As the cross-border payments industry contends with de-banking and stringent regulations, can emerging technologies and alternative solutions pave the way for a more efficient and accessible global payments landscape?
The cross-border payments industry is facing a growing challenge of de-banking and de-risking. Stringent regulations have made banks more risk-averse, leading to declining correspondent banking relationships.
This has created an impasse in the industry, as banks struggle to balance compliance requirements with the need to facilitate cross-border transactions. Inefficient core banking systems, a lack of transparency, and the general complexity of the cross-border payments process have further exacerbated the problem. The impact of money laundering on the correspondent banking model is profound, creating significant barriers for smaller banks and electronic money institutions (EMIs). Gary Palmer, founder and CEO of PayAll, highlights how these challenges are exacerbated by stringent regulations and the decline in correspondent banking relationships:
“For banks and regulators, it’s important to note that up to 5% of the global GDP is being laundered through banks. This high level of money laundering contributes to the difficulties smaller banks and EMIs encounter in establishing correspondent banking relationships. In fact, one of the main reasons some banks struggle in this regard is the concern about money laundering. Furthermore, there has been a 25% decrease in correspondent banks, indicating that the problem is worsening.”
The decline in correspondent banks has made it more difficult for certain institutions, such as e-money providers and payment service providers, to access the global financial system and move money internationally. This has reduced the efficiency and accessibility of cross-border payments, leading to slower transaction times, higher costs, and more barriers for certain customers and businesses trying to engage in international financial activities.
The need for more transparency, outdated technology, and complex compliance requirements in the correspondent banking model has exacerbated these challenges, highlighting the need for new solutions and approaches to improve the cross-border payments landscape.
Correspondent banking relationships play a crucial role in the cross-border payments industry, and various issues have arisen in this model. While crucial, the longstanding correspondent banking model is increasingly seen as outdated and inefficient. Palmer suggests that the industry must embrace technological innovations to overcome these challenges: “Software has redefined and transformed our lives, but we struggle to wrap our minds around how it can transform the banking industry. Software can play a big role in elevating our approach to risk management and making the overall cross-border payments experience better, more efficient, and more transparent.”
The correspondent banking model is being challenged due to several issues, including stringent regulations and risk-averse policies of banks, making it difficult for some institutions like EMIs and payment service providers to access correspondent banking services. There is also a lack of transparency in transactions and inefficiencies in core banking systems, creating a ‘mess’ in the cross-border payments process. Outdated software and technology are contributing to the problem, with 48% of the issue stemming from these outdated banking systems.
To address these challenges, new paradigms and solutions that can bring more transparency, safety, and efficiency to the cross-border payments process are needed. This includes exploring alternative models and technologies, such as software solutions that can enhance risk management, provide more data and transparency, and streamline the correspondent banking relationship.
New payment platforms and networks, like those from Visa and Mastercard, that bypass the traditional correspondent banking model and offer faster, more cost-effective cross-border payment services are also emerging. Additionally, regulatory changes that enable more direct access to clearing and settlement for non-bank financial institutions could reduce reliance on the correspondent banking network.
Software can play a big role in elevating our approach to risk management and making the overall cross-border payments experience better, more efficient, and more transparent.
Aside from software, several other new technologies, platforms, and approaches aim to improve cross-border payments. Direct access to clearing is one of these. Regulative efforts are underway to provide more direct access to clearing and settlement systems for non-bank financial institutions and payment service providers. This could help bypass the traditional correspondent banking network and enable faster, more efficient cross-border payments.
Palmer further elaborates on the importance of integrating new practices and technologies into correspondent banking, highlighting how these innovations can empower institutions to deliver better services: “The key is bringing transparency, safety, and efficiency to correspondent banking through software and new practices. This can empower banks, EMIs, and payment institutions to deliver great cross-border payment services to their customers in a way that manages risk effectively.”
Initiatives from large payment networks like MasterCard’s Cross Border Services, which allows financial institutions to access MasterCard’s infrastructure for real-time bank transfers, foreign currency conversion, and global liquidity, are making a difference. This eliminates the need for financial institutions to manage foreign currency and settlement themselves, streamlining the cross-border payments process.
Emerging alternatives and innovations in cross-border payments have the potential to significantly benefit speed, cost, transparency, and inclusivity. New technologies, platforms, and approaches aim to improve the efficiency and accessibility of international financial transactions.
For example, some solutions enable faster settlement times, with payments processed in minutes or hours rather than days. This can greatly improve the speed of cross-border transactions. Additionally, these innovations reduce the need for foreign currency conversions and pre-funded accounts, which can lower the overall costs associated with cross-border payments.
In terms of transparency, the new technologies provide more visibility and data on the payment process, allowing financial institutions and fintechs to manage risk better and comply with regulations. This increased transparency can help build trust and confidence in the cross-border payments ecosystem.
Furthermore, these innovations expand access to cross-border payments services beyond traditional banks, enabling more businesses and individuals to participate in the global financial system. This increased inclusivity can support the growth and development of international trade and commerce.
Significant regulatory and compliance challenges still need to be addressed in the cross-border payments industry. Navigating the maze of differing national regulations is one of the most complex challenges in cross-border payments. Navigating the regulatory landscape is one of the most complex challenges in cross-border payments, as Livia Benisty, chief external affairs officer at Banking Circle Group, points out to Payment Review: “It’s unlikely that any form of global authority could ever create and enforce a universal standard across the board. It just won’t work.”
She stresses the importance of transparency and accountability, stating that financial institutions need to be very clear and upfront with their clients about who is managing their funds and under what licences.
The transition from traditional banking models to innovative fund transfer solutions is a significant challenge for the industry. Eoin Cumiskey, director of payments strategy and innovation at Mastercard, explains the importance of maintaining trust and security during this shift: “The traditional funded banking model has legitimacy from its legacy and is embedded into the operating models and control frameworks of the banks and regulators. Managing the transition of this model into a new landscape with competing innovative fund transfer solutions whilst maintaining consumer preferences in terms of trust and security will be one of the key focuses for the payments industry over the coming years.”
Maintaining transparency and building strong relationships with correspondent banks is crucial, as they are the gatekeepers to the financial system. Institutions must invest heavily in robust AML and KYC processes, find ways to share data, and demonstrate their risk management capabilities to correspondent partners.
Some are also exploring ways to bypass the correspondent banking model entirely, such as by gaining direct access to clearing systems or leveraging new payment platforms. However, as Palmer notes, these alternatives still face regulatory hurdles and require careful consideration of sovereignty issues. Overall, financial players must adapt their practices to balance regulatory demands with the need to provide efficient, accessible cross-border payment services.
It’s unlikely that any form of global authority could ever create and enforce a universal standard across the board.
The de-banking and de-risking issues plaguing the cross-border payments industry pose significant challenges to the efficiency and accessibility of international financial transactions.
As the traditional correspondent banking model struggles with stringent regulations, lack of transparency, and outdated technology, there is a clear need for innovative solutions to address these problems.
Emerging alternatives such as software platforms, direct access to clearing, and initiatives from major payment networks offer promising avenues to improve cross-border payments’ speed, cost, transparency, and inclusivity. However, regulatory complexities and compliance hurdles still need to be navigated.
Ultimately, finding effective solutions to the de-banking dilemma is crucial to supporting the continued growth and accessibility of the crossborder payments ecosystem, a vital component of the global financial system. Overcoming these challenges will unlock new opportunities for businesses and individuals to engage in seamless international transactions.
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