Connecting Corporates To A Correspondent Banking Alternative

When it comes to making international payments, corporates don’t necessarily want or need to know how much moves from their bank account to a recipient’s. What they do need, however, is speed and transparency.

Unfortunately, today’s legacy cross-border payment services rarely provide either. With global payments increasingly made via the international correspondent banking network, high volumes of funds bounce around between banking partners to get to their ultimate destination. This strategy can mean money is delayed, often without either party having visibility into what’s causing the holdup, or where the money even is.

As more organizations demand greater efficiency, businesses are finding value in deeper payment integrations. This could come in the form of embedded technology from payments as a service provider, or in the form of corporate looping directly into payment rails. But when funds must move internationally, corporate’s lack the ability or resources to access national infrastructure directly.

In an interview with PYMNTS, Tranglo CEO Jacky Lee explored why the correspondent banking system remains so sticky, and what third-party FinTechs can do to ease businesses’ biggest international money-moving pain points.

The Compliance Burden

According to Lee, one of the biggest reasons that correspondent banking remains the standard in cross-border payments is the fact that legacy banks have dominated the landscape for so long, giving them a leg-up in key areas like compliance.

“Banks are incumbents, so they can spend billions of dollars a year to ensure regulatory compliance,” he said. “This is why many financial service providers continue to use them.”

There are drawbacks to the strategy, especially for payers and payees. With multiple intermediaries, fees can add up quickly on top of traditional foreign exchange (FX) conversion costs. And, there are also the issues of a lack of transparency and speed.

But such a tried-and-true way of moving money has its benefits, too. Today, Lee said two of the biggest barriers to cross-border B2B payments include language barriers and regulatory differences from one jurisdiction to the next. A company may be able to open up its own bank account in a foreign country, but that process can be expensive, especially when it requires the creation of a dedicated team of experts with acute understanding of local regulations (and languages).

According to Lee, there are even local regulations that govern the amount and kind of data that moves along with funds across borders. Offloading that compliance burden to a financial institution (FI) can certainly be helpful.

Exploring Alternatives

Considering the complexities of operating across borders, it’s no surprise that corporates need a third-party partner to facilitate global transacting. But businesses increasingly seek an alternative to the correspondent banking network as speed and transparency no longer become beneficial options, but must-haves.

Tranglo offers businesses a virtual account service that allows firms to send and receive money across borders without having to open up individual bank accounts. Via application programming interface (API), the company integrates into existing payment rails to send transaction instructions, then uses its own payment processing network to facilitate local payout.

Last month, blockchain FinTech Ripple announced plans to acquire a 40 percent stake in the company, strengthening its presence in Asia, where Tranglo is based. The deal places a spotlight on distributed ledger technology (DLT), which is becoming an increasingly popular tool to use to bypass the correspondent banking system and move money across borders.

The technology is relatively new, and not every corporate, consumer or FI is convinced that it can provide the speed, security and transparency it says it can. But corporates need money to flow more seamlessly across borders, regardless of the underlying mechanism that gets it to where it needs to go.

According to Lee, a focus on compliance and transparency are critical to promoting adoption of any technology that fuels cross-border payments.

“Transparency and visibility into payment status builds trust, which, in turn, increases reliability,” he said. “This leads to high retention rates.”