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Act global, think local
A new approach:
Crossborder payments, settled locally could promote post-COVID trade
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
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
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.
of their corporate customers which, in turn, will help them gain market share.”
But there is no room for complacency. It added: “As global trade begins to return to pre-COVID levels, banks must be ready to support businesses in their bounce-back.” That means offering accessible banking solutions that remove friction from local and international trade, allowing them to expand to other markets, unhindered by costly crossborder payments.
In that way, the crossborder payments system can help small businesses and startups to thrive, post-COVID, and bolster international economies at a time when they are in greatest need.
The report also highlights examples of what such partnerships can achieve, including international money transfer app TransferWise’s collaboration with France’s second-largest bank, BPCE, enabling the group’s 15 million customers to send money outside the eurozone at TransferWise’s standard fees via the bank’s API-enabled app.
Yet Bækkel says willingness to adapt varies among banks, and rationalisation among bigger players is further squeezing mid-tier institutions’ ability to serve SMEs in particular..
“Small retail banks are being de-risked, or losing, via their global partners, more and more international capacity,” he says. “The large international banks are focussed on trimming their global networks and revamping themselves, establishing profitability and coming back into the market able to develop and deliver. Increasing profitability means losing costs, and costs only come off by losing customers.
“In the last 10 years, the global banks’ thresholds have been going up and up, in terms of how much a client relationship should return, and they’re even greater when they’re high-risk sectors like bank-to-bank or correspondent banking. So, those that are supposed to drive the train are actually trying to cut off the wagons at the end to make it lighter, and smaller banks realise they have to connect with a different organisation, and start talking to us about solutions where they no longer need global banks.
“Some banks are trying to address this, but a significant segment simply haven’t accepted what’s happening. It’s a major battle for all parties, especially those with legacy IT. Roughly 80 per cent of retail banks and 74 per cent of wholesale banks are dealing with the classic correspondent banking framework, but more and more wish to work with other parties like us.”
Banking Circle is an enabler to those that want it. Bækkel adds: “It’s very clear what the market wants: instant payments, quick resolution and effectiveness, while reflecting regulations and governance.
“Payments represent a big burden for SMEs and mid-market companies in particular, but really all the different verticals, and our experience of building quick solutions enables us to develop tailormade options for them.
“The big question banks need to ask themselves is ‘do we want to take the burden upon ourselves to change?’. Because, to meet ongoing requirements, they need flexible systems and to be as quick to market as new fintech players.
“That’s why a partnership between classic banks, with classic correspondent banking, and a new, smarter way of getting things done, is a must for the future.”
The commercial risks of not embracing this, are considerable, he says.
“Many banks have started offering digital solutions for their customers to pay domestically via smartphone apps. But SMEs are using more and more currencies and have wider international needs. Eighty-five per cent of European SMEs find the solutions banks are delivering unsatisfactorily and 43 per cent are not committed to using banks, and increasingly choosing alternative solutions.
“This is where I see the development coming – from the roots, from consumers and SMEs, and slowly evolving up through the chain until, eventually, the big corporates will start using these kinds of solutions. If banks cannot deliver the quality of service customers are looking for, they will find them elsewhere and fintechs will take over that market. Sixty per cent of banks in the UK, Benelux, and DACH areas are already considering working with other providers. That is a strong message.”
But, as he says, correspondent banking has road left to run, albeit an evolved version with workarounds like those Banking Circle is pioneering.
“We won’t see correspondent banking disappear; it just requires re-engineering and we need to find new ways of working together,” adds Bækkel. “But banks need to understand that taking five days for a payment that costs customers $30 is not acceptable anymore. They want it brought down to an instant, next-to-nothing level”
What, then, does the future hold? “Correspondent banking will be forced by consumers, SMEs and mid-market clients to modernise. Big banks will start to work with parties like us and, by combining our new, smart, virtual solutions, we will achieve ways of getting international access, based on local conditions,” says Bækkel.
“Our virtual solution uses a very old-fashioned, classic SWIFT network, providing access to local payments without being there locally. Payments are just data, and once we have packaged them up in a good, smooth way, and have the access to local clearing in whatever country, it gives a client sitting in one country access to payments locally in another. So, payments go from being crossborder, worst-case scenario five-day transactions, to, suddenly, a five-second settlement on the local clearing system, very cheaply. We will also see the ratio of crossborder currency payments go down, because more transactions can be settled domestically,” he adds.
“That’s what the banks and SWIFT really need to understand, and is the biggest differentiator in what we are doing today, compared to a classic correspondent banking solution. That is how banks and fintechs can work closely together, but it means banks teaming up around SWIFT, as the tool.
“The winners of this game will be those willing to listen to customers and change; listen to what is happening down at the grassroots, among SME clients and consumers. If we can make solutions available for those, it’s easier to also develop bespoke options for the higher verticals or sectors of banking. "We can win this together: the clients, the banks and, ultimately, the economy.”
