Correspondent banking payments have been a core component of transaction banking for decades, generating stable revenues from fees and currency exchange. But the landscape is changing. Regulation continues to tighten, and new competitors are entering the international payments market with compelling propositions. Customer expectations are evolving, fuelled by significant advances in the domestic payments experience that are making these instant and seamless, as well as bringing useful value-added services.
A key advantage of correspondent banking as a global payments system is that it can reach almost any account in the world. Customer experience has also improved in recent years, with payments becoming faster and more transparent thanks to SWIFT’s global payments innovation (gpi)1 , and this is set to continue. However, other improvements are required to keep up with the needs and expectations of payments users, whether corporates or individuals:
– Compliance and Anti-Money Laundering (AML) processes result in regular delays, particularly where key information is missing from the transaction. SWIFT estimates that some 10% of international payments are held up somewhere along their journey for compliance checks, most of which are false-positives and avoidable investigations.
– Beneficiaries have little information to drive automated reconciliation, resulting in costly and inefficient manual processes, as well as reduced visibility on cash flow and cash positions for corporate treasurers.
– Common payments scenarios such as Payment on Behalf Of (POBO) are not fully supported, leading to tedious manual workarounds for customers.
– Banks have little insight into the business purpose of a payment, which hinders their ability to develop value-added services.
– Payments system users are similarly restricted in the business intelligence they can extract from their payments data, which should be a rich source of insight into customer behaviour.
These challenges all stem from a common cause: insufficient or poor quality data. To crack them, data needs to be improved systematically from end-to-end across the correspondent banking system, including banks, Real-time Gross Settlement (RTGS), instant and other clearing and settlement mechanisms. We need more, better defined and more granular data, and we need end-to-end consistency to ensure data is not lost or corrupted as it flows through the system.
The current cross-border payments standard (SWIFT MT) was conceived in the 1970s, when bandwidth and storage were high-priced commodities, payments volumes were much lower and systematic screening requirements non-existent. Messages were optimised to be small in size, carrying minimal datasets for ease of processing by the mainframe computers of the time.
To address the industry’s data problem, a modern standard is required. A standard that prioritises richness of data over message size and processing costs (no longer a challenge for today’s technology). That standard is ISO 200222 . ISO 20022 is an open, international data standard that is being adopted around the world for domestic batch and instant payment systems, and high value RTGS. Following in the footsteps of major market infrastructures, in 2018 the SWIFT community decided to adopt ISO 20022 for correspondent banking, starting in November 2021.
Introduction The correspondent banking community will adopt ISO 20022 from November 2021, and your institution needs to be ready.