By Justin Grensing
Cross-border payments both facilitate and are fueled by global trade. According to the World Trade Organization, increases in global trade are down from a recent peak of 4.7 percent in 2017, driven largely by global trade tensions, including new tariffs.2 Yet global trade still increased by nearly 3 percent in 2018 and is forecasted to rise 2.6 percent in both 2019 and 2020.3
As international trade continues to increase, one might expect cross-border payments and the correspondent banking relationships (CBRs) that serve them would be growing as well. Instead, the Bank for International Settlements (BIS) reports that CBRs have decreased globally every year since 2011.4 According to BIS, that drop is seen across all component regions, ranging from a roughly 10 percent drop in North America to a 30 percent drop in the rest of the Americas. Asia, Europe, Oceania and Africa have all seen correspondent banking relationships shrink by roughly 20 percent over the same period.
According to a 2018 World Bank report, since the global financial crisis of 2008, global banks have been reviewing their relationships and many have decided to terminate or limit their correspondent banking services—also known as derisking—to different regions, jurisdictions, or categories of clients.5 While there are many sources of risk involved in transactions of financial institutions, the World Bank report groups them into two primary categories for cross-border payments: regulatory risk and economic risk.
There are a number of regulations that can make the facilitation of cross-border payments fraught with regulatory risk and general burdens of bureaucracy and red tape, but the World Bank focuses on a few in particular that deserve mention6:
Collectively, the purpose of these regulations is to ensure that financial institutions bear some responsibility for knowing a bit about their customers and their financial transactions, so that they can’t turn a blind eye to illegal and terrorist activity. The potential for regulatory penalties—both civil and criminal—as well as the difficulty of adhering to regulatory requirements has led some banks to simply move away from cross-border payments.7
A related reason for withdrawal from CBRs is economic risk, according to the World Bank report. It notes that global banks in OECD member countries (including, the U.S., EU, Australia, and Canada) have led the way in CBR terminations. Interestingly, there were only a few cases in which such banks withdrew all CBRs from a given jurisdiction, suggesting that the motivation for withdrawing those CBRs was not driven purely by regulatory concerns. Rather, the financial burden of ensuring compliance with certain requirements can turn a marginally profitable CBR into a money-losing venture.
Whether the perceived risks are economic or regulatory, they generally tend to drive banks away from CBRs. When banks withdraw from CBRs, the entities that had been utilizing them need to either find an alternative or discontinue whatever cross-border payments the CBR was facilitating, according to the World Bank.
On a micro-level, this means individuals and businesses are seeing direct impacts. Migrant workers can lose the ability to send remittances home. Non-governmental organizations (NGOs) have had a harder time transferring foreign aid from rich countries to poor countries. And businesses—particularly small and midsize enterprises (SMEs) that have relatively few options to begin with—have seen increased costs due to both spending more money with the fewer remaining servicers of cross-border payments and the administrative costs of finding and switching to a new provider.8
At a macro-level, the market is seeing fewer servicers of cross-border payments.9 This limited supply not only has the potential to reduce choice and increase costs for the businesses that depend on cross-border payments, it also means companies are looking to less-traditional solutions to their cross-border transactional needs. These could include financial institutions that are somewhat less committed to KYC/AML/CFT regulations, as well as those using cryptocurrencies, which cut out the financial institutions entirely.10
The trend in disengagement of major global banks from the CBRs that facilitate cross-border payments, begun several years ago, has continued with no signs of slowing. As a result, migrant workers, NGOs, SMEs, and others are faced with fewer options and increasing costs when making cross-border payments. Those options that do remain often involve less transparency and regulatory rigor.
Justin Grensing is a freelance writer, MBA and attorney who covers topics ranging from finance, marketing, human resources, legal/compliance, and general business.
1. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts and Solutions,” World Bank Group; http://documents.worldbank.org/curated/en/552411525105603327/pdf/125422-replacement.pdf
2. “Global trade growth loses momentum as trade tensions persist,” World Trade Organization; https://www.wto.org/english/news_e/pres19_e/pr837_e.htm
3. “Global trade growth loses momentum as trade tensions persist,” World Trade Organization; https://www.wto.org/english/news_e/pres19_e/pr837_e.htm
4. “New correspondent banking data – the decline continues*,” Bank for International Settlements; https://www.bis.org/cpmi/paysysinfo/corr_bank_data/corr_bank_data_commentary_1905.htm
5. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts and Solutions,” World Bank Group; http://documents.worldbank.org/curated/en/552411525105603327/pdf/125422-replacement.pdf
7. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts and Solutions,” World Bank Group; http://documents.worldbank.org/curated/en/552411525105603327/pdf/125422-replacement.pdf