Correspondent Banking 3.0 white paper
SWIFT unveils its vision for a customer-centric, experience banking model where customers are the trigger for banking services, and where banks link together the best components to create a consistent and seamless customer experience. Welcome to Correspondent Banking 3.0.
1. White paper Correspondent banking 3.0 The compelling need to evolve towards a customer-centric experience banking model Executive summary Four such projects of significant benefit yet achievable were identified from 35 Correspondent banking and payments in-depth interviews held with banks by processing is an attractive business. But SWIFT during 2010-2011. The first two Collaborative actions profit is under pressure as banks need make the current model more efficient, the to comply with more regulation and deal towards with increased competition, whilst we last two are more provocative and radical steps leading towards the new model: experience banking are bracing ourselves for another global financial crisis and economic slowdown. nhanced business intelligence E services to better identify new So banks need to right-size and cut market opportunities, understand costs. Thats already happening. Whereas end-customer behaviour, and better correspondent banking 1.0 in the mid monitor liquidity; 1970s was about automating the telex with a large network of banks, a different An interbank EBAM (Electronic Highlights and more efficient 2.0 emerged late Bank Account Management) 1990s: centralised global transaction central utility to more efficiently Correspondent banking is an manage bank accounts and processing, fewer but deeper relationships attractive business relationships; and tighter performance management. Regulation and new market forces That brings more efficiency. A bank-owned global service for put pressure on profit This model is still too bank product person-to-person payments, that is Changing the current model is centric, based on inherently inefficient mobile enabled; necessary but not enough multiple agreements. The world has An international market The industry must evolve towards a changed around us. A mobile payment infrastructure, to reach many small customer centric experience via PayPal is simpler and faster than banks with low volumes, without banking model transferring money from one bank the need for a correspondent bank Collaborative projects are needed account to another. Corporates too are relationship and account with each of to increase efficiency and move looking for more integrated solutions. them. toward the new model We thus need to change again, to a The purpose of this paper is to start new 3.0, customer-centric experience a dialogue in the banking industry on banking model, where customers use a this new model and projects proposed, simple banking service, when they need possibly identify other projects, to in the it, as part of their business or personal end gain consensus and implement 1 or 2 transaction and where banks link concrete new collaborative services. together the best components to create a consistent and seamless customer Correspondent banking is core to the experience. business of over 3,700 banking groups in 200 countries. Evolving that is not How can banks evolve towards this new easy, but the new normal presents a model, or better, take the lead? Whilst compelling need to do so, now. each bank has to make improvements, collaborative projects are needed as well. 1 2. Correspondent banking is an in 2010. Within these, cross-border Impact of regulation on bankingattractive business payments punch well above their weight. Accounting for 2.5% of global volume in business: examplesWe define correspondent banking as ompliance with AML will cost the C 2010, they generated 10% of the revenue;the banking services mainly payments, industry over USD 5 billion in 2011, and by 2020, are forecasted to accountcash management and trade services - increasing at 7.9% per year4; for 3.5% of the volume and their revenueprovided by banks to customers via other contribution rise to 16% of total3. asel III rules on capital and Bbanks. liquidity will make the financialThis is an attractive business. system safer but come at a cost. This combination of sizeable, predictableIt is (still) the primary channel to deliver and growing revenue, with good profit Balances on nostro accounts willcross-border banking services. Looking potential and low capital requirements - no longer included on balanceat cross-border customer payments on make transaction services an attractive sheets, the cost of capital to backSWIFT in August 2011, those settled business for banks. up trade finance will increase;bank-to-bank is 67% of total volume. The odd Frank act will have Don-us payments carried out through fundamental changes in USthe banks own branches over SWIFT Regulation and new market electronic funds transfers andremained fairly stable over the last 5 forces put pressure on profit regulation. Combined withyears and account for 13% of total. Maintaining margin growth in transaction compliance costs, this is leadingPayments settled via cross-border market banking will be difficult going forward some banks to reconsider theirinfrastructures like EBA and Target 2 however. Regulatory and compliance position in retail cross-borderin Europe increased to 20% of total. projects are driving up costs. Increased services.Despite the ramp-up of these marketinfrastructures, bank-to-bank volume competition will put downward pressure S banks will be required to report Umaintained a 7% compound annual on revenues whilst banks