Banks have been executing de-risking strategies for decades, to reduce and remove risk. However, the past decade has seen the level of activity increase dramatically following the 2008 financial crisis which brought about a shift in the political agenda and that of the regulators. As a result, regulators began to work with banks to tackle financial crime.
In 2012, HSBC paid US Authorities $1.9 billion in a settlement over money laundering, sparking the de-risking movement that is still affecting the industry today. To protect themselves banks had to introduce new measures or remove clients perceived to represent a higher risk. Such banks often found it simpler to de-risk clients, sectors and regions that sat beyond their new risk appetite.
Unfortunately, that left smaller banks, Non-Bank Financial Institutions (NBFIs) and businesses without correspondent banking partners, which can lead to financial exclusion for underlying customers. This situation remains today, and for some it has got worse. Smaller banks and NBFIs are facing a fundamental threat to their operations that could have global societal and economic risks. The latest Banking Circle research investigated these threats.
Assessing the impact
The results of this research will be published in an upcoming white paper and show that banks and NBFIs are dissatisfied with the traditional correspondent banking solution. 77% of the Banks and non-bank FIs we spoke to have more correspondent banking relationships now than ten years ago, and most (64%) feel they have too many.
We believe this is a reaction to de-risking, with smaller banks and NBFIs protecting themselves from the impact of de-risking by spreading their own risk. But this is a heavy burden. Our research revealed that correspondent banking costs have increased for 80% of the banks and NBFIs we surveyed, and the real-life impact of this is that 3 in 4 believe they have lost customers due in part to a lack of access to fair priced correspondent banking partners.
Some of the financial institutions we spoke to have proactively reduced the number of banking relationships they have, and half of these did so for cost reasons. In cases where the bank or NBFI was let go by their bank, the main reason given was that the customer no longer met new eligibility criteria. Those who have reduced the number of relationships have since experienced difficulties in offering international payments, and costs have risen.
It is unsurprising, therefore, that 71% of respondents feel the global economy would benefit from an alternative solution. However, to gain access to cross border payments, there must still be a bank at the top of the chain with direct access to clearing. Rather than an entirely new solution, correspondent banking services must change to become more accessible.
As a tech-first payments bank, is investing in integrating a vast network of local clearing and payments schemes to build a unique super-correspondent banking network that is a true alternative to the traditional offering.
About Anders la Cour
Chief Executive Officer of Banking Circle Group, Anders la Cour used his experience in legal M&A and venture capital, and strong commercial acumen, to co-found in 2013. In 2018 he orchestrated a USD 300 million management buy-out with EQT and secured a Banking Licence in 2020. Anders is the inaugural Chair of the Emerging Payments Association EU, having been on the EPA Advisory board since 2016. He is regularly invited to speak and present at industry events around the world, has won multiple awards and had thought leadership articles published in a range of industry publications.