Bridging the gap: Reinventing global correspondence in emerging markets amidst the decline of traditional banking relationships

by Emily Corfield, EMEA head of financial institution sales - global payments, StoneX

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In recent years, the global financial landscape has undergone a notable transformation, characterised by a discernible decline in correspondent banking relationships. Several different factors highlight this shift, each contributing to the reassessment and restructuring of traditional banking networks

Stringent regulatory requirements, particularly in the realm of anti-money laundering and counter-terrorist financing compliance, are foremost among these factors. The Leibniz Centre for European Economic Research (ZEW) also revealed that due diligence costs and financial crime compliance reduce risk appetite. The increasingly complex regulatory landscape has placed a significant burden on financial institutions, driving up costs and heightening operational risks associated with correspondent banking relationships. Consequently, many banks have found it necessary to reevaluate their exposure to these risks and consider alternative avenues for conducting cross-border transactions.

In addition to regulatory pressures, financial institutions face mounting reputational risks linked to correspondent banking activities. Concerns about potential ties to illicit activities and the reputational fallout associated with such associations have prompted banks to exercise greater caution in their selection of correspondent partners. The need to protect their brand image and safeguard against adverse publicity has led to a more discerning approach to correspondent banking relationships, with some institutions opting to sever ties altogether to mitigate reputational damage.

Furthermore, financial institutions contend with escalating financial risks inherent in correspondent banking. Credit risk, liquidity risk, and operational risk pose significant challenges to banks operating in an increasingly volatile global financial environment. The emergence of disruptive technologies and alternative payment systems further complicates the landscape, offering potential alternatives to traditional correspondent banking networks. While these technologies present opportunities for increased efficiency and reduced costs, they also introduce new risks and challenges for financial institutions navigating an evolving payments ecosystem.

Market concentration among a limited number of global banks exacerbates challenges for smaller institutions or those in specific regions seeking access to correspondent banking services. Consolidating correspondent banking relationships has led to increased competition and reduced options for institutions seeking to establish or maintain correspondent relationships. As a result, smaller banks and those operating in emerging markets may find it increasingly difficult to access the correspondent banking services necessary to facilitate cross-border transactions.

 Emily Corfield, EMEA head of financial institution sales – global payments, StoneX

According to the Bank for International Settlements (BIS), the value and volume of cross-border payments increased by 2% and 7%, respectively, in 2020, while correspondent banking relationships contracted by 4% during the same period, resulting in a total decline of 25% from 2011 to 2020. As the international community grapples with the ramifications of this decline, stakeholders need to collaborate and explore innovative solutions to address the evolving needs of cross-border payments and financial transactions.

The reduction in correspondent banking relationships carries significant consequences, particularly for developing economies where access to global financial markets is critical. This challenge underscores the importance of having a broad network of global correspondents that can facilitate access to currencies in emerging markets, especially in areas faced with regulatory hurdles. A well-connected network is crucial for financial institutions aiming to ensure financial stability and improve the efficiency of cross-border payment flows. By focusing on a model that supports a wide range of currencies and extends across numerous countries, organisations can offer transparent, secure, and cost-effective solutions. This approach is increasingly vital as the traditional correspondent banking model evolves, highlighting the need for mechanisms that can provide financial institutions with a single point of access to an extensive network. Such networks are key in streamlining cross-border transactions and enhancing financial inclusivity for regions and institutions that encounter difficulties with the conventional correspondent banking system.

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