in Asia Pacific all in and outbound cross-bordergrowth rate over the period1. and emerging markets will see their transactions to FINCEN; market share increase. Funding innovationSecondly, global payments volumes ATCA may oblige non-US banks F will be difficult to sustain. Lets look atare forecasted to grow at an average to make significant changes to each of these in turn.compound rate of 9% per year through their internal reporting systems toto 20202. report information about financial Regulation and compliance drive up accounts held by US tax payers toAnd thirdly, its a sizeable business. costs the Inland Revenue Service (IRS);Provided along with cash management, The increasing cost of compliance andtrade finance, and sometimes foreign he industry cost of implementing T regulation is on the top of every bankersexchange or custody services, payments SEPA is estimated at EUR 8-10 agenda.are at the core of the services provided by billion, a migration end-date seta banks transaction processing division From AML and KYC, Basel III, Dodd soon5.and generated USD 590 billion revenues Frank, FINCEN and FACTA to SEPA Share of total 45 Annual growth rate 5% 2011 40 Total 8,1% 20% 0% Millions of messages per month 35 MIs 17,9% 30 Bank to Bank 7% -5% 25 20 67% -10% 15 10 -15% 5 On-Us 3,5% 13% 0 -20% 2006 2007 2008 2009 2010 2011 2005 2006 2 Correspondent banking is the most important channel for cross-border payments source: SWIFT Traffic Watch; Customer payments (MT103)1. SWIFT Traffic Watch2. Boston Consulting Group, Global Payments 20113. Boston Consulting Group, Global Payments 20114. elent, Trends in Anti-Money Laundering 2011 C5. ap Gemini, World Payments Report 2007 C 2 3. as one banker stated, regulation and Changing the current model is sized corporate and retail segments. compliance will dictate what we do in necessary but not enough The question is where are these juicy correspondent banking for the next three These market forces fundamentally customers and how to route payments to four years. changed the traditional 1.0 correspondent in a cost-efficient way. Significant sums The cost of implementing such projects banking model of the late 1970s, are invested in market and business is USD 10 - 300 million per institution6, where banks did wire transfers and a intelligence to obtain these insights. depending on size and complexity. long list of correspondents a sign of Banks are also addressing organizational importance. Since the late 1990s, banks aspects of managing their network, Competition will intensify significantly improved their efficiency, ranging from a decentralised model to Low growth conditions in mature running payments transactions as a more centralisation there is no one-size- markets will lead to intensive inter-bank business, using fewer but deeper and fits-all solution here. But the common competition for clients and volumes, better managed relationships. But is that theme is bringing product expertise closer especially for premium wholesale clients enough? to the local relationship managers and like large and mid-size corporates. clients. New entrants like PayPal, Google Wallet A more strategic alignment with the and also mobile network operators drive business Fewer but deeper relationships expectations in consumer payments, Banks increasingly focus on delivering Managing the correspondent network is no bringing ease of use, immediacy of value to their customers, moving the longer an administrative function, but plays transfer, transparency of pricing and correspondent banking relationship closer a key role in managing compliance and end-to-end tracing capability. This in to the client-facing divisions. Transaction risk. In response to the financial crisis and contrast to traditional correspondent services are less likely to be discounted as compliance initiatives, banks are generally banking payment services where this loss-leaders to win credit and investment reducing their nostros and relationships level of service still is not achieved. banking business. Scale is no longer the with weak balance sheets or high risk are Money transfer operators, been long in only objective. cut. Volumes are concentrated on fewer this business, are now playing up market Many banks centralised operations and partners. The concept of reciprocity is and target the small and medium size product management into a Global evolving, from a traditionally arms-length corporate segment. Transaction Banking unit - managed relationship to deeper partnerships. The shift from mature countries to a multi- as a business, and moved from product Large banks have rationalised their polar economy with a stronger presence sales to relationship managers assisted correspondent banking networks in of Asia and developing markets will have a by product experts. Product sets with Europe and North America, whilst building profound impact on the banking business low margins are weeded out or replaced out their payments business in Asia and payments flows. Seventy percent of by a 3rd party service and the portfolio Pacific. A good proxy for nostro accounts payments volume growth in this decade reconstructed for target client segments. is to look at the statements these banks will be generated by these regions7, Its about providing the right services to receive via SWIFT. Since 2005, the top 80 whereas payments volumes in North the right clients: large transaction clients payments banks reduced their average America and Western Europe will grow that can generate volume, converting number of nostro relationships in Europe at 6% and 5% respectively, well