Smaller banks and payments businesses are facing a fundamental threat to their operations that could have global economic consequences. Risk averse strategies of the big banks – de-risking from markets and geographies – are creating operational, customer loyalty and revenue threats. </p> New research commissioned by Banking Circle, for release later this month, is expected to find that payments businesses have seen their network of correspondent banks dwindle in the last five years. The research is also expected to show that where relationships do continue, costs from correspondent banking partners have increased.</p> The origin story</h4> Banks have been executing de-risking strategies for decades, but the current high level of activity began approximately nine years ago. In 2012, a leading British bank paid US authorities $1.9bn (£1.2bn) in a settlement over money laundering¹, sparking a global de-risking movement that continues today.</p> In the wake of the 2008 financial crisis, the world experienced a shift. The political agenda was changing and so too was the agenda of financial regulators – they began to see banks as more of a target. Rather than working alongside them to combat financial crime, the regulators changed focus. In their fight or flight response, banks either ran away – de-risked – or raised a shield to protect themselves. Those banks opting to take the ‘flight’ option rapidly reduced their risk by removing individual clients or entire sectors and regions that sat beyond their new risk appetite. </p> To discover the real impact of tier 1 banks de-risking, Banking Circle is currently investigating the operational, customer experience and revenue/profitability threats faced by tier 2 and 3 banks and non-bank FIs. The research is also exploring the global societal and economic risk of financial exclusion that is caused by de-risking – when access to cross border payment services is limited, with the findings due to be published later this month.</p> De-risking today</h4> It is expected that respondents to the research will confirm that they have fewer correspondent bank relationships in 2021 than in 2011. For some it may be a choice to proactively reduce the number of relationships, but others may well have become victims of the de-risking strategies of tier 1 banks.</p> The frustrating truth – for banks and their customers alike – is that it is often quicker and simpler for an institution to distance itself from an entire group, sector or region than to face the workload of assessing each one individually and the risk of fines and negative media. And, of course, emerging markets that desperately need economic support represent higher risks and higher costs, meaning risk-averse banks have been quick to pull out of these regions.</p> Without correspondent banking relationships in place, the financial institutions serving these regions quickly feel the impact. They lose both corporate and retail customers, remittance volumes fall and profits quickly follow. Alternative providers for these customers can be more expensive and some even start to look for unauthorised, unregulated and potentially illegal providers to support them. The result is that already vulnerable and underserved communities can be financially excluded to an even greater degree.</p> But there’s another fundamental problem in this trend, which has seen a 22% global decline in the number of active correspondent banks in the last decade: the financial institutions and tier 2 and 3 banks that are so often the innovators and challengers in new markets, can find their appetite for innovation undermined by the de-risking culture. </p> Looking to the future</h4> A solution must be found to overcome these challenges, helping increase financial inclusion among businesses and consumers around the world. This is where a new approach to correspondent banking might be the answer.</p> Avoiding a sector or region that appears high risk may be the easiest option, but this will exclude profitable customers and impede the progress of businesses that would be highly valuable to the economy. Even the highest risk emerging market includes customers that are low risk or present a greater potential opportunity than the level of risk they pose. Through an external partner, even the smallest banks and FIs can capitalise on the opportunities.</p> A licenced, compliant and efficient alternative to traditional correspondent banks would enable tier 2 and 3 banks, payments businesses and fintechs to provide their business customers with secure, cost effective cross border payments, enabling them to remain relevant and compete effectively to retain and gain corporate customers.</p> </div> ¹ Source: https://www.bbc.co.uk/news/business-20673466</a></p>