There are many small businesses that do business overseas either importing merchandise to sell in their local markets or exporting products to other countries. When James Cole, Director of Strategic Partnerships at Align Commerce, reached out to me about making a contribution to the OnDeck blog I thought it might be helpful for those in our audience who do businesses in other countries. —Ty
Did you just use your bank to send your money to an overseas supplier? Your money is most likely working its way through the correspondent banking system as we speak. Getting paid by your customer across the border in America? Money taking a while to arrive? You’ve no idea where it is? Most likely it is working its way through the correspondent banking system. Unpacking the murky world of correspondent banking is the subject of today’s post. Today we are going into the gory details so roll up your sleeves and don your rubber gloves.
Let’s look at some real life experiences and their probable causes:
Last time I paid this supplier, my money arrived in 3 days, this time round, it’s been a week and they are telling me it is still not there…
There is a premier club of tier one banks that maintain a global network of correspondent banking relationships. They have enough transactions going through their network to make maintaining these relationships commercially viable. Many smaller banks are unable to sustain such networks because they don’t have the breadth of transaction volume, so they pay the big boys for permission to send your money via their networks.
In each country the tier 1 banks will contract with at least two correspondent banks to deliver all transactions into the ‘overseas’ domestic banking system. At least two, because that gives the network fail over contingency; should one bank go down, tier 1 bank can still deliver on its obligations. The tier 1 bank must split all flow going into and out of a country between its correspondent banks, to grease the wheels of these relationships. This can be the cause of differences in delivery times: one correspondent may have a different relationship with the recipient’s bank than the other, or a different operational process.
Mega FX conversion costs…
Many companies in emerging markets who trade frequently with American businesses hold US Dollar denominated accounts, so they can be paid in USD. The largest outbound transaction flow from the US is actually USD, where US companies outsource the cost of FX conversion to their suppliers or customers, or where foreign companies want to be paid in the most easily traded currency in the world, the Dollar. However, when a US company instructs their bank to wire USD to Mexico, their bank may automatically convert USD going to Mexico into Mexican Peso’s (there is one conversion fee ~ 3%), when the money arrives at the correspondent bank in Mexico, the bank recognizes the account as being denominated in USD so they convert it back into USD (~3%). Double wammy of ~6% fees for you if you’re getting paid.
It took 7 days for our money to arrive!!…where has it been?!
Every time money moves from one bank to another it is debited from one account and credited into another. Someone needs to confirm these debits and credits have taken place correctly. Whilst much of this is done automatically using reconciliation tools, there are always exceptions and a manual process around these. This overhead means high volume accounts are given priority and reconciled more often than low volume accounts. Paying to a supplier who banks with a small regional bank? Maybe their banks account with the correspondent bank only gets reconciled once a week – meaning your money sits in the correspondent account for a few days before they even realize it has arrived and route it onto your supplier’s bank!
It turns out the correspondent banking network is a kind of distributed network. Wonderfully ironic, given the recent focus of the Fintech community on the distributed network known as the blockchain. The key difference between the two being transparency…With correspondent networks there is no way for users to investigate where money goes, and how it gets where it’s going, or what the cost of getting it there is going to be – with blockchain technology this is all wonderfully transparent.
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