Under fire for rising costs and lengthy processing times, the global correspondent banking model has frustrated corporate clients and prompted market entrants to develop alternative solutions. flow’s Graham Buck assesses whether the model is fit for future purpose
The global payment system has long relied upon correspondent banking to execute cross-border payments from a respondent bank to a beneficiary bank.1 The model has preserved trust and security for years, but is becoming outmoded as corporates seek real-time or near-real-time services, and emerging and maturing new technologies – such as distributed ledger technology – make them possible.
The Federal Reserve is now entering the arena with plans to launch FedNow, a service that will enable US banks to offer 24/7 real-time payment services by 2024.
Meanwhile, market entrants are responding to demands by utilising technology and alternative payment routing. Often providing cheaper and faster execution, these services might appear to offer the antidote to long-held issues with traditional cross-border payments. One area where they cannot compete, however, is security.
With around US$7bn lost to fraud by corporates worldwide between January 2016 and October 20172 and a median loss of US$104,000 per incident for larger companies (nearly doubling for small businesses), the checks and balances designed to rein this in need reassessing.
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