The global financial landscape has seen significant changes recently, with a marked reduction in correspondent banking relationships. This shift is driven by multiple factors, prompting a reevaluation and overhaul of traditional banking networks. The financial landscape worldwide has undergone substantial shifts over the past 20 years, particularly with a significant decline in correspondent banking relationships. Various factors have fueled this trend, leading to a thorough reassessment and transformation of the traditional banking network model. Despite the ongoing increase in global payment transaction values and volumes, the number of active correspondent banking relationships has steadily decreased over the past two decades, as banks seek to reduce their involvement with jurisdictions perceived as high-risk.
But what is driving this steady decline? Among the primary drivers of this trend are strict regulatory requirements, especially those related to anti-money laundering (AML) and counter-terrorist financing (CTF) compliance. Research from the Leibniz Centre for European Economic Research (ZEW) indicates that the costs associated with due diligence and financial crime compliance have diminished banks’ willingness to take on risk. The growing complexity of the regulatory environment has significantly heightened the pressure on financial institutions, leading to higher costs and greater operational risks linked to correspondent banking. As a result, many banks are reassessing their risk exposure and exploring alternative methods for handling cross-border payments.
And it doesn’t just stop there. Beyond regulatory challenges, financial institutions are increasingly burdened by potential reputational risk connected to correspondent banking activities. Fears of being linked to prohibited activities and the potential negative impact on their reputation have driven banks to be more selective in choosing correspondent partners. The imperative to preserve their public and reputational image and avoid negative publicity has resulted in a more cautious approach to these relationships, with some banks deciding to cut ties entirely to prevent any risk of reputational harm.
Additionally, financial institutions are facing rising financial risks often associated with correspondent banking. Challenges such as credit risk, liquidity risk, and operational risk are becoming more pronounced as banks operate in a more often unpredictable and volatile global financial climate. The rise of disruptive technologies and new payment systems adds complexity to this environment, presenting alternatives to conventional correspondent banking networks. While these innovations can sometimes offer prospects for greater efficiency and cost savings, they also bring new risks and hurdles for institutions adjusting to a transforming payments landscape.
The concentration of market power among a small number of major global banks intensifies the difficulties faced by smaller institutions or those in particular regions trying to access correspondent banking services. The trend of consolidating correspondent banking connections has heightened competition and diminished the choices available for institutions aiming to form or sustain these relationships. Consequently, smaller banks and those in emerging markets may struggle more to secure the correspondent banking services essential for conducting cross-border payments. When smaller and regional banks face difficulties in accessing correspondent services, it can limit their ability to participate in international transactions, affecting global trade and economic stability. They might therefore explore alternative strategies such as forming alliances or partnerships with other institutions to expand their reach.
However, it’s important to acknowledge a key metric: the value and volume of cross-border payments increased by 2 per cent and 7 per cent, respectively, in 2020, according to the Bank for International Settlements. Conversely, correspondent banking relationships declined by 4 per cent during the same period, amounting to a total reduction of 25 per cent from 2011 to 2020. As the financial sector addresses the effects of this decline, it is crucial for all parties to collaborate and devise innovative solutions to meet the evolving demands and challenges of cross-border payments. This is especially important as trade connections expand and business resiliency grows increasingly vital.
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
Emerging market economies are often the most affected by the decline in correspondent banking relationships, where access to global financial markets is crucial. Ensuring these economies have access to a wide range of currencies and a network of correspondents is essential. Moreover, the demand for currency access in emerging and frontier markets, particularly in areas under regulatory scrutiny, does not decline but increases. A strong network is vital for financial institutions to maintain stability, secure access, and enhance the efficiency of cross-border payment flows. By adopting a model that supports various currencies and operates across multiple countries, organizations can provide transparent, secure, and cost-effective solutions. As the traditional correspondent banking model evolves, this approach becomes even more critical, underscoring the need for mechanisms that offer financial institutions a single point of access to an extensive network, often facilitated by payment vendors. Such networks are crucial for streamlining cross-border transactions and improving financial inclusivity for regions and institutions struggling with the conventional correspondent banking system.
About the Author
Emily Corfield is the EMEA Head of Financial Institutions of Global Payments at StoneX. She currently has 9 years of experience working in the finance sector. Recognised externally for her expertise, she has received two awards that validate her commitment to delivering exceptional results – Women in Fintech Rising Star Award & Standout45 Power List. Emily’s focus lies in the lending sector, where I collaborate with a spectrum of Speciality Finance companies, Alternative Lenders, Card Network & Issuers and Loan Agents to provide tailored financial solutions that meet their unique needs. She also finds immense fulfilment in championing diversity, equity and inclusion initiatives. As the Regional Chair for JP Morgan’s sponsorship of Women in Payments, Emily aspires to bring together talented female professionals at a global scale. Additionally, she sits on the committee for JP Morgan’s EMEA Payments’ Women’s Network and spearheads the annual Women’s Network Takeover Week event, both of which empower and support women in finance.
