Payments

BAFT Releases New Guidance to Stem Correspondent Banking Decline

An updated guideline for respondent banks has been released by BAFT in a bid to better equip them to maintain their correspondent banking relationships in a complex regulatory environment.

Via Global Trade Review (GTR) by Eleanor Wragg

BAFT (Bankers Association for Finance and Trade) has released an updated version of its guidelines for respondent banks in a bid to better equip them to maintain their correspondent banking relationships amid an increasingly complex regulatory environment.

The Respondents’ Playbook 2.0: A Correspondent Banking Relationship Guide serves as a roadmap for respondent banks on international anti-money laundering (AML) and combating the financing of terrorism (CFT) standards. It outlines the decision-making process of correspondents establishing new and reviewing existing relationships and the measures that respondents may take to increase the likelihood of a favorable outcome.

Correspondent banking relationships are crucial for the financing of global trade, as they enable banks that may not have a presence in certain countries to still facilitate transactions, such as issuing or confirming letters of credit, in those regions.

However, although both the volume and value of cross-border payments have surged in the last decade – the Bank of International Settlements estimates increases of 61% and 37%, respectively –the number of correspondent banking relationships has fallen by 29%.

This decline is largely due to a heightened focus by banks on regulatory, reputational and financial risks from AML and CFT. With compliance costs increasing, for many banks, the risk presented by a sprawling network of interbank relationships – particularly in emerging markets – is too great to bear.

The BAFT playbook, which reflects the expectations and recommendations of a majority of the 20 largest global correspondent banks, clarifies correspondent bank expectations and provides constructive guidance for respondents to reduce their perceived financial crime compliance risk.

The new document replaces BAFT’s first set of guidelines, published in 2019, and includes adjustments to bring the guidelines in line with current regulatory concerns and correspondent bank risk appetite.

The 2023 version also includes information on the migration to the new ISO 20022 standard for financial messaging which will boost bank screening and filtering capabilities via a single format for transactions across different systems, platforms and geographies.

Navigating the Labyrinth: BAFT’s Updated Playbook on Correspondent Banking Relationships

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

Via Trade Finance Global by Deepesh Patel

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

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

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 payments 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 revolutionize 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 revolutionize 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.

BAFT Releases Updated Correspondent Banking Relationship Guide, Respondent’s Playbook 2.0

BAFT released today an updated version of its Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship.

The BAFT Respondent’s Playbook 2.0: A Correspondent Banking Relationship Guide serves as a roadmap for respondent banks on international anti-money laundering and combating the financing of terrorism (AML/CFT) standards. This updated correspondent banking relationship guide provides actions that may improve the ability of respondent banks to obtain and maintain a correspondent banking relationship.

This is an update to the 2019 guidance document for users of correspondent banking services. The Respondent’s Playbook 2.0 newly outlines the decision-making process of correspondents establishing new and reviewing existing relationships and the measures that respondents may take to increase the likelihood of a favorable outcome.

The 2023 version incorporates current regulatory changes in the marketplace and includes a new section on the ISO 20022 migration in addition to sections covering:

An Introduction on the Current State of Correspondent Banking
Establishing a New Correspondent Relationship
Maintaining an Existing Correspondent Relationship
Options for Respondent Banks Unable to Obtain or Maintain a Relationship
Special Considerations for Money Services Businesses and Fintechs
Frequently Asked Questions from Respondent Banks

BAFT Members can download the Respondent’s Playbook 2.0: A Correspondent Banking Relationship Guide for free. Non-members can purchase the updated guide through the BAFT Store.

Navigating the Future of Digital Payments: Efficiency, Security, and Compliance

In an era marked by technological advancement and rapid digitization, the landscape of financial transactions has undergone a transformative shift. Traditional modes of payment, such as checks and physical currency, have given way to the convenience and efficiency of digital payments.

By Deepa Sinha, Vice President of Payments and Financial Crime, BAFT via Trade Finance Global

Automated Clearing House (ACH), wire transfers, and credit cards have become the cornerstones of modern commerce, enabling seamless transactions across borders and time zones. However, as these digital payment methods flourish, industry stakeholders are increasingly cognizant of the inherent risks that come hand-in-hand with this progress.

