The number of correspondent banking relationships has shrunk by 20% over the past seven years, according to analysis of new data published by the Committee on Payments and Market Infrastructures (CPMI), the global standard setter for payment, clearing and settlement services.
The new data, which tracks the size and scope of the network of relationships, show a broad-based and global reduction in their number as their geographical focus narrows.
Correspondent bank networks continue to underpin cross-border payments – vital for global trade and for migrants who send remittances home, despite these payments being slower, more expensive and more opaque than domestic payments. The worry is that these negatives may push organisations and to use ‘shadow’ payment services such as cryptocurrencies.
The data builds on the 2016 CPMI report on correspondent banking, and is based on payment message data from over 200 jurisdictions provided by SWIFT. CPMI and SWIFT plan to update the analysis annually for the next five years.
While this continuing decline in the number of correspondent banking relationships in many countries around the world remains a source of concern, CPMI acknowledges that idiosyncratic and complex factors need to be factored in, such as the emergence of new and diverse methods for cross-border payments – including crypto.
The international community has already put in place a four-point action plan to address the decline of correspondent banking, and that attention has now turned to monitoring its implementation. The plan will:
- Further examine the dimensions of the decline and implications for financial inclusion and financial stability
- Clarify regulatory expectations, including through more guidance by the Financial Action Task Force
- Support domestic capacity-building in jurisdictions that are home to affected respondent banks
- Strengthen tools for due diligence by correspondent banks
Despite the decline in the number of banking relationships, over the same seven-year period, transaction volumes have increased by close to 40%. Hence there’s been a concentration of transactions across fewer channels. One possible explanation for this is the rise of companies such as Earthport and Transfast, both recently acquired by Visa and Mastercard respectively.
The size and scope of the network of relationships, show a broad-based and global reduction in their number as their geographical focus narrows.
For now, the volumes in conventional foreign exchange markets are exponentially greater than throughput in any cryptocurrency whether that’s XRP, Stellar Lumens or Bitcoin. In general, the greater the volume the narrower the margin or cost.
Through correspondent banking relationships, firms can access financial services in different jurisdictions and banks provide international payment services. However, the sector is not without risk.