1. xxxxxx | xxxxxx & Supply Chain | Correspondent Banking
Adapt to survive
Trade finance services make up a vital part of
the correspondent banking offering for financial
institutions, but to maintain a stake in this market
banks need to continue to adapt. Ben Poole reports.
orrespondent banks are not immune Rand Merchant Bank (RMB). banking market at Swift.
to the economic challenges of recent “Alternatively, they will have to package “Banks need to continue to improve
years, and their trade services are structured solutions using a portfolio efficiency of their operations. There are a
feeling the squeeze. Globally, unless banks approach. These two points could well number of ways to achieve this: through
can offer genuine added value, trade finance decide which banks successfully continue right-sizing; through focusing on the business
is becoming less profitable. To combat this, with trade finance and make a success of it, of their correspondents by using business
banks should focus on delivering value and which leave it behind,” says Chaytoo. intelligence tools to see where there
across the spectrum from supply to buy are business opportunities and through
side, rather than just focusing all of their Today’s challenges centralising their correspondent banking
energies on risk mitigation. While correspondent banking is still an operations into global transaction services
“For banks to remain competitive, they will attractive business, financial institutions are – all of which can improve the efficiency of
need to provide competitive pricing,” says under pressure from new regulation and their operations,” he says.
Suresh Chaytoo, senior manager and regional increasing competition. Banks need to ensure With correspondent banking having a
head, banks and development financial that they remain competitive and relevant in core trade element, there is still a strong
institutions, Africa and Latin America at this space, says Wim Raymaekers, head of proposition for the banks in terms of areas
34 | Global Trade Review www.gtreview.com
2. Correspondent Banking | Trade Services & Supply Chain
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such as open account. However, these are There is also a cost from Basel III to the regulatory challenge that correspondent
still being settled through the traditional associated payments business and liquidity banks are facing, via a number of different
channels. “The interesting thing is how the with correspondent banking. Liquidity has legislations, is the amount of anti-money
payments landscape might change and the a price, and this price has not necessarily laundering (AML), screening, and know your
challenges for correspondent banks around been factored into the correspondent customer (KYC) processing requirements.
the payments arena more generally,” explains banking equation in the past. This has had The EU directive on AML and the USA
Kevin Brown, global head of products, the effect of making banks on all sides of Patriot Act, in particular, are challenging
transaction services at RBS. the correspondent banking spectrum run the activities of correspondent banking
This is not just the case around mobile numbers and simulations, looking to find departments. All banks are looking at the
payments. There is a demand now from the banks that have been ahead of the cost of compliance, not least in ensuring
clients for lower cost, low value cross- game in terms of raising capital for the that they are able to keep up with changing
border payments, not just in the single future to protect business for the next standards and requirements in terms of
euro payments area (SEPA) but a broader few years. filtering and AML checking. Banks are
proposition on a global basis. “I think that And while some banks have prepared eating into a lot of their development costs
there will be continued pressure on the well and increased the capital they hold, just to maintain their current position.
traditional correspondent banking model some other banks will be behind the curve Even as far back as 2009, regulatory
for payments to drive a lower cost, more a little bit in this regard. changes were forcing managers to
economic solution,” says Brown. The costs associated with Basel III and reprioritise their spending plans. This was
other compliance and regulatory initiatives seen in a poll at that year’s North America
The regulatory burden are putting off some banks from further banks conference held by Citi in New York.
There are two main areas of regulation that developing their correspondent banking “In their ideal transaction banking
are proving to be a burden for correspondent business. investment spend, we found that
banking. The first of these is Basel III. With Typically, every bank has had some level management wanted 82% to go on new
its increased capital requirements and the of correspondent banking, but in light of client solutions, with 11% marked out for
focus on trade and non-trade exposure, the cost burdens, will all banks continue to managing core capabilities and 7% on
the way that banks are treating liquidity is participate in classic correspondent banking? improving operational efficiency,” says
under scrutiny. With this regulation, the Jeremy Shaw, head of trade finance Emea Matthew Hodgson, managing director of
Basel committee wants to ensure that at JP Morgan, suggests not. “Personally, Citi’s bank services group.
banks are financially secure, that they are I think this market will consolidate “But when we compared this to actual
adequately covered in the event of a run on into fewer banks actively engaged in spend the picture is very different.
funds and that liquidity that can be moved correspondent banking. There will still be New client solutions were down to just
“There will be continued pressure on
the traditional correspondent banking
model for payments to drive a lower
cost more economic solution.”