The Digital Advantage: Efficiency and Accessibility

Digital payments have revolutionized the way businesses and consumers conduct transactions, offering unparalleled convenience and speed. ACH transfers allow for the automatic movement of funds between accounts, streamlining processes like payroll and bill payments.

Wire transfers expedite international transactions, eliminating the time-consuming intermediaries of traditional cross-border commerce. Credit cards, with their widespread acceptance and instant payment capabilities, have become the go-to choice for in-store and online purchases.

Beyond the convenience, these digital methods have democratised financial access. Small businesses can now compete on a global scale, reaching customers beyond their local markets. Consumers benefit from the flexibility to manage their finances, make purchases, and pay bills with a few clicks. However, these benefits come intertwined with potential risks that necessitate careful consideration.

Navigating the Risks: Security and Fraud

The rise of digital payments has also given rise to an array of cybersecurity challenges. With transactions occurring in the virtual realm, the potential for cyberattacks, data breaches, and fraud has grown exponentially.

While security breaches predominately occur with merchants connected to the network rather than the payment systems themselves, malicious actors are constantly seeking vulnerabilities in payment systems to gain unauthorized access to sensitive information, leading to financial loss and reputational damage for both businesses and consumers.

ACH transactions, while efficient, can be susceptible to account takeovers and unauthorized withdrawals. Wire transfers, particularly in international contexts, may be subject to fraudulent instructions that divert funds to the wrong destinations.

Credit card fraud remains a persistent concern, with cardholder information being compromised via retailer breaches. As these risks evolve, industry stakeholders must adopt comprehensive security measures to safeguard digital transactions.

The Role of Regulations and Compliance

Recognizing the critical need to address these challenges, regulatory bodies have implemented measures to protect digital payment ecosystems. The Payment Card Industry Data Security Standard (PCI DSS) provides robust requirements for safeguarding credit and debit card data, requiring encryption, regular security assessments, and compliance reporting.

A lack of PCI compliance by non-bank entities (major retailers, most prominently) has been the proximate cause of major data breaches, demonstrating that a secure ecosystem relies on compliance by all data handlers.

The EMVCo (Europay, Mastercard, and Visa Consortium)’s global card and mobile payment security standards are a major step forward in securing new payment types and have reduced payments fraud worldwide. The new EMV Secure Remote Commerce (SRC) standard is increasingly found online, where it’s called “Click to Pay” and leverages a combination of methods to secure card-not-present transactions.

The Bank Secrecy Act and Anti-Money Laundering regulations impose robust due diligence practices on financial institutions, mitigating the potential misuse of digital payment platforms for illicit activities.

Yet, achieving compliance is not a one-size-fits-all solution. Industry participants must tailor their security protocols to their specific operational landscapes. Robust authentication mechanisms, multi-factor identification, adoption of the latest standards from bodies like the PCI Council and EMVCo, and real-time transaction monitoring are among the strategies that can fortify digital payment platforms against threats.

Uneven regulations between banks and non-banking financial institutions across the global payments industry are a problem that needs to be addressed. The BAFT Global Payments Industry Council, comprised of senior bankers in global payments, is publishing a collaborative white paper titled “Uneven Regulations in Payments”, which is a model code for how to remedy the uneven payments landscape.

It addresses the uneven regulations’ four themes and their implications:

Regulatory Oversight,
Extension to Sponsorship – Indirect Scheme Participation,
Consistency of KYC/CDD Requirements,
Permissibility of Cross-Border Activity.

The overarching principle should be to avoid ambiguity or “silent” rules, which will then lead to different interpretations and difficult enforcement. The paper will be published later this year.

Collaboration and Innovation as Defenders

As the digital payment landscape continues to evolve, collaboration and innovation emerge as vital strategies for managing risks. Industry stakeholders must come together to share insights, best practices, and emerging threat intelligence.

Financial institutions, retailers, fintech startups, cybersecurity experts, and regulatory bodies must forge partnerships to create a united front against cyber threats.

