Correspondent banking: Trends and challenges in a fragmented world

Mick Fennell
Mick Fennell – Business Line Director, Payments

I recently had the privilege of speaking with Peter Hazou, Director, Business Development, Financial Services at Microsoft, about the changing face of correspondent banking and the need for financial institutions to modernize their capabilities or risk being left behind. The following explores some of the key issues discussed.

Correspondent banking is an integral part of the global financial system, facilitating cross-border transactions and connecting banks and Payment Service Providers (PSPs) worldwide. However, this sector faces new trends and challenges.

  1. Fragmentation: Multiple competing services put pressure on visibility and outcome certainty
  2. New disruptive players
  3. Cloud technology’s role in modernization and processing time for payments
  4. Real-time cross-border banking
  5. Legacy technology


Information over payments: A crucial lesson

Let’s be honest, fintechs have taught banks a crucial lesson. It’s not just about the successful execution of payment transactions but also the information surrounding them. The movement and management of information are prevalent trends.

Modern correspondent banking requires a shift towards data and insights. Banks need to upgrade their technology infrastructure to harness the value of this data. This substantial change to focus on the movement of information is redefining the payments business. One of the key takeaways is the concept; it’s about information, not the widget.

Additionally, we see the consolidation of relationships as a trend. The number of correspondent banking relationships in the market has reduced by 25% from 2010 to 2019, according to the Bank of International Settlements. Much of this reduction is due to the perceived risks in certain markets because of a lack of transparency, but alsobecause the larger players are offering more services and attracting more business, as business volumes have continued to increase despite the reduction of relationships (e.g., during the pandemic, relationships reduced by another 4% while global cross-border volumes increased by 2%).

To compete on a level playing field, modernization of capabilities is key.

The role of AI is vital

Artificial Intelligence (AI) can and will play a vital role in modernizing correspondent banking processes. Of particular interest is its ability to address challenges in fraud detection, where reducing false positive rates in sanction screening is important in maintaining straight-through-processing (STP) rates and, consequently, customer service levels. Also, we can see the benefits of AI in automating payment repair, improving payment routing, and advanced payment analytics. It’s important to make judicious use of AI, as it provides better customer service by increasing STP.

ISO 20022 standard: A game-changer

You can’t talk about correspondent banking without mentioning ISO 20022. The goal behind ISO 20022 is that all financial standards initiatives will use a common standardization methodology, process, and repository. Its introduction into the payment and reporting flows on the SWIFT network is historic and is changing the game for cross-border payments. The situation has changed. It’s not just about the new data set, the expansion of information, and the nature of the structured information; but also, how the updated process and message flow work. The new standard not only merits a significant change in the global processing of cross-border payments via SWIFT, but also drives a change in how data is secured, stored, and distributed.

 “ISO 20022 will unlock huge opportunities for financial institutions, such as boosting operational efficiency, enhancing customer experience, and enabling innovative new services.” SWIFT

The final deadline for switching the SWIFT cross-border network over to this standard is 2025. During this transition period, banks with legacy systems face the challenge of adapting and making their operations natively compatible with the new scheme. This is a daunting challenge for many organizations that may have implemented temporary message translation services rather than going fully native in processing. Once you embrace the full data set, there is the opportunity to build new insights and create new products with the data.

This is where Temenos can take advantage of running on Microsoft Azure and the added-value data management capabilities on the Azure platform. By shifting our clients to the Cloud, we cannot only protect and distribute the new data sets more efficiently, but we can also generate useful business insights.


Fragmentation and competition: a primary challenge

Fragmentation of the cross-border market is a primary challenge. Multiple players have entered the field, including many fintechs, crowding the market with competitive offerings. These new players leverage innovative technologies and alternative approaches to move money across networks, servicing specific corridors or market verticals. Traditional banks must adapt to the new disruptors who have permeated the banking scene and collaborate rather than compete, thus offering their customers more choices in how payments can be executed successfully across jurisdictions.

Cloud technology in modernization

Cloud technology will play a pivotal role in modernizing correspondent banking. Most correspondent banking systems run in on-premise environments. Banks need to start moving to the Cloud to leverage greater agility, which enables them to upgrade their systems continuously and thus meet the demands of today’s interconnected world. Cloud technology offers the ability to “evergreen” one’s environment while addressing scalability issues and improving data security and management, which are crucial for building trust with customers.

Real-time cross-border banking

The emergence of instant payment clearing services in many markets around the world has created an opportunity and a challenge for correspondent banks. Today’s customers demand real-time, transparent execution of their domestic payments. That expectation is now being transferred to cross-border flows. The customer is expecting near-real-time completion and reporting payments destined for foreign lands. Correspondent banks must adapt to this real-time processing paradigm. The pressure is on to provide seamless experiences in cross-border payments. That means linking the domestic real-time clearing services to the incoming orders from abroad, reducing completion times to seconds rather than hours or, in some cases, days before the beneficiary account is credited. But the heightened expectations do not just stop in real-time; they also expect added value in credit and cash management services.

Regulatory challenges  

Correspondent banking operates in a hard-hitting regulatory environment. Efficient, automated compliance and risk management are critical to success in the real-time fraud prevention world.

When it comes to regulatory compliance, correspondent banks seek to do the same things as other banking divisions. Multi-jurisdictional regulatory compliance is an issue impacting all divisions of banks across different markets. One of the key elements of the solution in this space is the ability to support continuous upgrades, thus enabling the regular updating of software in a controlled fashion.

Meeting the challenges head-on

Correspondent banking has changed, and is continuing to change, so it can meet the demands of the modern fragmented, digital, real-time world. Systems and capabilities must be continuously improved if banks want to succeed in this new paradigm. Alliances, innovative thinking, and leveraging advanced technology are all essential elements for overcoming obstacles.

However, despite this shifting ground and the emergence of new challenges, correspondent banking remains relevant, acting as the glue that keeps international commerce afloat, with banks being the bridge between customers, technologies, and regulatory requirements. Adapting to the changing environment and embracing technology-driven solutions will help correspondent banking continue to provide up-to-date services to meet customer demands.

Finally, as is often said, “Correspondent banking brings together a ‘little feeling of the United Nations,’ highlighting its role in fostering international cooperation and financial stability.”

Mick Fennell
Mick Fennell – Business Line Director, Payments