Why sending money overseas is about to become even more difficult

If you’ve ever had to send money across borders, either as a business or an individual, you know just how frustrating, time-consuming, and expensive it can be. But according to forecasts from financial industry experts, it may soon get worse. Major banks around the world are increasingly cutting ties with foreign partners, leaving organisations to wonder how they will transfer money across borders once the world’s correspondent banking network begins to contract.

For those who aren’t familiar, correspondent banking is a process whereby one financial institution provides services on behalf of another. It’s through these relationships that banks are able to process trillions of dollars in cross-border payments every year. But there’s one big problem with this model: transparency.

Correspondent banking networks offer payers and payees virtually no visibility into the path of their funds transfer, and banks involved in the process don’t know with any certainty that others in the chain adhere to their same standards of scrutiny. Always risk-averse, the financial industry has expressed growing concern that these relationships could unknowingly be exploited for the purposes of terrorist financing, money laundering and other nefarious activities. As a result, the correspondent banking model is being called into question.

The decline of correspondent banking

North America and western Europe have seen the largest reduction of correspondent banking relationships. Data from the Bankers Almanac, compiled by Accuity, shows declines of 46 per cent and 39 per cent respectively. According to a letter to investors from CEO Jamie Dimon, JPMorgan Chase & Co alone terminated relationships with some 500 foreign partner banks last year.

This contraction couldn’t have come at a worse time. The rise of two-sided platforms such as Airbnb, Uber and Amazon has increased the demand for a viable method of moving high volumes of low-value transfers across borders. eMarketer reports that these types of digital retail payments are expected to grow from $1.3trillion in 2014 to roughly $3.6trillion by 2019. Emergent platforms have come to rely on the correspondent banking network for the distribution of earnings to their hosts, drivers, and sellers. Could the demise of this banking model also limit the global expansion of gig economy platforms?

New technologies and alternative solutions
Fortunately, the gig economy has access to another solution. Cross-border payment functions traditionally serviced by centralised banking institutions have been disintermediated by agile financial technology firms such as the San Francisco-based Hyperwallet. Hyperwallet has spent more than 15 years building a robust network of financial partners beneath its global payout platform in anticipation of correspondent banking’s contraction and tougher regulatory scrutiny.

“We knew back then that the banks’ correspondent relationships would never evolve,” explained Peter Burridge, Hyperwallet’s Chief Commercial Offer. “Hyperwallet was created to eliminate payout inefficiencies and costs for platforms requiring rapid cross-border transfers.”

A “network of networks,” Hyperwallet’s platform is authorised as an electronic money institution by the Financial Authority of the UK, an important classification when it comes to handling marketplace payouts in today’s regulatory environment. “The introduction of the Second Payments Services Directive, or PSD2 as its commonly referred to, requires two-sided marketplaces to revisit the way that they handle transactions on their platform,” says Burridge. “Simply put, marketplaces that have built their own end-to-end payments system using correspondent banking networks may actually find themselves in violation of these rules, which confirm that a platform cannot act as agent for both the buyer and the seller.”

Forecasts predict that correspondent banking relationships will continue to decline, with an estimated 15 to 20 per cent of these relationships ending over the next five years. Legislation such as PSD2 will likely hasten this downward trend as businesses look to new and innovative cross-border payment solutions such as Hyperwallet. A viable payout alternative for businesses that have in the past relied on banks to distribute mass cross-border payments, Hyperwallet promises to help platforms improve transparency, reduce transfer times, and scale operations to overseas markets.


To learn more about Hyperwallet and how the company is disintermediating correspondent banking relationships, download their ebook, “Five Ways Payments Can Accelerate Your Marketplace Growth.”

+44 (0)800 086 9801 europe@hyperwallet.com

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