Correspondent Banking and Network Management
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The area of Correspondent Banking more recently entitled “Network Management,” is a business sector in the banking world that is often misunderstood, or not even known about. This is because it sits within the “Bank to Bank” space, or “Wholesale Payments” area, and not in the Retail and Corporate Banking sectors. So, to the commercial client who sits at the “front-end,” it is totally invisible; and as far as they know, it does not even exist!
Most of us possess bank accounts as individual members of the public, consumers; and as commercial and corporate entities do too. So similarly, banks also have accounts with other banks, for using their services regarding exchanging and trading currencies that are required to meet the payment obligations on behalf of their corporate and retail customers. This is called Correspondent Banking; or now often termed “Network Management.”
Without Correspondent Banking, and this “inter-bank” activity, international trade, cross-border payments, and the exchange of currencies, which is key to the ability of buyers and sellers across the globe to do business, would not happen. Without Correspondent Banking, Banks would not be able to provide the international services they currently offer to all their clients, as part of their core services.
However, as with all financial transactions, there are challenges regarding certain aspects, such as; transaction fees and “hidden” correspondent bank fees, and the transaction timescales involved from a buyer’s bank account in one country, to a seller’s bank account in another, amongst other issues. These challenges are present across both the High and Low Value International and Domestic Payment Infrastructures that exist to “clear and settle” all payment obligations between buyer and seller, on a “full and final settlement” basis.
The biggest impact and noticeable feature of Correspondent Banking is often felt at the “front-end;” that is in Retail and Corporate Banking areas, as mentioned earlier, due to timescale and hidden fees. Experience shows that the latter is the most frustrating. For example, on many occasions a buyer makes a payment to a supplier for goods purchased under a Letter of Credit, or on an “Open Account” basis, where say USD 100,000 is owed to the seller. But only USD 90,000 is credited to the supplier’s/seller’s bank account; clearly much to the latter’s frustration. In this instance, one bank or several banks across the cross-border payments correspondent routing, will have taken their individual fees as a deduction for their “routing services” - often termed “Bene Deduct” - from the original currency amount transmitted by the buyer’s bank (often called the “Ordering Party” or “Initiating Bank”) - as payment for “work done” on a “pass-through” basis. These are considered “hidden” type fees; and an area that the SEPA initiative has addressed with regards for cross-border Euro transfers.
Many US International Clearing Banks (i.e., the Initiating Banks) earn their revenue from taking a “Bene Deduct” fee on individual cross-border payments; that is on currency-to-currency transactions - generally USD - through a sliding scale, based on the individual transaction values of each US Dollar Commercial Payment.
The “Bene Deduct” is taken before the individual payment is sent to USD Clearing (CHIPS, or FedWire). These “charges” are usually levied as a percentage basis according to where the “payable amount” sits in an agreed Bank-to-Bank sliding scale tariff. This is especially true in the USD Payments arena; given the USD is the world’s biggest trading currency.
In Japan it is even more challenging; as a Japanese Bank is permitted by local law, to charge a percentage of say 2% or even more, as a “Credit Deduct” for the incoming funds, when crediting these same funds to their customer’s local bank account held with them; that is the supplier/beneficiary of the incoming payment. In short; an agreed sum as a percentage is deducted from the incoming sum that is credited to the beneficiary.
As mentioned earlier; despite industry initiatives, such as SEPA - which ensures the need for the initiating party (the buyer) to have full notice in advance of fees levied before the payment is actioned - fees can still be deducted. Why? (1) Because of the number of intermediary banks involved in processing the payment, and transaction “mid route;” and (2) due to the laws of disparate local legal jurisdictions, where these same banks are based. In addition, some banks as beneficiary institutions might possibly be outside the SEPA area. Such scenarios are often termed: “one leg in; and one leg out.” The “leg” element refers to the country presence of the account in question (buyer or seller). “One leg in” denotes a bank based within the SEPA geographical environment; and “one leg out” denotes a bank based outside of SEPA geographically.
Therefore; there are a minefield of issues. This is not helped by the current and on-going individual Bank-to-Bank “Network Management” agreements, which are often geared to a range of different currencies, and agreed through a series of inter-bank “revenue share” arrangements.
Above are just some of the challenges; there are of course many more. Those buyers’ and sellers’ commercial organisations, and all manner of entities whom are actively involved in international trade and cross-border currency to currency payments, should speak directly to their bank to obtain absolute clarity.
However; all is not necessarily lost. Many banks will agree a “Revenue Share” arrangement where the bank will rebate a percentage of the “Bene Deduct” fee back to the Initiating Bank. But given we are referring here largely to Bank-to-Bank Correspondent Banking, this arrangement is generally undertaken on a Wholesale Inter-Bank basis. It is unusual to see such an arrangement in the Corporate Banking sphere.
Nevertheless, some large multinational companies can negotiate more of a “generic refund” from their Corporate Banks. The Corporate in this instance must be “big” and maintain a deep relationship with the bank itself, to reap the benefit of such a “rebate” arrangement. But be aware; such arrangements are based on all services and fees across all business lines and not simply USD and Currency Clearing in the Correspondent Banking environment. There is clearly a difference here between the type, specific, and generic services offered, and these elements should not be confused. As such; again; there is the need for absolute clarity for all parties involved in such scenarios.
One further point to consider; it is not just the hidden fees, and other charges mentioned here that need to be well-thought through. One must also be aware of the FX margins deployed and settlement fees, which also impinge upon every cross-border payment transaction. It really is a case of need to know on a “need to know” basis. However; this is a separate issue, and for the moment, one to be looked at under the matter of FX and Settlement Fees in an alternative discussion.
