Sibos 2017: The emergence of SWIFT gpi and the future of correspondent banking

By Alex Hammond | 17 October 2017

In one of the livelier panel discussions on Day One of Sibos 2017, Stefan Dab, Senior Partner and Managing Director at The Boston Consulting Group led a conversation examining the future of correspondent banking, and specifically the pain points corporate treasurers face in their cross-border payments operations and where technology can be developed to alleviate these.

It is clear that the global economy is shifting to create a new landscape which is putting strain on the current correspondent banking system, and consequently is highlighting its flaws. Globalisation, the rise of the global marketplace through cross-border payments for domestic products, coupled with the expectations of a new generation of corporate treasurers who have grown up used to the user experience of purchasing through digitally native platforms such as Amazon, are all factors that raise the question of where correspondent banking, and even if correspondent banking, has a future?

SWIFT gpi – the correspondent banking saviour?

The discussion became focused on the new SWIFT gpi network, how the technology is intended to improve cross-border payments for corporates, and whether SWIFT gpi is the optimal solution for treasurers, both now and looking ahead.

Representing treasurers on the panel was Javier Orejas, Head of Banking, EMEA & Americas at IATA, the organisation responsible for 80% of global air travel. As a processor of billions of dollars of cross-border payments annually, Javier was quick to explain the frustrations he has with existing technology.

Unsurprisingly, Javier points to transparency issues as the key grievance he has with the current correspondent banking system. A lack of visibility on when the transaction is completed is a constant source of headaches for cross-border payments initiators; due to the lack of speed in the system corporates know the time the transaction is processed but do not know at what point the payment is completed. This lack of transparency also impacts cost, as the recipient of the payment can receive a different sum to the payment they expected.

Javier also highlights security issues, particularly those centred around data protection and AML, as pain points correspondent banking in its current form impose on corporates, and also the lack of clear definition and upkeep of regulatory standards.

Emma Loftus Head of Global Payments, Foreign Exchange and Channels for J.P. Morgan, argues that the introduction of SWIFT gpi does begin to address some of the pain points that Javier cites with the current correspondent banking service.

The overarching criticisms of corresponding banking are that the system is slow, expensive, and lacks transparency, but Loftus contends that SWIFT gpi is addressing these concerns directly by increasing connectivity across banking. Its intention is to achieve full visibility of the payments process for corporates end-to-end, including demystifying costs, thus alleviating many corporates’ concerns as the ecosystem is widen to include more banks globally and standards across the system are improved.

On the other hand Nigel Dobson, General Manger, Wholesale Digital Transformation at ANZ offers a radically different view on the effectiveness of SWIFT gpi in taking affirmative action to prevent the loss of clients who were unsatisfied with correspondent banking and were looking to non-banking alternatives for better solutions.

Dobson argues that the current framework of correspondent banking needs overhauling, and replaced by a new approach that is centred on radically different, disruptive technology. He continues by stating that blockchain could hold the key to this disruptive new technology as it has no liquidity but does transfer value. He argues that a hybrid model containing both traditional SWIFT gpi transactional banking components and blockchain components will ultimately help banks maintain their customer base.

Ultimately it isn’t corporate treasurers who are deserting traditional banking, it is retail and small business customers that are being ignored by the banks who are looking for better solutions at cheaper prices.

Does correspondent banking have a future?

Christian Westerhaus, Head of Clearing Products, GTB Cash Management at Deutsche Bank advocates greater agility in the marketplace moving forward for treasury than the two years it took to develop SWIFT gpi for correspondent banking to survive, a statement that Javier Orejas is quick to echo.

He contends that banks are entering a stage of ‘digital Darwinism’ where the expectations of corporates are rapidly increasing and are clear. Players in the market will need to satisfy those expectations quickly through technology solutions, those who are unable to do so will find themselves struggling to remain in existence.

Nigel Dobson is another believer of this theory, and points to domestic payments in China as the primary example of a scenario where tech companies have seized market share from banks through developing credibility and reputation. It is possible, he asserts, for significant networks to evolve and become established outside of the banking system; this threat is on the doorstep of correspondent banking and will render the system obsolete if drastic action is not taken.

“Many industries have shown that thinking they had more time than they do is their death nail. It is these industries that mis-define their purpose and timing that lose,” he states.

One opinion from the floor that was met with accord from the panel was that perhaps the greater issue to correspondent banking isn’t in fact the transparency issue of the system, but rather the shrinking of the global network which is reciprocal to the nature of the expanding global economy.

Christian Westerhaus agrees, stating that banks must consider which parts of the global ecosystem that SWIFT gpi is not addressing.