Furthermore, embracing technological advancements such as artificial intelligence (AI) and machine learning can empower payment platforms to detect anomalies and patterns that indicate fraudulent activities. Real-time fraud detection algorithms can provide an additional layer of security, swiftly identifying and blocking suspicious transactions.

No Pain No Gain

The ongoing digital payment revolution offers a host of benefits, enabling businesses and consumers to transact with unprecedented ease. However, these advantages are accompanied by inherent risks that require strategic vigilance and action.

Security breaches, fraud, and compliance challenges underscore the need for comprehensive risk management strategies. By implementing robust security measures, adhering to regulations, fostering collaboration, and leveraging innovative technologies, the industry can navigate the intricate landscape of digital payments and usher in an era of secure and seamless transactions.

“Don’t Forget About Us”: SVB’s Impact on the Underbanked

Regulators need to ensure that new rules passed in the wake of the U.S. banking crisis do not increase financial exclusion, writes Tod Burwell, President & CEO of BAFT.

Via The Banker

Reactions to recent bank failures in the U.S. have unfolded along predictable lines. Banks are re-examining their client diversity, liquidity, risk management approach, lending practices and counter-party risk. Regulators are re-examining the appropriateness of existing regulations and the need for new guardrails. Investors are re-examining their risk profiles and due diligence on portfolios. There is a flight to quality.

These are all very reasonable measures to reinforce the resilience of individual institutions and the overall banking system. Yet what has not often been mentioned are the implications of recent banking failures on the underbanked and those most at risk of financial exclusion.

For several years, BAFT (Bankers Association for Finance and Trade) has highlighted the impact of correspondent bank de-risking, with the current trade finance gap standing at around $1.8bn globally, and discussed potential solutions.

The trade finance industry has endeavored to close this gap; multilateral development banks and alternative finance providers have increased lending to fill funding gaps in emerging markets; fintechs have introduced solutions to reach the underbanked; and governments have introduced policies that widen participation in national financial systems.

Then, in one day, we witnessed $42bn of deposits withdrawn from a single institution in what has been described as “the first Twitter-fuelled bank run”, causing a wave of disruption throughout the system. U.S. bank deposits fell by about $175bn in the week following the collapse of Silicon Valley Bank (SVB), hitting their lowest level in two years by the end of April.

Lower deposits limit the amount of lending that banks can extend, with small and medium-sized enterprises (SMEs) the most vulnerable to the resulting squeeze in credit. Biz2Credit’s Small Business Lending Index shows that large bank lending approval rates fell to 13.5% in April 2023, a drop of more than 50% in the past three years. Small bank approvals meanwhile fell to 18.7%, nearly a 60% decline over the same period.

Strong Systems Needed

Increased financial inclusion is a contributing factor to two-thirds of the UN’s Sustainable Development Goals, promoting growth, addressing poverty and enhancing financial stability of society. While large banks remain systemically important to the global economy, these institutions rely on strong local and regional banking systems to reach parts of the market they are less equipped to serve.

In the weeks following the recent U.S. bank failures, the country’s regional banks have been adversely affected, with their letters of credit requiring additional confirmation and additional restrictions being placed on their ability to obtain insurance on certain transactions. Relationship reviews are underway, putting additional institutions in jeopardy of being de-risked.

Fintechs routinely partner with banks to extend capabilities to the SME and micro-SME market with cost- and technology-efficient solutions. Non-traditional financial service providers are engaging in more traditional banking activity.

However, fintech, crypto and digital wallet companies that accept and hold client funds are also susceptible to interest rate risk, uninsured assets and liquidity crises. What will be the consequences of SVB for fintech banking? Fortunately, the recent U.S. bank failures have not spread to other regions of the world, but the effect on the broader ecosystem’s behaviors will be seen in the coming months.

The overall health of the international banking system remains strong, and greater inclusion inside the transparent and regulated system is better than outside it. Correspondent banks should absolutely look at their individual portfolios to make sound risk and liquidity decisions, but also consider the broader economic impact of fewer companies able to trade, transact and make payments if de-risking is expanded.

