 percent in developing nations.
A Reduction In The Number Of Corridors
Part of the reason for the decline is a 12 percent reduction in the overall number of corridors through which money moves.
But as the BIS wrote: “Despite the decline in the number of active correspondents and corridors, both the value and volume of cross-border payments processed via correspondent banking networks continued to grow in the last year, by roughly 5 percent and 4 percent respectively. Over the same period (2011-19), emerging-market economies saw an increase in the value of cross-border payments via correspondent banking about 10 times larger than that of advanced economies.”
Those payments are vital for economic growth, but are slower, more expensive and less transparent that would be seen with domestic payments, the bank said. The BIS added that such issues hurt financial inclusion — and we’d add that for corporates, cross-border payments can be a pain point and a cost center.
While 2020 data aren’t yet available, we’d also note that the pandemic and economic headwinds have hit remittances. The World Bank estimates that global remittances to low and moderate income countries could be down double-digit percentages to about $445 billion.
But there have been pockets of strength, such as in remittances to Mexico. And eventually, global volumes should rebound as economies re-emerge from lockdowns.
However, cross-border payments could become ever more challenging as the network shrinks and becomes more concentrated across fragmented messaging formats, wires and domestic infrastructure. Regulations are also becoming more stringent, not less — through, say, the USA Patriot Act and various Know Your Customer mandates.
The fragmented nature of correspondent banking founded on bilateral connections also means that payments to individuals or between enterprises can take days to settle. Some initiatives like SWIFT can improve the speed of cross border transactions, but they still have roots in the nostro/vostro relationships between banks. And as the BIS reports, the number of banks is declining.
Of course, the industry is rolling out instant-payment systems on the global stage, but these are still fragmented in terms of reach and messaging. Fortunately, there are a range of initiatives in play and tools being deployed to address those inefficiencies.
For example, Rohit Garg, executive vice president at Dubai-based Mashreq Bank, told PYMNTS in a recent interview that introducing a “local switch” that connects banks to other countries rather than just banks within one country can simplify payments.
And earlier this year, Harbour & Hills CEO Rahul Tripathi took note of the vagaries of correspondent banking. “I always say, ‘You cannot build your empire on somebody else's infrastructure,’” Tripathi told PYMNTS in April. “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.”
Harbour & Hills has launched a B2B payments gateway in China, announcing earlier this year the acquisition of payments processor Global Envoi. The gateway enables payments to be processed via connection to the country’s central clearing system.
Other entities such as Apifiny have looked at using blockchain to bypass the legacy ways of correspondent banking. The company recently announced that its Roxe settlement network would use blockchain to facilitate real-time clearing and settlement of cross-border transactions.
It remains to be seen which solutions finally change the correspondent banking process. But to quote a classic soul song, “a change is going to come.”