What are banks’ pain points due to de-risking strategies?

By Puja Sharma

The survey examines pain points faced by banks and FinTechs as a result of de-risking strategies. While the big banks have been forced to protect themselves, their actions are leaving many smaller banks and non-bank Financial Institutions (NBFIs) without correspondent banking partners.

According to the research commissioned by Payments Bank, Banking Circle, big bank de-risking is significantly hampering the efforts of many Financial Institutions to deliver services that empower financial inclusion. The root cause appears to be the risk-averse strategies adopted in response to the financial crisis of 2008 and subsequent money laundering fines imposed on several big banks.

Banking Circle is the payments bank for the new economy. As a fully licensed bank, free of legacy systems, it enables payments companies and banks of any scale to seize opportunities in the new economy – quickly, at a low cost.

While the big banks have been forced to protect themselves, their actions are leaving many smaller banks and non-bank Financial Institutions (NBFIs) without correspondent banking partners. And this means they are unable to access fair and affordable international banking solutions, the consequence of which is that already financially vulnerable society and businesses are further excluded and put at a greater disadvantage than ever.

Banking Circle surveyed 700 cash managers and corporate treasurers in the UK, northern and southern Europe. The survey found that 65% of respondents believe they currently have too many banking relationships. However, while most have had to take on additional relationships to remain competitive and keep serving diverse customer requirements, many also report that they had found themselves let go by their banks, some with less than a month’s notice.

The survey also asked respondents about the current correspondent banking offering, to examine how, coupled with bank de-risking, the current solution is compounding financial exclusion for many customers. Less than half of the respondents believe there are any good alternatives to traditional cross-border payments although 71% feel that an alternative would benefit the global economy.

“It’s no industry secret that some banks have been de-risking for decades,” said Mitch Trehan, UK Head of Compliance and Money Laundering Reporting Officer at Banking Circle. “However, this has intensified in recent years and our latest research reveals the impact this is having on smaller Financial Institutions across Europe. For example, the banks and non-bank Financial Institutions with fewer correspondent banking relationships reported having difficulty offering international payments, and their costs have increased.

“It is a spiral that the financial industry has a responsibility to address. Individuals and businesses should have fair access to the banking solutions they need to prosper and Banking Circle’s mission is to build a new tech-based approach that improves processes and lowers costs for banks and non-bank financial institutions of all types and sizes.”

Key findings

• Two in Three said their bank ended their relationship because they no longer met the bank’s eligibility criteria.
• Around 77% have more banking relationships now than they did ten years ago.
• Over 80% have seen correspondent banking costs rise.
• Approx 44% stopped offering international payments because their bank ended the relationship.