The evolution of Correspondent Banking –Building a more inclusive network to connect the world

Digital advancements, including AI and blockchain, have revolutionised banking processes, creating a favourable environment for young professionals seeking innovation and growth.

Much like the rest of the global economy, the world of correspondent banking has undergone rapid changes in recent years. Though we have started to witness the changing dynamics of correspondent banking relationships, we have yet to truly understand their longterm impacts. TFG heard from leaders at banking association BAFT, who have recently partnered with TFG for the launch of their correspondent banking hub.

To tackle the topic of the changing correspondent banking environment, best practices and what the future looks like, BAFT hosted a panel discussion with Aaron Zynczak, Vanessa Lin, Jean-Francoise Mazure, and Attia Salim at the 2023 BAFT Global Annual Meeting.

In the early days, expanding business opportunities dominated the discussions within correspondent banking. However, Jean-Francoise noted that there has been a shift in recent years. The emphasis has now pivoted towards providing high-quality service. Ensuring customer satisfaction and maintaining impeccable service standards have taken precedence, reflecting the industry’s commitment to meeting the evolving needs of clients.

But 2015 brought about major changes.

This era brought a heightened awareness of embedded risks and the necessity to bridge gaps compared to new market entrants. To stay competitive, industry players recognised the need for change and innovation. Mandatory industry changes such as GPI (Global Payment Innovation), ISO (International Organization for Standardization), and instant payments were identified as crucial areas to address.

However, this change isn’t all bad. With technology driving change, the industry has become more appealing, promising new opportunities and positive transformations. Digital advancements, including AI and blockchain, have revolutionised banking processes, creating a favourable environment for young professionals seeking innovation and growth.

Challenges ahead

Though technological advancements are useful in many relationships, they also create some problems. Correspondent banking must now adapt to mandatory industry changes while ensuring compliance, modernising legacy architecture, and maintaining operational efficiency are key priorities.

Vanessa Lin said, “The world has become a little bit more complex. And I think it’s become more complex for a few reasons. One is the breadth of service that one could offer has actually expanded in recent years. Cross border low value, real-time payment, cross border realtime, and also a lot of these infrastructures are built on new platforms, new technologies. Connectivity is beyond what we use in terms of Swift, a lot of these are APIs. So that adds the complexity, the breadth of service adds the complexity.”

These issues won’t be going away anytime soon either, as there will always be geopolitical strife, KYC issues, and technological advancements will always be happening.

But the problems don’t stop there, Attia Salim believes that tightening government regulation and the banking sector’s risk appetite has led to the rise of fintechs in the space, and ultimately, the changing dynamics of correspondent banking.

And these fintechs have an advantage: because they are not banks, they are not regulated. And according to Lin, something is off about this. Lin said, “If you’re a technology company or you’re a non-bank, it’s not about who you are, but the activities you do. And we’re performing the same activities. Smells and acts like a bank.”

An inclusive correspondent banking future

Lin sees that emerging markets pose challenges for banks due to high-risk jurisdictions. While commercial considerations can be addressed through digitisation and process efficiency, the main obstacle lies in risk appetite. Collaboration between regulators and the establishment of a common framework are crucial to navigating these markets. While there won’t be an answer to solve all the problems, the panellists believe increased communication can solve many of the problems faced by all parties.

In order for correspondent banking to survive, let alone thrive, into the future, governments need to increase communication and there needs to be a concerted effort to create a unified and interoperable system for bankers. SWIFT has served the community well in the past, but the panellists agreed that we need a better and more robust system to usher in a new era of correspondent banking.

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