Correspondent banking is a hassle for corporate treasurers, leading many of them to consider moving to a new system for cross-border payments.
The following is an excerpt from the latest AFP Payments Guide, The Advent of New Cross-Border Payments Systems, underwritten by MUFG Union Bank. Download the guide here.
Cross-border payments occur primarily through correspondent banking, which requires banks to set up accounts with selected counterparty banks to facilitate payments. The correspondent banking model is antiquated and inefficient, often resulting in high costs, payments not being delivered on time and illicit activity.
Inefficiencies in the current system have resulted in the emergence of new cross-border payments solutions that either improve the correspondent banking model, or replace it entirely. For corporate treasury departments that are desperate to rid themselves of correspondent banking for good, there are some key questions they should ask themselves as they weigh the different options available.
CORRESPONDENT BANKING QUESTIONS
How many international payments do we make on average? Fees and time delays are never convenient, however, if the overall process is relatively efficient, exploring new options may not be necessary at this time.
Are you getting full transparency into your transactions? On the flipside of the coin, if you find that you are not getting detailed remittance information or are unable to track your (often high value) payments once they go out, then it may be time to upgrade your payment model.
How well does this new system integrate with your TMS or ERP? This is perhaps the most important question to ask. There are many service providers out there and if the service you’re considering doesn’t work with the software that you’re using for all of your other tasks, then you may want to move on to something that does, or wait until that service can offer you what you need.
How well do we know the countries where we are sending payments? Different countries have different requirements for their payments. Treasury practitioners should talk with their bank before sending payments into a new region to educate themselves on what may be required to complete a transaction. “Make sure you fill out all the fields those countries require,” said Magnus Carlsson, AFP’s manager of treasury and payments. “If you miss even some obscure little detail that they require to process a payment, they’ll hold it. That creates an additional delay and potentially more fees.”
Which new cross-border platforms might you be able to use now? It’s a good idea to talk with your banking partners about which cross-border payments services they may be able to offer you, or may be adopting in the near future. And it’s also worth talking with your vendors to see if any of them are open to using one of those services for payment. Convincing all of your vendors to move to a service like SWIFT global payments innovation (gpi) or Ripple may not be possible at this stage, but you might be able to sway some of them.
How well do you understand the technology? The recent rise in fintech companies has left corporate treasury professionals fascinated by technology like blockchain. But do you really understand the capabilities of these technologies, or are you simply relying on what a salesperson is telling you? Take some time to researching these new cross-border payments platforms and the technology behind them. That way you’ll know whether they’ll truly benefit you.
Fear of the Unknown
For corporate treasurers, correspondent banking is a hassle, particularly if you miss filling in some obscure information detail that delays the payment, but it’s also something they know very well. While you may want to move to a new solution for cross-border payments, it simply may not be high on your priority list at the moment.
And even if it is, there is much to consider when choosing a cross-border payments solution. Every company out there will tout their system as the best of the best, but right now, treasurers would likely be best served by being cautious. None of the current offerings are used by the majority of banks at the moment. How do you know the new solution will be in place for the long term? So while you might want to rid yourself of correspondent banking for good, it may be best to proceed with caution until a clear winner emerges.
AFP 2018 has multiple sessions on cross-border payments in the Payments track. Learn more here.