Correspondent banking is a crucial aspect of the global financial system, facilitating cross-border transactions and enabling banks to provide international services to their clients. Establishing a correspondent banking relationship can be a complex process, but it's essential for financial institutions looking to expand their reach and offer seamless international services. In this article, we'll outline the key steps to start a correspondent banking relationship.
1. Identify the Potential Partners
When you are considering establishing correspondent relations, top-tier banks could be your first choice. Here is the top 5 banks which serve as a correspondent banks for USD currency:
- JPMorgan Chase Bank National Association
- Citibank NA
- The Bank of New York Mellon
- Standard Chartered Bank
- Deutsche Bank Trust Company Americas
Euro is a second popular currency for cross-border payments, so you can also consider to establish correspondent relations with top 5 banks for EUR:
- Deutsche Bank AG
- Commerzbank AG
- Standard Chartered Bank AG
- Raiffeisen Bank International AG
- Societe Generale
If you have doubts that those banks provide correspondent services in your geography, you can check your neighbors (competitors). Simply find them by SWIFT code here and check in which banks they maintain nostro accounts.
2. Check Out Alternatives to Correspondent Banking
Unfortunately, in recent years there is a negative trend in correspondent banking relations. According to research of Bank of International Settlements there is a constant year-to-year decline:
The key issue is de-risking - overhead on payments screening is higher than potential benefits of those relations. Increased number of sanctions and overall geopolitical tensions in the world in recent years make situation even worse. Sometimes whole countries, like Kyrgyzstan, don't have any direct relations with US banks.
For high-risk geographies and/or newly licensed banks establishing correspondent relations could be extremely challenging. That's why financial organizations are looking for alternatives. While there are disrupting players, like Ripple, which propose to replace traditional settlement with their $XRP token, most probably the real-life solution is to use pay-out systems, including Visa / Mastercard, or to establish direct bank-2-bank relations.
Establishing and maintaining direct relations with each bank where your clients are willing to send funds is almost impossible due to absence of common legal framework and potential liquidity issues. However Xferly, newly launched US start-up, could potentially solve those challenges. They use a common collateral (or optionally pre-funded account) for all direct bank-2-bank relations, integrate payments screening to ensure safety of participants and even replace SWIFT to pass messages between banks.
3. Reach Out and Initiate Contact
Once you've identified a potential correspondent bank, reach out to initiate contact. This can be done through various channels, such as email, phone calls, or attending industry conferences and networking events. Normaly, LinkedIn is the easiest tool to find a proper contact. You can pair it with Rocketreach to get email contacts. Be prepared to provide information about your institution, its business model, and the specific services you are seeking.
4. Due Diligence
Expect a rigorous due diligence process from your potential correspondent bank. They will want to assess your financial stability, compliance with regulations, and the nature of your business. You may need to provide financial statements, compliance documentation, and information about your customer base.
Check The Correspondent Banking Due Diligence Questionnaire issued by Wolfgang's Group which is basically the industry standard for due diligence procedures when establishing correspondent relations.
Starting a correspondent banking relationship is a significant step for any financial institution looking to expand its international reach. While the process can be complex and demanding, careful planning, due diligence, and compliance with regulations will pave the way for a successful and mutually beneficial partnership.
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