Correspondent Banking is dead, long live Correspondent Banking


About the Author

Oonagh McGrane

Director, FI Propositions, Global Transaction Banking, Lloyds Bank

Oonagh MCGrane

Correspondent Banking is in the midst of unprecedented change. We examine the drivers of that change, what it means for clients and where opportunities lie.

The most significant change to our clients’ expectations has been brought about by digitalisation. In a world where immediate real-time access to anything from travel information to shopping and same-day delivery is becoming standard, traditional payment methods can appear slow and unwieldy. Hand in hand with this change, the move towards non-cash payment methodologies continues apace.

The regulatory impact on change

Alongside increasing digitalisation, regulatory change has become the new normal for financial institutions. Continually managing the costs of implementing regulatory change – think Basel III, FATF VII, Dodd Frank, PSD 1&2 – can often divert resources from innovation, however much this may be desired. With the second European Payments Services Directive (PSD2) and the Competition and Markets Authority’s Open Banking initiative in the UK centred on XML ISO 20022 and Open Banking standards, we are likely to see enhanced security and greater transparency. This will in turn encourage innovation and competition, resulting in further changes to the payments landscape.

Increasing competition

Competition is also stepping up as new market entrants, unrestricted by legacy infrastructure are challenging the SWIFT infrastructure, pricing modes and the transparency of banks. Stepping into aggregator roles, these new players are characterised by their fast and agile approach to using the latest technology. What remains to be seen is whether this increased competition leads to an enhanced client experience.

A demand for greater transparency

Payments now require a degree of transparency in terms of cost and FX rates that the traditional correspondent banking model has not necessarily been able to offer. The current charging process, for example, is complex, potentially involving both charges taken at the time of the transaction as well as those incurred weeks later being sent to the remitting bank as MT 191s, Nostro Debits or even paper invoices. Using PSD2 as a trigger, we have analysed our flow and charges received, creating a single price point for PSD2 One Leg Out Transactions for our clients. Further, we believe that the need for ultimate transparency will also mean a phasing out of some current revenue share models.

Partly in response to the increasing costs of AML / compliance and risk, banks are also withdrawing from some markets and volumes of RMAs exchanged are being reduced. Operational costs, in terms of IT, people, expertise and governance of the end to end process, are on an upwards trajectory – we believe that the KYC Register is a great resource to ensure that compliance teams are focusing their time and expertise on the right thing.

"Clients increasingly expect faster and more efficient payment delivery than merely at the end of a working day."

Meeting client expectations for speed and efficiency

Whilst we have seen extensions to settlement days in multiple jurisdictions, for example, here in the UK the CHAPS and CREST settlement times were extended last summer, the signs are that we will ultimately move to a world of 24/7 settlement. Clients increasingly expect faster and more efficient payment delivery than merely at the end of a working day. In the UK, where faster payments has been embraced as a real alternative to ACH or RTGS, £1,189 billion in value was sent via the scheme in 20161. For our own FI clients, we have also created an easy to implement connectivity in regards to both domestic and originated overseas GBP Payments to the UK’s immediate payments system, thus enabling reachable flow to be credited almost instantaneously to the beneficiary account.

As immediate / real-time payment solutions become more widespread for the EUR, USD, CAD, AUD & JPY, we will undoubtedly get closer to an immediate 24/7 fast way of reaching beneficiary accounts that is standardised, XML compliant and accessible to third party providers.

An opportunity to evolve

So what opportunities are out there? A lot can be learnt from partnering with FinTech's, but a lot can also be learnt from the way they operate. Data is clearly a core asset. Using the vast amounts of data that banks are sitting on to analyse client behaviour and identify pinch points (something that retailers have been doing for some time), makes clear commercial sense. We can also learn much from FinTech, not just about the speed of material change but how that change is delivered to clients. At Lloyds Bank we have adopted agile methodology to design products based on real-time customer input and to deliver changes to our customers quickly.

Partnership is key – combining the technical expertise and agility of FinTech Technology with the client and market knowledge of Banks offers access to unique solutions. The SWIFT Global Payments Initiative has given a taste of how this type of partnership using new technologies can deliver greater transparency in the payment space across a global network of banks to meet client needs. Imagine what we can do next.

As Europe steps further towards a digital market, the use of APIs in smartphone apps and on the internet is commonplace – they are all around us, pulling information in real-time. We have already seen how they have revolutionised the wider world – surely post PSD2, we must seize the opportunity to co-operate and identify APIs that best meet ever-changing customer demand.

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