Battle for correspondent bank accounts: 4 scenarios

Today, a well-established correspondent network is a major strength for many banks and payment services. If earlier the client’s choice and demand for services were driven by the size of the advertising budget, right now the issues of financial logistics are in the forefront: how the client money will be transferred to different countries and regions. In fact, today there is a war for correspondent accounts among payment service providers.

Third party payments are a huge risk and the least preferred client for correspondent banks. Therefore, in order to compensate for this kind of risks, the actual turnover of payment services is very important for banks. However, where can a payment institution get this big turnover, if it has only just started its activities and still isn’t able to offer best in class financial channels (e.g., quick payments to any regions)? As a result, we end up in a vicious circle.

Usually, I get calls from my friends, who have heard somewhere that it is easy and simple to open a payment institution. They ask, “Listen, we have got a license here. Where should we open a correspondent account?” and I laugh in response to this question.

A standard conversation between the average new payment institution with the bank, “Hello, we would like to open an account.” In return, the bank asks for millions of turnovers every month. All correspondent banks expect that your 50-million-euro turnover pass through them, with 40 million, roughly speaking, being utility payments from individuals - that is a huge turnover and super low risk.

Besides, if you have a very large amount of transactions and a low risk, correspondents will give good rates for payments. Consequently, we, as an institution, can give the best possible rates for our clients, when we have many of them. But where will they come from, as long as you don’t have correspondent relations? 

There are several scenarios.

FIRST SCENARIO

A bold fool boasting an incredible amount of investments at the start. Attract huge investments, invest in technology, advertising and everything - so that the functionality is perfect, and everything is “flying” at a super speed with all the frills and fuss; so that it can be offered relatively cheap, when going viral and attracting masses of customers. When payment services are shadowed by individual customers, then you can add a small percentage of middle risk customers to the rest - and the correspondent bank will close its eyes.

Cons: for the investor, it requires high capital investments and there is the prospect of a loss for a very long period of time. For the company – there might be some difficulties of finding such an investor.

SECOND SCENARIO

Moderate investment with a consistent development plan. The limited budget needs to be capitalized as much as possible. The company is acquiring a modest package of clients, improving results and consistently working on its weaknesses. At first, one thing gets better, then something else comes along. Product and correspondent development without a rush.

It brings a small turnover, but also requires reasonable investments.

Usually, in such companies there is a highly motivated staff, a team of like-minded people, who believe in their success story. If, at a certain stage, it turns out to be a great product, it can then be profitably sold.

Cons: the need to constantly be in suspense and ready for fast and sharp maneuvers, there is a risk of failing to adapt to these market changes.

THIRD SCENARIO

Short-lived payment institutions. For a huge amount of money, almost everything is possible and available to customers, but, in reality, not for long time - until the correspondent bank finds out.

Cons: everything can collapse in seconds, there is a high risk of losing money, reputation, and freedom.

FOURTH SCENARIO

The acquisition of “turnkey” payment services: with ready-made correspondent relations. You can further develop the company according to any of the above scenarios, but the entire set up of correspondent accounts will be already included in the “package”.

Cons: in most cases these will be some weak correspondent accounts that either offer SEPA payments only, or payments with different kinds of restrictions and huge fees.