The Silk Road: Ancient Trade Routes, Modern Information Flows
For millennia, exports and imports along the southwestern route of the Silk Road have facilitated the creation of great wealth and a rich cultural and information exchange. Today is no different. The U.S. Census Bureau reports U.S. Exports to India increased by 260% over the last decade. However, this growth is being hampered by a pullback in correspondent banking relationships, especially for smaller banks. Correspondent banks depend upon increasingly complex, oftentimes burdensome and therefore costly, information requirements to maintain respondent bank relationships.
The Correspondent/Respondent Bank Relationship & SWIFT
A recent report by the Bank for International Settlements (BIS) defines correspondent banking as “simply (a) arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks”.
Correspondent banking relationships permit overseas banks (respondent banks) to access financial services and facilitate cross-border payments to their customers, promoting international trade. The backbone of these relationships depends upon an international flow of information to establish accounts, authentication instructions and payment and clearing services. Respondent banks’ inability to provide cross-border products and services is typically due to the absence of access to this international network. The information and authentication network most widely used by banks since the late 70’s has been based on the SWIFT (Society for Worldwide Interbank Financial Telecommunication) platform.
Banks are citing increasing costs and uncertainty about new regulatory requirements for customer due diligence as the main reason for cutting back correspondent relationships. The Know Your Customers’ Customer (KYCC) requirement is dissuading banks from maintaining or establishing new relationships with respondent banks that are low volume or located in markets perceived to be risky. There are a host of other risks from compliance, reputation, a reluctance to transact in foreign currencies with a higher risk of economic sanctions, or issues related to money laundering or terrorism. At the heart of this problem is the efficient flow of information that will facilitate cost-effective compliance with KYCC.
The Opportunity: SWIFT India
On March 3, 2016, India’s financial community welcomed the expansion of the SWIFT platform in India. Formally approved by the Reserve Bank of India last year, the digitization and harmonization of participants in the domestic Indian community promises the opportunity of more efficient information flows domestically and internationally. Eleven domestic banks are already live on the SWIFT network. The potential for correspondent banks to transact while observing KYCC requirements could facilitate more efficient information flows on letters of credit, documentary collections, and open account transactions with insured receivables.
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