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Challenges of Correspondent Banking in Cross-Border Payments

March 18, 2024


Correspondent Banking in Cross-Border Payments

Correspondent banks play a crucial role in completing the transaction loop for cross-border payments. But the job isn’t easy. Here are the challenges.

As the world becomes increasingly digitalized and global, the cross-border payments market is expected to grow exponentially, reaching a value of $361.9 trillion by 2032. This growth will be fueled by emerging payment methods and innovations in payment processing. The introduction of new payment formats, like the ISO 20022, the launch of CBDCs, and the 24/7 availability of transaction processing will continue to drive the evolution of the payment landscape. To keep pace with the speed of change, FIs, especially correspondent banks, need to focus on agility in adapting to new technologies, industry norms, and regulatory frameworks.

Source: Faster Payments Council

The Role of Correspondent Banking

Correspondent banks have been providing services since the late 19th century, facilitating the transfer of funds between banks. It is a financial institution authorized to provide services on behalf of another bank, often in another country. It functions as an intermediary to facilitate cross-border transactions between a domestic bank, and an overseas bank. It gives access to domestic banks to foreign financial markets and allows the servicing of international clients without needing to open a branch in another country. Correspondent banks also offer numerous other services, including liquidity management, currency conversion, and compliance with local laws.

Role of Correspondent Banks in Cross-Border Payments

Source: Aite Novarica

Challenges of Facilitating Cross-Border Payments

The increasing demand for instant payments worldwide presents both opportunities and challenges for correspondent banks. Customers today expect transparent, real-time (or near-real-time) payment execution, domestically and internationally. In addition, FIs face the pressure of providing seamless experiences in all customer interactions, including cross-border payments. This requires linking domestic and international real-time clearing services and minimizing completion times from days or hours to mere seconds. All this brings its own set of challenges.

High Costs

Cross-border payments tend to be costlier than domestic transactions, given the involvement of currency exchange expenses, regulatory costs, and charges for intermediary services. As of end-2023, banks are the most expensive cross-border remittance provider according to the World Bank, costing an average of 11.48% of the transaction, compared to the global average of 6.20% for payment providers in general.

Average Cost of Remitting from G20 Countries

Source: World Bank

Forex Rate Risk

Fluctuations in currency exchange rates have a major impact on the cost of cross-border payments. This makes it difficult to predict with accuracy what the cost of a specific payment is likely to be, which can lead to unexpected losses and gains.

Lack of Transparency

Cross-border payments tend to be complex, and without transparency, which makes it difficult to track transactions. Transparency is required to ensure the security of payments and keep all parties informed of the status of the transaction. This not only helps the sender understand the cost of transaction, including forex costs and fees, before sending the payment, but also reduces the risk of financial crimes and fraud.


Interoperability between payment systems, networks, market infrastructures, and FIs is crucial for successful and rapid cross-border payments. This requires the adoption of common protocols and standards, while improving regulatory frameworks and infrastructure to ensure efficient and secure cross-border transactions.

Regulatory frameworks for cross-border payments vary across jurisdictions and include a variety of aspects, such as KYC, AML, and data privacy laws. Correspondent banks need to ensure compliance with regulations across geographies, which is both time-consuming and complex.

In the US, BASEL III mandates a standardized approach to determining a bank’s operational risk capital requirements based on:

  • A measure of the bank’s income.
  • A measure of the bank’s historical losses.

Source: Deloitte

Security and Data Protection

Transmitting financial information across borders raises security risks and the potential for fraud. Different countries have varying data protection laws to safeguard such sensitive information, such as the California Consumer Privacy Act (CCPA) in the US, or the General Data Protection Regulation (GDPR) in the EU. These regulations lay down the rules for access to and use of customer data, and complying with them across regions makes interoperability challenging for correspondent banks.


Liquidity Management 

Ensuring that transactions are successfully completed in the right currency and at the right time requires correspondent banks to manage fund flows between countries, while also managing risks related to forex fluctuations. The aim is to ensure that sufficient funds are available to cover both expected and unexpected payment requests.


Competition from FinTech

The proliferation of FinTech has disrupted the market with innovative solutions and intensified the competition for correspondent banks. These new players capitalize on alternative approaches and innovative technologies to ease money movement across networks. Cloud technology plays a pivotal role in making such services available. Correspondent banks need to consider transitioning from on-premise environments to cloud-based banking to drive agility in meeting the evolving demands of today’s interconnected world. Cloud technology not only improves flexibility and scalability, but also enhances data management and security. This, in turn, eases compliance and fosters customer trust.

Enhancing Cross-Border Payments

Source: Australian Payments Network

Powering Correspondent Banks for the Future of Cross-Border Payments

In a world that values faster payments, correspondent banks need to ensure that cross-border payments become more convenient, efficient, and accessible for individuals and businesses alike. This requires adopting technology solutions that will increase transaction speeds and keep the FI at par with advancements in FinTech. This also means staying updated on the evolving needs of payment systems and applications, including potential challenges to seamless cross-border payments.

With almost three decades of experience of providing cutting-edge solutions for the finance sector, Opus Technologies powers correspondent banks to migrate to the latest technology solutions to enhance operations and stay ahead of the curve. With custom strategies to ensure minimal disruption to operations during the transition phase, the experts at Opus ensure seamless implementation of the best-fit technology solutions. Contact the team today to understand how you can future-proof your organization for cross-border payments.

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