The industry retrenches, redefining networks in response to client needs
For some time now, pundits have predicted the demise of correspondent banking. The move to a single European currency in 1999 meant that banks needed to maintain fewer correspondent banking relationships to service clients’ needs in the eurozone. The global financial crisis saw a spate of regulations (Basel III, intraday liquidity reporting) that ramped up client expectations of service from correspondents. New payment channels (mobile, PayPal) and currencies (bitcoin) were viewed as threats to the correspondent model.
And yet, notes Peter Jameson, managing director, co-head EMEA product management, Bank of America Merrill Lynch, the way people move money cross-border hasn’t fundamentally altered.
“Correspondent banking is the lifeblood of international trade, and although new technologies and innovation will drive improvements and efficiency, it remains the most practical and cost-effective way of moving money from A to B,” he says.
The fact is, banks still need correspondents, particularly in markets where they don’t have a direct presence. In markets like Africa, for example, global transaction services providers such as Bank of America Merrill Lynch have partnered with Standard Bank, a strong regional player in sub-Saharan Africa.
So while correspondent banking, which facilitates the movement of money and other financial services globally, is as relevant today as it has been for hundreds of years, the relationships that underpin it are undergoing unprecedented change.
“Transaction volumes are up [as are] scrutiny and regulatory pressure in terms of ensuring best practices and guarding against fraud or misuse of funds,” says Dominic Broom, head of treasury services, EMEA, at BNY Mellon. “This puts a heavy onus on transaction banks to manage that activity much more tightly.”
Broom says the ongoing cost of compliance, coupled with large fines on banks for noncompliance with anti-money-laundering and other regulations, have led institutions to rethink their approach.
Jameson notes that some banks are moving away from a correspondent role because of compliance and reputational risks. “The minimum cost of supporting a relationship has come to the fore. If revenue does not justify the fixed costs, I suspect we’ll see some banks continue to prune back their correspondent banking network,” he says. “It may not be cost- effective if they only have three small clients in a particular market, for example.”
Jameson believes the business will move toward a more risk-based pricing model. But at a time when other banks may be cutting back their reach, he says BofA Merrill is enhancing its presence.
“The overall trend is that many banks are looking at paring back or selling off parts of their network,” he says. “But I see us moving in the other direction. We’ve opened a branch in Switzerland, and we’re investing in new markets where our clients need us to support their growth.”
According to Broom, the era of the traditional correspondent bank is over.Just as traditional airlines have retrenched, so have banks. “What you’re seeing is that global banks are re-regionalizing. Correspondent banking is now increasingly based on deeper alliances, with banks routing activity among themselves in a manner akin to the airlines,” he says.
Previously, Broom says, there was no formal linking up of processes to help clients. “It was pretty disjointed and sometimes expensive if you got multiple charges along the passage of the transaction.”
Now, he says, “Clients want to see the passage of a transaction electronically in exactly the same way as they order something on their laptops."