below credit clients to transaction clients, and the Americas by 16% and 11% the global average of 9%8. Banks in the leveraging higher margin small to mid- mature markets will thus need to partner with banks in Asia and developing market or grow their own operationsShare of total Annual growth rate in those 5% +4% Asia Pacific 2011 countries. Total 8,1% 20% 0% 0% Investment MIs 17,9% in innovation: difficult to sustain Whilst Bank to Bank 7% banks are investing in front-end -5% channel innovation like mobile, increased regulatory projects and allocation of 67% -10% assets to support balance sheets will -11% Americas put strains on resources for product and process innovation. -15% On-Us 3,5% -16% EMEA 13% -20%2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 6. elent, Getting Smart About Regulation, C August 2011 7. oston Consulting Group, Global Payments 2011 B 8. oston Consulting Group, Global Payments 2011 B 9. SWIFT Traffic Watch Top-80 payments banks reduce nostro relationships in EMEA and Americas source: SWIFT Traffic Watch; Interbank statements (MT950); average number of nostro relationships 3 4. respectively, whilst in Asia Pacific they onitoring performance across M transactions or lifestyle, at the time they increased by 4%9. correspondents. While products execute that transaction. They dont wake across correspondent relationships up and say oh, I have to do a payment On the sell-side, transaction banks want are broadly similar, e.g. cross-border now. Instead, the corporate treasurer to increase their vostro portfolio. But here, payments, service level agreements wants a real-time view about the liquidity compliance is a barrier to developing the can be highly inconsistent. available across the firms multiple business, as due diligence now extends banks and accounts on an iPad. Or, the to a full legal and operational audit of the nsuring transactions are routed E payment is made from a mobile phone counterparts KYC and AML processes to the correct partners. Even when when the family back home calls for cash. and capabilities, causing delays in relationship and network management contract renewal and on-boarding of new set clear direction where transactions clients. should go to, payments may on an Shift forward: from product transaction operational level be routed to different to customer experience As result, a three-tier segmentation of (non-partner) banks. The new normal requires a change the correspondent banking network is from the current 2.0 product-oriented becoming apparent: So, a lot of change is already underway. transaction banking organisation to It is positive and essential but only artner banks - based on true P a customer-centric 3.0 experience incremental in nature. What is happening synergies, with relationships typically banking model. today is a prelude to bigger change on based on geography where the partner the horizon. For that, real step-changes In this model, the banks product bank has a very strong presence in in cost efficiency and customer service and relationship management is very a specific country or region and the capability need to be achieved. closely if not fully integrated with the ability to transact a high volume of client channel and the customer service business across a broad range of provider (which may or not be another products; A new vision for 3.0: bank). The banks service is triggered pecialist banks - for capabilities on S Experience banking by an API (published by the bank), and specific product lines e.g. using performed on a renewed core banking Whilst necessary, those changes are strong domestic retail players for system or outsourced to a larger bank not sufficient to compete and run a distribution of pension payments or that can leverage the advantages of scale successful payments business going consumer remittances; and offset the cost of compliance or to forward, because the world around us overage banks - to fill out the C has changed. a 3rd party specialised payment service geographic footprint of the banks provider. Its no longer about having a web capability in areas where it does not Linking all these components together as site that merely projects the banks have a presence, but its clients need a seamless experience will allow banks products as offered in a branch and to do business. to focus on providing a more innovative have customers try to navigate their way. Instead, customers now expect a experience rather than trying to build out More, pro-active performance banking service as part of their business the entire IT product set itself. management The now smaller correspondent network is under increased scrutiny. Some +4% Asia Pacific Where does your bank play? examples include: roactive monitoring of financial and P compliance risks0% the network, in ensuring that stand-by contingencies are in place in the event of a shock. 