While it is certainly appropriate to re-examine regulations to determine if any modifications are required, regulators should also take care to avoid unintended consequences of more financial exclusion resulting from new regulation.

Next Steps

BAFT has participated in the World Trade Board’s efforts to produce a roadmap for financial inclusion in trade, outlining steps various parties can take to help eliminate the $1.8tn trade finance gap. It calls for digital, data and legal infrastructure reform, new funding sources and technical assistance to organizations that need to build their capabilities.

This last point was identified particularly with local and regional banks in mind. Regional banks would do well to increase not only their technical capabilities, but also would benefit from increasing their direct relationships with each other across the global community.

The World Bank estimates around 1.4 billion adults remain unbanked, and SME and micro-SMEs around the world remain particularly vulnerable to disruption in the financial system. If our collective response leads to more financial exclusion, one could argue that we will have weakened, rather than strengthened, the overall financial system.

During a recent conversation with a friend who is a small business owner, I talked about what the banking industry and policy-makers were doing in response to recent bank failures. His response still resonates: “Don’t forget about us.”

New Correspondent Banking Hub Launched by TFG in Collaboration with BAFT and EBRD

Trade Finance Global launches a dedicated Correspondent Banking hub, in collaboration with BAFT and EBRD, to provide sector-specific content and resources for professionals in the global correspondent banking industry.

LONDON —Trade Finance Global (TFG) is thrilled to launch its latest addition to its platform—a dedicated Correspondent Banking hub, in collaboration with BAFT and EBRD. This innovative hub aims to provide a wealth of industry-specific content and resources, catering to the evolving needs of professionals in the correspondent banking sector across the globe, whilst amplifying the voice of key regions and markets.

Correspondent banking plays a pivotal role in international trade, facilitating secure and efficient cross-border transactions. In recent years, traditional correspondent banking has experienced exponential changes across product delivery and servicing, regulatory compliance as well as relationship building. Therefore the need to provide up-to-date knowledge and insights on this impactful sector.

Rudolf Putz, Head of the Trade Facilitation Programme, EBRD, said, “We highly welcome and support this initiative which might help us to raise awareness of the increasing difficulties of smaller banks and banks in early transition countries to establish correspondent banking relationships with foreign commercial banks.”

Responding to these changes, TFG has developed this hub to centralise pertinent information, making it easily accessible to industry professionals, banks, financial institutions, and trade finance practitioners worldwide.

The hub offers content in a wide range of formats, including articles, podcasts, and videos, covering various aspects of correspondent banking, such as market trends, regulatory developments, risk management, compliance, and technology advancements.

Tod Burwell, President & CEO, BAFT, said, “Trade Finance Global has been an important platform for thought leadership in the transaction banking industry, and BAFT is glad to further collaborate with them in support of their Correspondent Banking Hub.”

By leveraging TFG’s extensive network of global experts, thought leaders, and industry professionals, the Correspondent Banking hub ensures that the perspectives and insights from key regions and markets are prominently represented, enriching the discourse and fostering thought leadership in the industry.

Mark Abrams, Managing Director & Global Head of Trade and Receivables Finance, Trade Finance Global said, “Our Correspondent Banking hub is an exciting addition to the Trade Finance Global platform.

“We believe that providing a dedicated hub for this crucial sector will enable professionals to stay updated with the latest industry trends, deepen their understanding of complex topics, and foster meaningful connections within the correspondent banking community.”

In addition to the Correspondent Banking hub, Trade Finance Global continues to enhance its platform, delivering cutting-edge solutions that drive innovation and efficiency in the global trade finance landscape. With a strong commitment to empowering businesses of all sizes, TFG remains at the forefront of bridging the gap between trade finance stakeholders and supporting the growth of international trade.

About BAFT

BAFT, the leading global financial services association for international transaction banking, helps bridge solutions across financial institutions, service providers and the regulatory community that promote sound financial practices enabling innovation, efficiency, and commercial growth. BAFT engages on a wide range of topics affecting transaction banking, including trade finance, payments, and compliance. Follow Us: @BAFT

TFG Media Contact:
Deepesh Patel
Director, Public Relations
[email protected]
+44 (0) 7507-398018

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