Correspondent banking relationships (CBRs) are the linchpin of international trade and finance, enabling cross-border transactions and providing a gateway to foreign financial markets. 

However, these relationships have come under scrutiny in recent years, with a decline in CBRs observed in many parts of the world.

This decline has raised concerns about financial exclusion and the rising costs of trade finance, issues that have only gained urgency in the face of evolving regulatory landscapes and technological advancements.

The Bankers Association for Finance and Trade (BAFT) has released an updated version of its Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship in this complex environment. 

The playbook serves as a roadmap for respondent banks navigating international anti-money laundering and combating the financing of terrorism (AML/CFT) standards.

This update, a successor to the 2019 guidance document, incorporates current regulatory changes and introduces a new section on ISO 20022 migration.

Sweet symbiosis: Correspondent and respondent banking

In CBRs, one correspondent bank holds deposits and offers payment and other services to another bank, referred to as the respondent. 

Typically, respondent banks are smaller entities, often located in emerging markets, that rely on their correspondents for international transactions. 

This symbiotic relationship is essential for the functioning of global trade, yet it is fraught with complexities, particularly in compliance and risk management.

De-risking – a double-edged sword?

While risk management is the cornerstone of any financial institution, the strategy of de-risking or terminating CBRs to avoid risk has had unintended consequences. 

Financial exclusion, particularly in emerging markets, and the resultant increase in trade finance costs have raised ethical and economic concerns. 

De-risking has effectively hampered global trade and development, creating a ripple effect that extends beyond the banking sector. Here, industry standards, such as those set by the Wolfsberg Group, become particularly relevant. 

This association of thirteen global banks has been instrumental in developing frameworks for managing financial crime risks, offering a layer of uniformity in an otherwise fragmented landscape.

Factors contributing to the decline in CBRs

Several factors have contributed to the decline in CBRs, including:

• Increased regulatory scrutiny: Correspondent banks are subject to strict regulatory requirements, particularly with AML/CFT compliance. Compliance costs have risen significantly in recent years, making it more difficult for some banks to maintain correspondent banking relationships.
• De-risking: Some correspondent banks have adopted a de-risking strategy, which involves terminating CBRs with banks that are perceived to be high-risk. This has been particularly common with banks in emerging markets.
• Technological advancements: Fintech companies are developing new solutions for cross-border payments, which could reduce the need for correspondent banking relationships.

Fintech companies are playing an increasing role in the cross-border payments landscape. 

Some fintech companies are developing alternative solutions for respondent banks, such as providing access to global payment networks or offering digital escrow services.

While fintech companies could help address some of the challenges faced by respondent banks, it is essential to note that they are also subject to regulatory scrutiny. 

Additionally, fintech companies may need help to provide the full range of services that correspondent banks offer, such as trade finance and cash management.

Updating the 2019 playbook

BAFT’s original playbook, released in 2019, was a timely intervention. 

It provided respondent banks with actionable insights and guidelines on maintaining correspondent banking relationships, particularly in the face of stringent AML/CFT regulations. 

The document was a comprehensive guide covering everything from establishing new relationships to the intricacies of compliance.

Regulatory landscapes are not static; they evolve in response to emerging risks and economic realities. 

Four years later, the updated playbook, the Respondent’s Playbook 2.0, reflects these changes.

It incorporates current regulatory shifts and introduces a new section on ISO 20022 migration, an international standard for electronic data interchange between financial institutions. 

This update is not merely an addendum but a recalibration designed to equip respondent banks for the challenges ahead.

ISO 20022 migration

One of the critical updates in the 2023 playbook is the inclusion of a section on ISO 20022, a standard set to revolutionise the way financial messages are transmitted across the globe. 

ISO 20022 is a new international standard for electronic data interchange between financial institutions. 

It is set to revolutionise how financial messages are transmitted globally.

The adoption of ISO 20022 is not just a technical upgrade but a strategic move that will enhance the efficiency and transparency of international transactions. 

Respondent banks should start planning for ISO 20022 migration now, as the standard is expected to be widely adopted in the coming years.

The benefits of ISO 20022 for respondent banks include:

• Enhanced efficiency and transparency: ISO 20022 uses a common data language to streamline cross-border payments and reduce the risk of errors.
• Reduced costs: ISO 20022 will help reduce cross-border payment costs by eliminating the need for multiple data conversions.
• Improved compliance: ISO 20022 will help respondent banks comply with international AML/CFT regulations.

The challenges of ISO 20022 migration for respondent banks include:

• Technical complexity: ISO 20022 is a complex standard, and migrating to ISO 20022 will require significant investment in technology and resources.
• Time and cost: Migrating to ISO 20022 will be time-consuming and costly.
• Coordination with correspondent banks: Respondent banks must work closely with their correspondent banks to ensure they are both ready to migrate to ISO 20022.

The playbook also details compliance practices, providing both correspondent and respondent banks with a toolkit to navigate the complexities of international finance and regulatory compliance.

The future of correspondent banking relationships is still being determined. However, respondent banks must adapt to the changing landscape to remain competitive.

The BAFT Respondent’s Playbook is a valuable resource for respondent banks, guiding how to obtain and maintain correspondent banking relationships in compliance with international AML/CFT standards.

It addresses the ‘what’ and the ‘why’, offering insights into the rationale behind best practices and regulatory requirements. 

In doing so, it provides banks with the tools to adapt and thrive in an environment of constant change. 

The playbook serves as a timely reminder that in the fast-evolving world of international finance, staying ahead is not just about keeping pace with change but anticipating it.

The BAFT Respondent’s Playbook 2.0 can be read here.