Evolving Asia’s correspondent banking through innovation

The rise of correspondent banking has paved the way for more cross-border payments to take place, as it allows banks to access financial services in different jurisdictions across the globe. Correspondent banking relationships have proven especially important for local banks, which do not have overseas branches, as it acts as the bank’s representative. At the same time it has helped close the knowledge and technology gap for the smaller banks, which are not privy to international business access. These advantages are especially beneficial for highly dynamic regions such as Asia, where financial and technology adoption varies in each market.

Correspondent banking has been under pressure due to growing compliance requirements and from increasing service expectations of end customers. As the network for financial institutions worldwide to send and receive information on financial transactions securely, the Society for Worldwide Interbank Financial telecommunication (SWIFT) has been supporting the industry to keep compliant and evolve correspondent banking through new payment services, such as the global payments innovation (gpi) initiative launched in late 2015.

Compliance burden has led to network rationalisation by banks

Banks around the world have begun to reduce correspondent banking relationships, focusing particularly on high-risk jurisdictions. The reality speaks for itself: according to a report issued by the World Bank in November 2015, as much as 75% of the large international banks surveyed had reported a decline in their correspondent banking relationships.

Together with growing compliance burdens coupled with cost and liquidity constraints, banks have downsized and reassessed their correspondent banking relationships. This trend is known as de-risking. Without access to traditional banking channels, businesses – especially small and medium-sized ones, where cost remains a key deciding factor – may seek alternative channels for transaction. These alternative channels are less well regulated and may come with even higher risks. The scale of the issue might not have been immediately obvious when de-risking measures first began to take effect, but it could cause a domino effect which, in turn results in social, economic and political impacts.

SWIFT prepared an information paper, ‘Addressing the Unintended Consequences of De-risking’, published last July, which looks at what industry experts are saying about the impact of de-risking. The report cites a number of cases where de-risking can affect specific economies and industry sectors. For example, in the Caribbean, a number of citizens send their children to universities in the US, and the consequence of cutting off correspondent banking relationships would be to make it difficult to pay for fees and accommodation costs, creating a spiraling effect on the education sector.

Compliance costs have been increasing with changes in the regulatory landscape over the past decade, and correspondent banking has been immensely affected by a flood of new requirements. High on the list is know-your-customer (KYC) compliance.

 The lack of a single, standardised source for up-to-date KYC information has led to a high number of document changes – there are more than 1.3bn bilateral correspondent relationships across the industry. This is a massive administrative burden for banks each time a relationship is added, or when information needs to be updated in real time.

A secure, central repository of up-to-date due diligences and data of banks, which allows users to monitor, manage and grow their correspondent banking network, can be one of the solutions to address the issue. Such a shared platform will make it easier for banks around the world to access information on their counterparts, and will help ensure standards are in place through an alerting mechanism that informs banks of any document changes made to the financial institution’s data.

Another challenge to smaller banks within Asia is the increasing cost of remaining compliant to ever-increasing international regulations, particularly around sanctions. To obtain or maintain a correspondent relationship with US or European institutions will usually require a bank to have invested in complex payment and customer screening solutions. Maintaining these systems and feeding them with the various international sanction lists, can be an expensive, complicated task, with high operational risk. The emergence of utilities created by co-operatives can greatly reduce the cost of operating. These systems can help banks operate at international compliance standards. This is now a must if they wish to maintain their correspondent banking network.

Increasing demand from end customers

In today’s world, customers expect greater speed, transparency to costs, and traceability. For example, when sending a payment, customers would ideally like to know what is happening with the payment, its progress and when it has been received. Many countries, such as Singapore with Fast And Secure Transfers (FAST) and Australia with the New Payments Platform (NPP), have introduced – or are in the process of introducing – real-time domestic payment capabilities to deliver faster payment outcomes. In the cross-border context, this has not been the case with correspondent banking, as each bank has only been able to guarantee and share information on its own leg of the payment. In fact, in Asia cross-border payments can take many days to complete.

To improve the customer experience with cross-border payments, over 90 banks worldwide are collaborating to dramatically improve efficiency with greater speed, transparency and end-to-end tracking. This global initiative, gpi, will deliver a new service to address the end-customer needs, without compromising banks ‘abilities to meet their compliance obligations, market, credit and liquidity risk requirements.

One of the chief components of gpi is to provide end-to-end payments tracking. This will be managed by a “tracker database in the cloud”, securely hosted at SWIFT. The tracker allows banks to provide a DHL-like experience to their customers and provide certainty on payment timing and costs. At Sibos 2016 last autumn, it was announced that the gpi pilot phase had now been successfully completed and the industry is now preparing for a formal launch of the service.

Although gpi will make large improvements to the current payment experience, it is also intended as a long-term platform to support further global payments innovation and to make use of new technologies, including distributed ledger technology (DLT)-based services when the technology matures and firm business cases emerge.

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