COMMENTARY: CORRESPONDENT BANKING A new approach: Crossborder payments, settled locally could promote post-COVID trade
Act global, think local Banking Circle’s Head of Institutional Banking, Jakob Bækkel, doesn’t believe correspondent banking as a means of crossborder settlement is redundant. But it desperately needs re-engineering
With the COVID-fuelled e-commerce explosion and year-on-year rises in global transactions expected to resume as the world regains its feet, better solutions to international settlement is no longer just desirable, it’s imperative for global economic recovery. Yet many of the worldwide banks currently providing the rails for such payments, keeling under the weight of legacy systems, processing costs and regulation, are struggling to live up to this increasingly urgent need. Does this put the traditional correspondent banking, that underpins the majority of crossborder transactions, in jeopardy? Or has news of its death been much exaggerated? Global banking services provider Banking Circle’s head of institutional banking, Jakob Bækkel, doesn’t think correspondent banking as a means of
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crossborder settlement is on the way out – but it’s certainly no longer the only kid on the block. And banks’ failure to fully acknowledge that and reform global payments in response – notwithstanding SWIFT’s efforts – has forced SMEs to look elsewhere for solutions. Alternative providers have been only too happy to oblige. Bringing correspondent banking back from the brink will require some serious self-criticism by banks, and a willingness to innovate and partner with others to create a future-proof new hybrid model, believes Bækkel. International payments have typically been settled via a combination of correspondent banking, direct central bank clearing and global processing network SWIFT. However, although SWIFT gpi has dramatically improved payment speed, transparency and security, users are increasingly unwilling to stomach the hefty charges associated with traditional methods, much less not-uncommon, five-day turnaround times, frequent hiccups, and the fact that they often have no idea where their payments are on their journey from A to B. Processing crossborder payments still costs banks dearly, around US $25-30 per transaction, according to McKinsey, against a backdrop of increasing competition and pricing pressure from fintech entrants.
Some major banks have already decided to derisk by pulling out of correspondent banking geographies, at a time when businesses and consumers need to transact abroad more than ever. Bækkel believes there are workarounds to sluggish and costly correspondent banking arrangements – and one of them is virtual IBAN (international bank account number), which allow customers to settle international payments locally, quicker and at minimal cost. It’s one of the services that Banking Circle offers its B2B users. For its recent white paper, Better Business Banking: Collaborating For Success, it canvassed 300 European C-suite banking executives for views on what was stopping them from delivering better services to corporate customers, including crossborder payments. It discovered cost and internal infrastructures are major blockers, even though 70 per cent of those surveyed considered crossborder payment provision to be a core banking service. Many saw partnerships as key way to resolve such issues. The report found half already have partnerships or plan to work with an external provider imminently, while another third had partnerships on the agenda for the next 12 months. “Collaboration is no longer a novelty,” it said. “The new wave of specialist partners… can play a significant role in helping banks to exceed the expectations www.fintechf.com
