Correspondent Banking and Network Management
The area of Correspondent Banking, most recently known as “Network Management,” is a sector in the banking world that is often misunderstood, or not even known about. This is because is sits within the “Bank to Bank” space, or “Wholesale Payments” area, and not in the Retail and Corporate Banking sectors. So, to the client who sits at the front-end, it is totally invisible; and as far as they know, it does not exist! But of course that is not the case.
You and I have banks accounts as members of the public, and commercial and corporate entities do too. So, like us, banks also have accounts with other banks, in order to use the key exchangeable and trading currencies that are required to meet the obligations of their corporate and retail customers. Without Correspondent Banking, and this “inter-bank” activity, international trade and the exchange of currencies, which is key to the ability of buyers and sellers across the globe to do business, would not happen. Without this inter-bank activity, Banks would not be able to provide the international services they currently offer to all their clients, as part of their core offerings.
However, as with all financial transactions, there are challenges regarding certain items, such as: transaction fees and “hidden” correspondent bank fees; the transaction timescale from buyer’s bank account in one country to seller’s bank account in another; and the local high and low value payment infrastructures across the globe that are deemed suitable to “clear and settle” all payment obligations between buyer and seller, on a “full and final settlement” basis.
The biggest impact and noticeable feature of Correspondent Banking is often felt at the front-end; that is in the Retail and Corporate Banking client activity, in particular; the issue of timescale and hidden fees. These can be a real headache to both buyer and seller. From my experience, “hidden” fees is the most frustrating. For example, I have witnessed on many occasions a client/buyer make a payment to a supplier for goods purchased under a Letter of Credit or on an “Open Account” basis, where say USD$ 100,000 is owed to the seller/supplier. But actually, only $90,000 is credited to the supplier’s bank account, much to the latter’s anger and frustration. In this instance one bank or several banks along the cross-border payments route, have taken their fees as a “deduction”, often termed “Bene Deduct” from the sum owed. In Japan it is even worse; because a Japanese Bank by local law is permitted to charge a percentage of say between 2% to 5% or even more, as a “Credit Deduct” on incoming funds, when crediting these same funds to their own customer’s local bank account; that is, the supplier himself.
In addition, many banks earn their revenue from “Bene Deducts” on cross-border payments; that is on currency-to-currency transactions (i.e., no FX conversion and “commission”) through a sliding scale of USD values, levied by a percentage according to where the sum owed sits in the sliding scale. This is particularly true in the USD Payments arena; given the USD is the world’s biggest trading currency. In spite of industry initiatives, such as SEPA – which ensures the need for the initiating party, the buyer, to have full notice in advance of fees levied before the payment is actioned – fees can still be deducted. Why? because of the number of intermediary banks that can be involved in processing the payment, and transaction “mid route;” and whom are subject to the laws of disparate legal jurisdictions according to where they themselves are domiciled. In this example, the SEPA area illustrates this point exactly; where one or more banks in the payment chain is outside the SEPA area. Such scenarios are often termed: “one leg in; and one leg out”. The “leg” element refers to the country presence of the bank account in question (buyer or seller).
So, in short; there are a minefield of issues. This is not helped by the current and on-going individual Bank to Bank “Network Management” agreements, which are based on individual currencies, and agreed inter-bank “revenue share” arrangements through these aforementioned “deductions”.
Above are just some of the challenges; there are of course many more. Those buyers’ and sellers’ commercial organisations, and all manner of entities whom are actively involved in international trade and cross-border currency to currency payments, should contact The Payments Business (www.thepaymentsbusiness.com) to obtain real clarity here. We have many consultants that can assist with strategies that mitigate the above example of “hidden” fees, as well as the other challenges mentioned here.
If you would like to talk to me about how the team at The Payments Business can help you, please contact me Eliot Heilpern. My contact details are below. In any case; I would urge you to join the Payments Business either via our website, or on the LinkedIn Group. That way we can keep you informed about developments in the Wholesale Payments and Correspondent Banking environment. It really is a case of: you need to know, on a “need to know” basis.
Eliot Charles Heilpern Membership Director of The Payments Business