Wednesday’s session on Blockchain and correspondent banking – The way to go? was standing room only. This is no surprise as it married a) a hot technology that attendees need to understand and b) the day to day job that pays the bills for most attendees.
The panelists were:
CEO and Founder
Senior Innovation Manager at UBS’s FinTech Innovation Lab
IBM Vice President, Payments and Blockchain
Managing Director, Treasury Services Regional Sales EMEA
Global Head of Transaction Service
Global Head of FI Payments and Clearing
They did a great job of explaining why Blockchain was the future of Correspondent Banking. Look at this classic diagram of Correspondent Banking today and replace it with a diagram that shows a shared, immutable database.
Voila 2 big benefits accrue:
cost to settle
time to settle
Blockchain technology is an enabler for the move to real time. Forget the technology – it is the move to real time that matters.
The direct cost reduction is not the big deal - not even close. For the customers of the banks - the corporates doing cross border trade - it is the second order impact of the time to settle that will drive a) massive reduction in AR and AP processing costs b) improved cash flow as the long promised Supply Chain Finance benefits scale to the mainstream.
The problem of the current dialogue about a Blockchain replacement of today’s correspondent banking network is very simple - correspondent banks are being written out of the script. Look at the panelists and you see a) technologists and b) global banks. Both agree that the future is bright.
Elsewhere in the conference there was a lot of talk about reducing the number of Correspondent Banks in your network. The driver was Compliance. You cannot have a Correspondent Bank in your network who does not comply with the latest regulations from governments related to tax, money laundering, terrorist financing and all the other bad actors who use money alongside the good actors - and these regulations get more onerous every day.
It is fashionable to say that Correspondent Banking is dead. This conflates the current incarnation of Correspondent Banking which is batch based with the concept of Correspondent Banking itself. I am convinced that Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.
The Correspondent Banking is dead meme suits the global banks. It is inconvenient for them to deal with regional banks and much simpler to have a global network that is totally under their control. The technologists will deliver that for them. Voila - a handful of global banks control global trade.
Technically this is simple – really simple. Blockchain will be like Internet - we will use it invisibly every day. TCP/IP is not rocket science (but might have been perceived that way in 1996).
If you step outside the innovation echo chamber and talk to the regional banks you can sense the discomfort. They are being forced to consider a future without themselves in that future. Yet in the real world, these regional banks are prized by their customers. Consider a classic global trade scenario:
A mid-sized company in mid-sized country wants to do business in another mid-sized country in a totally different region. For example, imagine a Malaysian company wanting to do business in Poland. Note that this is NOT big market to big market. This not an American company wanting to do business in China or a German company wanting to do business in America. Nor is this about neighboring countries with existing relationship channels; it is not a Malaysian company wanting to do business in Indonesia.
That is where banks in both places – Malaysia and Poland in our scenario – facilitate the relationships and make a profit from doing that.
The regional banks can do that because of a relationship of trust between banks in a correspondent banking network – nurtured over many lunches and other socializing at SIBOS every year. The transactions enabled by technology come later - “schmooze offline, transact online”.
Correspondent Banking will go real time. The 9,000+ member banks of SWIFT will keep the human relationships and just switch over to a new system.
The payment fees will drop by about 90%. But trade volumes will rise – as normally happens when price comes down. It will be almost totally automated so margins will be good. More importantly regional banks will keep the relationships with the companies and lend them money and provide other profitable banking services.
The enabler for all this is grossly simplified Compliance so that Regional Banks can simply plug into a Compliance utility. But that as they say is another story.