1.0 2.0 3.0 This requires better access to, and Correspondent Transaction Experience use of external and internal data banking banking banking sources. Collection of information such as account mandates, compliance -11% Americas certificates, audited accounts etc, is Mid 1970s Late 1990s Mid 2010s more frequent. onitoring of multiple business lines M Automate the telex. Make it more efficient. Banking made simple. within each relationship requires -16% EMEA Banking community created SWIFT Each bank improved its product Customer triggers banking service data gathering from multiple internal ong list of correspondents is L o on-us first, created MIs, D ntegrated with client channel I systems. This is important in sign of importance smaller relationship network and customer service provider2010 2011 monitoring reciprocal arrangements, anks do T/T & wire transfers, B entral product & operations, C PI into new/outsourced core A which is no longer based on like-for- between application islands GTB - managed as a business, platform + 3rd party solutions, like products but looked at on the Main payments flow: EU-US market + business intelligence consumer intelligence aggregate business. Main payments flow: US > CN Mutli-polarity, more in Asia 3.0 = Experience Banking 4 5. But how do we evolve towards this new underway we may mention some for Conclusion and call for actionmodel? The required changes can be illustrative reference; Since the late 1990s, correspondentcomplex and costly, and benefits only Achievable a project must produce banking changed from a traditional 1.0achieved if a large number of banks move its benefits with reasonable costs and to a 2.0 transaction banking model withat the same time. The banking system time frame. We assess the technical fewer but more efficiently managedcomprises over 3,700 banking groups complexity and costs for a bank to relationships.in 200 countries10. Network inertia is the integrate and use the new service aschallenge to collaborative innovation. In todays new normal however, this is not well as the network complexity in terms good enough anymore, as we enter into of how many banks it takes for the an era where banking services need to be project to succeed.Collaborative projects designed around customers who trigger Significant the project must bring them as part of their experience. We callTo evolve towards the new model, banks significant benefits to banks, improving this new vision 3.0 or experience banking.need to, in addition to improvements the existing model or helping evolvewithin their own shop, start a series of Banks have the dual challenge to further towards the new model (as describedcollaborative projects with other banks, to improve the current model whist evolving in the previous chapter), thus filteringfurther improve the current model as well towards the new one. For this, they out many small projects. At this stage,as evolve towards the new experience need projects within their organisation as we did not do a full business case orbanking model. well as solutions developed and run in benefits sizing that will be done onceFrom interviews with 35 banks during collaboration with other banks. the shortlist is further refined to 1 or 22010-2011 by SWIFT, over 20 such project proposals. We identified four such collaborativeprojects were suggested. projects, and look forward to stimulating debate on this new vision and projects Project short listFilters to focus proposed. In that process, these projects Four projects were retained. Some areProject ideas were filtered against four will evolve and mature, or not find practical, other more provocative andcriteria to develop a short list to focus on: sufficient support and other may emerge. forward looking. We also assessed their What matters at the end of the day, is the Collaborative a project must be for technical and network complexity (see consensus to develop 1 or 2 new services the benefit of more than one bank. E.g. diagram below and table overleaf). that have significant impact, and put them a project to renew a core system is an The purpose is to get feedback on the to action. individual banks decision and thus not projects proposed, discover other ideas short-listed here; The world has changed around us. To and test them against the same criteria, keep their payments franchise, banks New it must be a new project, not in order to reach consensus on 1 or 2 must take charge of their destiny and lead already underway. It is not the intention projects to take forward. the way. to re-evaluate a project if already10. SWIFT Traffic Watch High Interbank EBAM central utility Technical complexity Bank-owned P2P Cost for a bank to payments service, integrate the solution mobile enabled Enhanced International MI business intelligence to reach many services small banks Low Network complexity High Number of banks required to make the solution work Collaborative project assessment 5 6. Potential project Description Enhanced business Issue: To identify new market opportunities, better understand end-customer initiator and intelligence services beneficiary, counterparty bank performance and liquidity risk, make informed transaction routing decisions, improve interbank invoicing and reconciliation or e.g. report end-destination country of a specific instructing party, banks need enhanced business intelligence over and above what is available today from their internal systems or via eg SWIFTs existing set of Watch analytics. Solution: The proposed solution is to significantly enhance SWIFTs current business intelligence capability, by for example extracting more fields (e.g. beneficiary end-customer country) provide intra-day timestamps, and combine SWIFT traffic data with external market data (e.g. cross referenced to industry sectors) for opportunity sizing and country risk assessment. Assessment: The technical integration complexity for a bank is rather low, as data provided needs to be coupled with in-house business intelligence platforms. The network complexity is low, since no co-operation or multiple banks are required (except e.g. syndicated surveys). Interbank EBAM (electronic Issue: As part of their correspondent bank relationships, banks need to manage those bank account management) accounts on an on-going basis (open, modify, close, periodic