Kevin Brown, RBS
very quickly and efficiently. They want to a significant number involved, but we will 10% of the spend; managing core capabilities
ensure that if there is a significant outflow, see consolidation as the normal practice was up to 48%, while operational efficiency
that banks will remain in a strong position to of supporting 3,000-4,000 correspondent was at 23%. In addition, the amount of spend
conduct business. banking relationships faces a heavy burden dedicated to regulatory changes made up
Basel III has a large impact on from the various compliance requirements, 19% of this budget,” he adds.
correspondent banking, as more capital is and this will only increase,” he says. While there are opportunities within
required for the trade business. This will have “If the financial dynamics don’t make correspondent banking to innovate and
the effect of reducing some banks’ appetite sense versus the risks, coupled with the create additional value for customers off the
for correspondent banking and trade increasing need for core capital, then back of the regulatory changes, the main
because they may not want to put aside that some institutions will question whether they driver for the banks is to make sure that they
extra additional capital, or it may increase need to maintain full-scale correspondent are compliant. This will continue to give all
the cost of providing these services, again banking departments.” banks a continued challenge in terms of
because there is more capital required. Beyond Basel III, the second main cost and development.
www.gtreview.com March/April 2012 | 35
3. xxxxxx | xxxxxx & Supply Chain | Correspondent Banking
Organisational structure Most banks have already been new capital requirements following the EBA
Most banks today have consolidated their quite proactive in restructuring their stress test.
correspondent banking arm into their correspondent banking units over the This translates into yet another challenge
global transaction business, as this makes past three to four years with a focus on to trade. “Through a variety of risk mitigating
commercial sense. Take Citi as an example; consolidation and improving efficiency. measures, we are seeing non-banking
the bank self-clears 77 different currencies “That said, there could still be some more organisations such as insurance companies,
as a payment provider to banks and consolidation in Europe as a result of the hedge funds and trade funds getting more
corporations, and makes payments in over reorganisation of banks there – this would and more involved. They are all moving into
130 currencies throughout the branching be a function of mergers and acquisitions this area of trade finance,” says Reinhard
network and its network of third-party (M&A) in the European banking sector,” Furthmayr, head of financial institutions
enabled banks. says RMB’s Chaytoo. products and marketing at Commerzbank.
“Because of the cross-border nature Despite this, opportunities still exist. There
of our client base – top-tier financial Current trends is a lot of opportunity for banks in financing
institutions, public sector, and multinational Today the correspondent banking world payable and receivable assets. Also, there is
corporations – we are connecting directly to is dealing with a number of trends in more of a movement from clean payments
clearing houses, exchanges and depositories addition to the fundamental challenges into more structured trade-related payments.
to allow our clients to get direct access to already mentioned. For example, there Meanwhile, the US dollar liquidity situation
these markets and these systems to be is currently limited US dollar liquidity, creates a demand that will be of interest to
able to support their own clients,” says particularly in Europe. the larger players.
Citi’s Hodgson. “Our correspondent banking Another problem seen in Europe at the While challenges remain, correspondent
business is core to our global transaction moment is the deleveraging of bank balance banking is still an attractive proposition for
services business.” sheets in the wake of the various regulatory those institutions committed to the cause.
Consolidation is not a new thing. measures recently introduced, such as the GTR
The next generation
Swift white paper on correspondent an attractive and popular business, but its The paper proposes that correspondent
banking released in January has profits are being squeezed by increased banking should move to a new stage of
called for advancements to be competition and regulation. development called “experience banking”.
made in correspondent banking. The paper stated that correspondent The use of this term implies that banks
It deems the current model as “too banking remains the main channel to deliver need to develop services that fit round their
bank product-centric, based on inherently cross-border banking services. Looking at client’s lifestyle; for example a corporate
inefficient multiple agreements”. Swift cross-border customer payments in treasurer who wants a real-time view of
It noted that the correspondent banking August 2011, those settled bank-to-bank his company’s liquidity across banks and
and payments processing business is still made up 67% of the total volume. different accounts via an ipad.
Where does your bank play?
1.0 2.0 3.0
Correspondent Transaction Experience
banking banking banking
Mid 1970s Late 1990s Mid 2010s
“Automate the telex” “Make it more efficient” “Banking made simple”
Banking community created SWIFT Each bank improved its product Customer triggers banking service
●● Long list correspondence is sign ●● Central product & operations, ●● Integrated with client channel
of importance GTB – managed as a business, and customer service provider
●● Main payments flow: EU-US market + business intelligence ●● Multi-polarity, more in Asia
36 | Global Trade Review www.gtreview.com