Why correspondent banking is failing emerging markets

Emerging economies face financial exclusion as global banks cut ties, but credible alternatives exist.

Correspondent banking services are necessary for businesses and individuals to transact internationally. Yet, global banks are severing ties with local banks in emerging markets for various reasons.

The number of active correspondent banks worldwide fell by 22% between 2011 and 2019, according to the Bank for International Settlements. This threatens financial exclusion, trade, aid and disaster recovery.

In this article, we examine why correspondent banking is failing emerging markets, how we got here and the possible fixes.

What’s the problem with correspondent banking?

Banks are in the business of making money. But some customers, corridors and countries are just not profitable. They cost more to service than banks earn from doing so. That’s either due to the commercials, high compliance costs, regulatory or reputational risks.

So, banks decline, ‘de-bank’ or ‘de-risk’ such business. This disproportionately affects emerging markets, because correspondent banking is such a critical pillar of the international financial system.

Essentially, correspondent banking is when one bank provides services to another, such as for cross-border payments, wire transfers, currency exchange or settlement.

Imagine a business in one country wants to send payment to a supplier in another country. Their respective banks aren’t connected to the same local payment network to transfer the funds directly. So, their banks turn to a correspondent bank to execute the payment on their behalf.

Even payments that don’t involve a bank account at the customer level, such as remittances sent via a money transfer operator, rely on correspondent banking for the actual transfer of funds.

Large international banks are terminating or severely limiting correspondent banking relationships with smaller regional banks. The World Bank and other international bodies are concerned as this threatens international trade, remittance flows and humanitarian aid.

How big is the problem?

The sharp decline in correspondent banking relationships is a big problem, both in terms of size and impact to emerging markets. For example, the World Bank recorded a 60% drop in correspondent banking relationships in the Pacific Islands between 2011 and 2024 – double the world average.

Financial exclusion at an institutional level leads to the financial exclusion of local businesses and individuals. At its most basic, a transactional account is used for receiving income and making payments. It is also a gateway to credit, savings products, insurance and pensions. Financial inclusion allows people to save for family needs, borrow to support a business, or build a cushion against an emergency.

Foreign aid also depends on efficient money movement. But when bank de-risking stops funds from flowing, communities can be left waiting. Delays in disaster relief – food supply or emergency response – could result in increased suffering and even preventable deaths from malnutrition and other diseases.

How did we get here?

Banks are hamstrung by legacy and systems from 50 years ago. To process international payments, they linked different domestic systems together via SWIFT, a message system that enables international correspondent banking. This is fine in theory, but comes with drawbacks in practice.

Individual banks are part of a global system, so to maintain interoperability cannot easily make changes. International wires were always a workaround. The system may well have worked 50 years ago – and still work for traditional customers with traditional needs. But emerging markets are not traditional, nor are their needs.

Due to their smaller transaction volumes, emerging markets may be unattractive to international correspondent banks. Local market conditions can also be challenging. A lack of banking infrastructure, civil or political disruptions, regulatory requirements and corruption may increase the reputational risks and cost of compliance.

What are the possible fixes?

Naturally, the possible fixes to cross-border payments in emerging markets depend on the root cause of the problem locally, for example:

1. To overcome the problem of low transaction volumes in the Pacific Islands, the World Bank is trialling a consortium approach. It’s hoped that aggregating volumes, common standards and shared services will make it more commercially attractive to banks to provide services across the region.
2. To side-step the problem of hard-to-reach or ‘de-risked’ countries, newer payment providers, like Inpay, have built alternatives to SWIFT for cross-border payments. As payments take place between members on proprietary networks – and Inpay can pick the optimal route – global payments are as quick, simple and cost-effective as local bank transfers.
3. To improve the last-mile payment problem, newer providers are specializing. Their country and sector expertise means they can offer guidance on documents required and processes locally to pre-empt problems. This contrasts with domestic banks for which cross-border payments are neither a specialty nor core focus.
4. To address the problem of complex, dynamic regulatory requirements, newer providers often make compliance a strategic focus. This builds trust and credibility as their brands are less well-known. Combining a thorough understanding of anti-financial crime regulations with industry-leading compliance frameworks and modern screening capabilities helps differentiate them from legacy players.
5. To get around the problem of scaling, newer providers offer a unified payment platform in a single API. When pay-ins and payouts come from one place, clients can manage payments end-to-end on a single contract, often with a single integration. This is the antidote to the localization, logistical and linguistic challenges of international expansion.