compliance checks, etc). A large central utility proportion of the information shared is common across relationships but formats and timing are not harmonized leading to manual, time-consuming and expensive processes. Solution: A solution for EBAM provided by SWIFT is already being used in the corporate-to- bank space. The proposal is to extend this for interbank account management. The solution consists of a set of standards and electronic instructions to open, modify, close and verify accounts combined with a central hub providing standards validation and a repository to store account opening criteria. As possible extension, the hub could contain management, KYC and compliance statements of correspondent banks. Assessment: The technical integration complexity for a bank is rather high, as account management applications are typically not automated systems. The network complexity is medium, as it requires a large number of participants to publish their data but no cooperation between them is required. Bank-owned global service Issue: Retail payments account for 87% of total cross-border volume, and will grow by 13% for P2P (person-to-person) per year over the next decade to reach nearly 24 billion transactions per year11; worldwide payments, that is mobile recorded remittance flows are expected to reach nearly USD 536 billion in 201312. Whilst banks enabled have a good solution for international on us payments and some have proprietary bilateral remittance products, the international money transfer based on multiple correspondent banking relationships is losing out to simpler, faster and more transparent alternatives provided by money transfer operators (largest market share), global wallet providers, and mobile network operators (getting into this space with mobile wallets) and they are starting to link to each other. Banks however cannot offer one compelling / consistent experience because it depends on the multiple agreements with and capabilities of each of the receiving banks all different. Solution: Several banks distribute a money transfer operators product or 3rd partys P2P online or mobile payments service (next to their own). However, banks do not own/control those products, they are not bank branded, and do not allow the bank to further develop the customer relationship since they are not fully integrated with the banks operations and customer intelligence. The solution proposed is to create a bank-owned company/product providing a simple yet compelling, international, interbank, person-to-person, mobile-enabled payments service with account as well as cash pay-in/pay out capabilities. It could be built or bought (eg, by buying or enhancing an existing product of a money transfer provider). Assessment: The technical integration complexity for a bank is medium, via APIs into front-end systems. The network complexity is rather high, since a critical number of banks and/or agent networks need to be connected to the platform.11. Source: Boston Consulting Group, Global Payments 201112. Source: The World Bank, Outlook for Remittance Flows 2011-2013, May 23 2011 6 7. Potential project DescriptionInternational MI (market ssue: Many banks already rationalized their correspondent network, due to increased cost Iinfrastructure), to reach of compliance versus low transaction volume. Still, they need global reach and exchangemany small banks transactions with many small banks without holding a correspondent bank account or being required to route transactions via complex serial chains. The problem is with many small banks not with the intense relationship with large bank correspondents. olution: The proposed solution is a payments hub to complement existing correspondent S banking arrangements. This would comprise a multilateral legal and SLA framework for the clearing and settlement of a limited set of basic payments products. Each participant would accept to receive and process payments from all (or a limited subset of) other participants under a set of business conditions communicated in the framework. Several banks could competitively offer foreign exchange and settlement capabilities to participants within the framework. ssessment: The technical integration complexity for a bank is rather low, since existing A technology could be used (like eg FIN messaging and copy using SWIFT). The network complexity is rather high, since a critical number of smaller banks need participate (but that can be driven by the sending bank). 7 8. For more information about SWIFT visit swift.com To join the community debate visit swiftcommunity.net Legal Notices Copyright Copyright S.W.I.F.T. SCRL (SWIFT), Avenue Adle 1, B-1310 La Hulpe, Belgium, 2011. All rights reserved. Reproduction is authorised provided the source is acknowledged. Trademarks SWIFT, S.W.I.F.T., the SWIFT logo, Sibos, Accord and SWIFT-derived product and service names such as but not limited to SWIFTNet, Alliance and SWIFT Standards are trademarks of S.W.I.F.T. SCRL. SWIFT is the trading name of S.W.I.F.T. SCRL. All other product or company names that may be mentioned in this document are trademarks or registered trademarks of their respective owners. Disclaimer This white paper is provided for information only. If a customer or any third party decides to take any course of action or omission based on this report and/or any conclusion contained therein, they shall do so at their own risk and SWIFT shall not be liable for any loss or damage, arising from their acts or omissions based on this report and/or any recommendations contained therein.000000 - DEC 2011 SWIFT 2011