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How The Decline In Correspondent Banking Impacts International Wire Transfers And Trade Finance

By Frances Coppola

For hundreds of years, correspondent banking has been the lifeblood of international wire transfers and trade finance. Networks of banks cooperate to enable people and businesses to transfer money around the world and borrow to fund business deals. Correspondent banks are used by migrant workers, charities, non-government organizations, and small and medium-sized enterprises. They are vital to maintaining the flow of goods, services and money around the world.

But correspondent banking networks are shrinking. A survey conducted by the World Bank in 2015 showed that large banks, in particular, are withdrawing from markets perceived as “risky”, closing branches, selling subsidiaries and terminating relationships with smaller regional and local banks. The World Bank found that of 110 banking authorities surveyed, about half said they were experiencing a decline in correspondent banking and slightly more regional and local banks said the same. But among large banks, three-quarters said they were reducing their correspondent relationships. The worst affected area is the Caribbean. The correspondent banking services shrinking the most are check clearing and settlement, cash management, international wire transfers and trade finance.1


Regulatory pressure causing large banks to withdraw from correspondent banking


The consultancy Price Waterhouse Coopers (PwC) says that the primary reason why firms are withdrawing from correspondent banking is that complying with know-your-customer (KYC) and anti-money-laundering (AML) regulations is becoming prohibitively expensive. The huge volume of transactions, the complex web of interactions, the proliferation of new payment technologies such as mobile money and online banking, the growing complexity of financial relationships, the time-critical nature of today’s financial system – all these factors conspire to make tracing genuine bad apples extremely difficult.2


Large banks are under increasing pressure to comply with KYC and AML regulations. There has been a series of high-profile investigations and prosecutions of banks, resulting in large regulatory fines and civil penalties. Some have resulted in criminal indictments.3 So, faced with a choice between severely squeezed profits if they comply with KYC/AML regulations and risk of regulatory fines, litigation costs and reputational damage if they do not, large banks are retreating to safer markets.


Often, the gateway to the correspondent banking network is a non-bank, such as a money transfer business, which will make money transfers in return for cash payment – no bank account is required.


Rising numbers of money transfer businesses are being denied access to correspondent banking networks. The World Bank says: “A large majority of respondent banking authorities indicated that money transfer operators and other remittance companies are most affected, followed by small and medium domestic banks and small and medium exporters.”4 Although money transfer businesses generally seem to find other providers when banks close their accounts, the result is increased costs for their customers – typically, small and medium-size businesses, migrant workers and the unbanked.


An existential crisis in International Trade Finance


PwC describes the withdrawal of banks from International payments and trade finance in riskier areas as an “existential crisis” for the financial services industry. “After all”, it says, “what good is a global financial system if it cannot enable legitimate businesses to transfer funds across borders and regions and facilitate international trade?”5 And it warns that severing correspondent banking relationships can have severe economic and humanitarian consequences.


The World Bank emphasises that banks have every right to terminate business relationships and activities they perceive as too risky, but expresses concern about the effect on the global financial system:


“The concern is that while large banks might be cleaning up their books and terminating relationships with higher risk customers, the system as a whole ends up as it were pushing that risk to channels that are less transparent, or excluding legitimate customers, and thus actually increasing overall risk.”6


But new technology offers hope. PWC says that modern “big data” analytics and smart monitoring techniques can give firms far better control of their risks. Firms can cooperate, too, sharing information and resources to trace criminal Money Transfers across chains of payment service providers. And innovative providers of payment services and trade finance, including peer-to-peer lending, blockchain-based payment services and mobile money platforms, may provide a lifeline to those excluded from existing correspondent banking networks.7



The current shrinkage of the global correspondent bank network is restricting the availability of international wire transfers and trade finance in some corners of the world. But, according to Price Waterhouse Coopers, as modern technology enables banks and non-banks to cooperate in the fight against international crime, a new ecosystem of international payments and trade finance providers may develop to service the needs of the global businesses of the future.

Frances Coppola - The Author

The Author

Frances Coppola

With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.


1. Withdrawal from Correspondent Banking: Where, Why and What to Do About It – World Bank, Nov 2015
2. Correspondence Course: charting a course for US dollar clearing and correspondent banking through data analytics – Price Waterhouse Coopers, Sept 2015
4. World Bank.
5. Price Waterhouse Coopers.
6. World Bank.
7. Price Waterhouse Coopers.

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