“Everything starts with the customer”

If bankers were asked to point to those areas of their business that are at the cutting edge of innovation, correspondent banking would be an unlikely candidate. From another perspective, one would also have to say that use of nostro and vostro accounts within longstanding bilateral banking relationships has stood the test of time as a way of handling cross-border payments.

Digital innovation is, however, posing a strong challenge to tradition. Olivier Denecker, director of knowledge, global payments, McKinsey & Company, says correspondent banking today is on a transformational journey: one that starts with customer centricity and ends with material change.

“Correspondent banking is really the fabric on which international trade and cross-border payments are built,” says Denecker. “It is a very complex network of rules, agreements and relationships going well beyond reciprocity.” In essence, corresponding banking entails the linking of business opportunities through networking, supported by a set of operational criteria. It is the latter that are most challenged by the arrival of new entrants to the payments market. “Some of the new players that have appealed primarily to retail requirements work in a closed loop,” he comments. “Because of that, they do not have all the complexity of the many-to-many activity that the correspondent banking system has. They can introduce more efficient processes and adopt a different approach to customer services, but they cannot get the same coverage as a correspondent banking network.”

Higher expectations

Nevertheless, the service levels of the new entrants are setting expectations. The start of the transformational journey for correspondent banking is addressing the shifts that these closed loop systems have effected in perceptions of customer value and back-office efficiency. “Banks realise the need to be able to handle payments in a timely and cost-effective fashion that is closer in experience to some of these closed loop systems,” says Denecker.

“To judge from the last two Sibos conferences, the need for change is well recognised,” says Denecker. “It is not driven by regulation per se, but by customers becoming much more aware. It’s very difficult to say to a customer that, as an individual, you can do a faster payment in the UK immediately, for example, but if you want to make a payment through a correspondent banking channel, it will take you three to five days. That doesn’t compute anymore. Customers expect more and competition is also pushing banks to change.” In addition, he says, the wider operating environment for correspondent banks is unforgiving. “Interest rates are at an all-time low which means that some of the main sources of revenue that were fuelling a more expensive system are actually not there anymore.”

Denecker suggests that there are short- to medium-term improvements to the nature of correspondent banking that can be made, and notes that incremental process changes can deliver value to customers before more fundamental reforms are considered. “The changes are quite transformational, but less than revolutionary,” he says. “Should we enforce a standard agreement across banks and step away from everybody having the right to differ bilaterally? Should we introduce certain types of monitoring systems that all participating banks adopt? How can we make it possible for customers to pre-check the account information they use for cross-border payments? These could bring significant benefit before considering reforms to the fabric of correspondent banking. Eventually the fabric – reciprocity, nostro/ vostro accounts – will need to be addressed, but that’s not the starting point.”

Drivers of change

As with many other aspects of the wholesale complex markets, the transparency of the blockchain is often touted as a fasttrack to a new, more efficient paradigm for correspondent banking. But while Denecker acknowledges that technology has a role to play in improving payment systems, it is not in itself the driver of change.

“Changing the system doesn’t automatically introduce the changes that are necessary from a customer perspective,” he says. “One of the learnings on the retail side is: everything starts with the customer.”

Find out more at the ‘ Evolution of correspondent banking: Can compliance help defend the model? ’ session, on Tuesday 27 September at Sibos 2016.