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Complementary or competitive?

The future of correspondent banking is being called into question

In light of the proliferation of instant payments and fintech advancements, correspondent banking may need to alter their traditional business model if they are to continue to prosper, according to a SIBOS 2017 panel discussion led by RBC’s Lisa Lansdowne-Higgins, vice president, business deposits and treasury solutions.1 Lansdowne-Higgins and the panel explored the challenges and opportunities facing payments market infrastructures and correspondent banks in instant international payments.

The proliferation of instant payments

The transition towards real-time payments is a global trend, driven by increased retail and wholesale client demand for more rapid services. The UK led the way in domestic real-time payments with its Faster Payments Service in 2008, which prompted a number of other major markets to follow suit.1 For example, in 2014, Singapore launched Fast and Secure Transfers (FAST) allowing for instantaneous money transfers between participating banks.2

Key insights

  • Real-time cross-border payments will pose a number of challenges to the correspondent banking model, but efforts such as those by SWIFT are being made to meet these challenges. Correspondent banking may need to adapt its traditional business model to continue to prosper.
  • Fintech, including blockchain, could disrupt the correspondent banking processes, but SIBOS attendees are skeptical that the technology will disintermediate traditional providers altogether.

Meanwhile, Australia is set to go live with its New Payments Platform (NPP), a scheme that “extends well beyond mobile payments to include consumers, corporates and public institutions, touching practically every part of the economy.”3 In the US, The Clearing House’s Real Time Payments (RTP) system, which is based on ISO2022, is gradually being rolled out nationwide, enabling US consumers and businesses to send and receive real-time payments from their existing accounts.4

In November 2017, the European Union will launch its own instant payments initiative, which will allow for real-time money transfers within the Single Euro Payments Area (SEPA). All these programs have been praised by end users, and it is only a matter of time before they begin to interoperate with each other to facilitate real-time cross-border payments. This development could pose a number of challenges for the existing correspondent banking landscape.

Correspondent banks need to transform

For many years, correspondent banks have generated revenues by supporting cross-border payments for customers. However, there are some concerns among industry stakeholders that the sector may be reacting too slowly in an era of significant market change. Challenges with legacy technology and traditional development cultures within banks may serve as barriers to progression in the industry. As a result, many banks will have to transform to be at the forefront on global cross-border real-time payments.

Safety and soundness are a top priority for the industry

The emergence of real-time cross-border payments may also create pressure on correspondent banks when it comes to anti-money laundering (AML) and know-your-customer (KYC) activities, as providers will have less time to verify the legitimacy of transactions and those executing them. AML/KYC failings can result in significant fines. Safety and soundness are a top priority for the industry and to protect against such threats, correspondent banks will have to ensure they adopt fast, standardized AML/KYC processes when enabling client access to real-time cross-border payments. Collaboration and engagement between banks and new providers are key areas being explored and considered.

The future for real-time cross-border payments

Industry-wide initiatives to ensure that the correspondent banking world evolves with change are underway

A SIBOS poll found that 42 percent of respondents believed correspondent banks would be capable of managing the transition to real-time cross-border payments, but acknowledged that serious structural changes to existing practices and processes have to be undertaken first. Industry-wide initiatives to ensure that the correspondent banking world evolves with change are underway.

In collaboration with 110 international transaction banks, and across 200+ countries, SWIFT has made significant progress towards simplifying and hastening real-time cross-border payments through its Global Payments Innovation (GPI), which launched in 2016. The GPI Tracker provides enhanced transparency, enabling more accurate reconciliations, liquidity optimization, and reduced FX exposures through its same-day processing of funds in the beneficiary's time zone.5 As GPI Tracker is available through an open application programming interface, it is “compatible with proprietary banking systems worldwide.”6 Accordingly, systems like the GPI Tracker should aid banks in meeting their obligations when cross-border instant payments become more widespread.

Too little, too late?

There is still debate as to whether the GPI is sufficient to ward off disintermediation of correspondent banks by fintechs, particularly with the incoming Payment Services Directive II (PSD2), which will permit open account access, giving consumers the ability to use non-bank providers to facilitate transactions.7 Some banks may feel they are at a competitive disadvantage as fintech may be subject to less regulatory oversight and scrutiny. However, attendees at SIBOS felt fintech disruption of correspondent banks’ dominance was unlikely, with just 16 percent believing an innovative market player would disintermediate the status quo.

A discussion around distributed ledgers and blockchain capabilities focused on long-term strategies supporting digital identity and identification, which were noted as key areas of opportunity, versus focusing on blockchain as disrupting global payment capabilities. While blockchain is unlikely to completely disintermediate correspondent banks, it is likely that collaboration between traditional providers and blockchain companies will emerge as market players seek to introduce efficiencies in the cross-border payments process.

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  1. SIBOS (October 16, 2017) Complementary or competitive? The role of payments market infrastructures and correspondent banks in instant international payments
  2. SWIFT – February 14, 2017- Real-time payments closer to reality in Australia
  3. Ibid.
  4. Ibid.
  5. FX–MM – May 5, 2017 – Why Challenging times lie ahead for real-time cross-border payments
  6. SWIFT – May 23, 2017 – SWIFT unveils industry's first ever cross-border payments tracker
  7. Ibid. FX-MM