While there has been a retreat from international relationships, we have seen a similar pattern emerge in the correspondent banking world before, albeit for different reasons.
" All players must decide whether they are committed to the cross-border payments business or not.
John Campbell, Head of Transaction Banking International & Financial Institutions, ANZ
In the correspondent banking sector - which comprises networks of banks which ensure payments can find their way to any bank in the world – financial services groups have had to decide whether to be a global or a local player.
However, in the case of cross-border payments, it’s not politics or the nature of free trade agreements which has driven the question but rather the impact of an increasing regulatory and compliance burden on the banking sector.
A 2016 report by the International Monetary Fund notes the number of correspondent banking relationships has been declining since the financial crisis. This means fewer pathways for payments to travel across the world. In some cases countries could be entirely cut off from receiving international payments altogether.
The correspondent banking network is crucial to facilitate the flow of funds around the globe but the existing model is under pressure from rising regulatory, compliance and operational costs – a scenario forcing banks to decide whether they want to be international or domestic players when it comes to payments.
The challenges in correspondent banking have been well documented: increased regulatory and compliance costs, along with the threat (and issuing) of massive fines, mean banks have had to re-assess and make tough decisions relating to their correspondent banking activities including exiting long-standing relationships.
For some banks, the risk-return trade-off and cost of offering cross-border payments in certain jurisdictions has become just too prohibitive.
The issue, however, is not just about which regions to retreat from and where to play; the question is more fundamental than that. Banks ultimately have to decide whether they want to remain in the business of cross-border payments or not.
Regulators have made an example of banks that have failed to comply with regulations or their duty of care, especially as it relates to preventing financial crime and complying with sanctions restrictions. And when fines run into the billions of dollars, it is natural for banks to reconsider whether the risk-reward continues to make sense.
For treasurers, especially those who require access to harder or higher-risk jurisdictions, this means their banking relationships have changed as managing payments into different countries is now more likely to involve dealing with a handful of regional banks rather than a single global player.
Seemingly, the days of a large global bank being all things to all people are a thing of the past. Banks that operate in multiple jurisdictions or are domiciled in highly regulated markets tend, or are required by their home regulator, to take the ‘regulatory high ground’ and choose the strictest common denominator for the standards they apply across their network.
If regulations are particularly strict in one country, this standard will be applied to all the markets they operate in.
Applying the strictest common denominator approach can be very costly to manage and, in higher-risk jurisdictions where transaction volumes can be low, it does not always make financial sense to continue offering correspondent banking services, resulting in many financial institutions exiting relationships in these jurisdictions.
This, however, leaves something of a moral dilemma for banks. On the one hand they have to comply with regulations and meet their internal compliance requirements which may make the activity unsustainable or unprofitable.
Yet if they opt out of providing international remittances to a specific jurisdiction are they meeting their obligation to do the right thing by the underlying consumer or corporate customer?
This is particularly evident in some developing markets that rely heavily on cross-border payments to support their economy (remittances of funds from offshore workers, facilitating trade flows, etc.).
If the large, or in some cases, all correspondent banks no longer support the international remittances – whether through their own correspondent banking relationship or by banking a money service bureau – then this action could severely restrict the flow of money in and out of the country which in turn could have serious humanitarian consequences for the people who live there.
How do we solve this? In the short term, it is not clear how to address the trend of the reducing corresponding network, but there are a few things that can be improved.
Firstly, there needs to be better communication and engagement between financial institutions and regulators. In some cases, there is not a level playing field for domestic and regional players.
Domestic institutions only have to contend with one set of rules but regional players that apply the ‘strictest common denominator’ approach can be severely disadvantaged.
Setting a level playing field for domestic and regional banks will ultimately benefit the end consumer as it will stimulate greater competition.
Secondly, addressing the mismatch of regulations and standards across markets through better harmonisation – driven by various regulators – will provide greater comfort on local standards governing financial institutions.
Thirdly, more can be done to ensure domestic providers are doing know-your-customer and anti-money-laundering checks to the same standards as cross-border players, in particular to provide the much needed comfort that funds are originating from a trusted source.
At ANZ, we, like other banks committed to the cross-border payments business, continue to invest heavily in our payments systems and operations areas to keep pace with changing regulations as well as the advances in payments technology.
This is crucial as the payments industry rapidly moves toward a world where delivery of payments has to be faster, cheaper, more transparent and with certainty of delivery.
On top of the increased regulatory pressure on correspondent banks, there are also other external forces at play. Newer payments technologies and fintech companies are emerging challenging the status quo.
Banks are meanwhile piloting the latest technologies, such as distributed ledger technology, with the same aim of improving speed, transparency, certainty of delivery and cost.
There has been much discussion about the correspondent banking model and alternatives and corporate treasurers will no doubt be exploring their non-bank options for international payments.
Regardless of the provider of these cross-border payments, however, any serious player in this business will find the same pressures of meeting the obligations of preventing financial crime, for example, and will have to commit time, effort and investment dollars to comply and be a credible service provider.
Ultimately, the fundamental global vs local question remains: all players must decide whether they are committed to the cross-border payments business or not.
John Campbell is Head of Transaction Banking International & Financial Institutions at ANZ
An earlier version of this article first appeared in GTNews