April 18, 2024
April 18, 2024
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Unlocking Success in Transaction Banking: The Power of Data and Automation

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Transaction Banking - Staying in the Payments Game

In today's financial industry, transaction banking plays a crucial role in facilitating various financial transactions for corporate clients and financial institutions. This includes the processing of cash payments, providing trade finance options, and handling securities services. For international payments, transaction banking relies on a network of correspondent banks. 

Transaction banking is prised by banks for being a stable and relatively low risk source of fee income with low regulatory capital requirements that allows banks to stay close to their corporate customers. However, margins in the payments world are under pressure, driving the need to improve straight-through processing rates and reduce the need for costly manual intervention.

The financial industry has also seen a rise in non-traditional payment service providers, and customers now demand faster and more efficient payment services, adding to the pressure on banks to adapt to this evolving landscape. 

While transaction banking may face challenges in the form of shrinking margins and increasing competition, with the right strategies and investments, banks can still stay relevant in the payments game. By constantly improving their processes and embracing new technologies, banks can continue to provide efficient and secure services to their customers, maintaining the trust and loyalty of their corporate clients and financial institutions.

The Impact of De-Risking: Balancing Risk Mitigation and Financial Inclusion

Intensified margin pressure has forced many banks to de-risk and consolidate their cross-border payments operations, resulting in a smaller number of banks holding control over this area. In order to stay competitive and survive, banks in the correspondent banking sector must either expand their operations to achieve economies of scale or exit the business altogether.

De-risking is a term used to describe the practice of banks and financial institutions cutting ties with customers, accounts, and correspondent banks that are deemed to be high-risk. These high-risk activities could range from money laundering, terrorist financing, sanctions evasion, or involvement in illegal or illicit activities. The act of de-risking is typically done to reduce the financial institution's exposure to potential regulatory penalties, reputational damage, and other legal risks.

Another consequence of de-risking is consolidation, or the trend of banks reducing their number of correspondent relationships in high-risk countries. By cutting these relationships, banks limit their ability to offer a wider array of services, such as international wire transfers, foreign currency exchange, and trade finance to their customers and may restrict their customers' ability to access the global financial system.

One of the main drivers of this consolidation is the additional cost of doing business in high-risk countries. Financial institutions must conduct comprehensive risk assessments and due diligence on their correspondent partners, and the cost of these processes can be significant. Additionally, they must allocate resources for ongoing monitoring and compliance, which can also be costly. In many cases, the return on investment for conducting business in high-risk countries may not outweigh the costs and potential risks. The consequences of consolidation are significant as it may even lead to financial exclusion for many in developing countries.

Over the past 10 years the number of active correspondents has declined by 30% even as the total number of cross-border transactions increased by 30%, implying a 90% increase in the average number of transactions per correspondent bank. Since 2021 there has been a noticeable increase in the number of lower value cross-border transactions; the total value of transactions processed has declined relative to the volume of transactions, driving the need for yet more innovation, automation and efficiency. 

While de-risking and subsequent consolidation may be a necessary tool for banks to reduce their risks, it also has consequences that can impact the global economy. Finding a balance between mitigating risks and maintaining access to banking services for individuals and businesses is essential to ensure a fair and inclusive global financial system. 

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The Cost of Failed Payments: Understanding the Impact 

On a global scale, an average of 14% of cross-border payments are not successfully completed. Not only does this result in charges from banking partners, but it also incurs significant indirect costs such as manual payment repairs and a negative impact on operations. Additionally, the loss of clients due to a poor customer experience can greatly harm a financial institution's credibility and financial success. According to a CapGemini Invest survey, the average charge for a failed payment is around $12 per transaction. However, the true cost goes beyond just the monetary aspect. When a large sum of money is directed to the wrong counterparty, it quickly becomes a matter escalated to the Chief Risk Officer level. This can lead to risk reviews and potential regulatory reporting, which require additional resources, time and cost. This means that the risk and return distribution of transaction banking is negatively skewed. A few payment errors of this magnitude can consume a substantial amount of cost and damage a bank's credibility, while the profit margin on successful transactions remains relatively lower. 

In light of these consequences, it is crucial for banks to address and minimise payment failures to ensure a positive and profitable transaction banking experience for all parties involved. Focusing on improving payment processes and implementing prevention measures can help reduce the impact of failed payments and create a smoother and more efficient system for all stakeholders. 

The Importance of Accurate Routing Information for Improved STP Rates

A substantial share of payment failures are due to incorrect routing information (outdated Standing Settlement Instructions) and incorrect or outdated BICs (Bank Identifier Codes). These data issues cannot always be attributed to input errors by customers as information about the banking network is readily available and it is the bank's responsibility to regularly check and update this information to prevent payment failures.

Although individual banks may not frequently change their correspondent banking relationships, the entire correspondent banking network sees an average of 100 changes in payment corridors daily. (BankCheck observations of SWIFT Ref data)

The consequences of a single incorrect currency corridor are significantly more severe than the cost of automating information updates for all banks (except the smallest ones with a very small operation). By simply excluding expired BICs from the data feed, the risk of failures due to this issue can be eliminated. Therefore, it is crucial for banks to utilise automated data feeds or APIs to ensure accurate and up-to-date payment routing information, reducing the risk of human error and administrative burden. By addressing these data issues, banks can significantly improve the success rates of payments and provide a smoother banking experience for customers. 

Sanctioned Entities: Reducing Risk at the Data Feed Level

Following Russia's invasion of Ukraine, the use of sanctions has increased significantly. Many banks have implemented transaction monitoring software to identify payments being made to sanctioned beneficiaries. However, rather than relying solely on this software, it is more effective to exclude any payment corridors involving BICs belonging to beneficiaries, correspondents, or intermediaries that have been sanctioned. By taking this precautionary measure, sanctioned BICs can be removed from the data feed update, eliminating the chances of a payment being processed and then flagged/stopped by the software later on.

By operating on a dataset of combined legal entity and payments data, BankCheck is also able to detect and remove entities from a payment corridor if the ultimate beneficial owner is sanctioned, even if the entity itself is not on a sanctions list. It is also possible to mitigate other risks at the data feed level by using algorithms to identify illogical payment corridors and prevent them from being included in the dataset. As the saying goes, "better safe than sorry."

Mitigating risks at the data feed level is a crucial step in ensuring compliance with sanctions and avoiding potential penalties. By excluding sanctioned BICs and using advanced algorithms, banks can strengthen their compliance practices and avoid potential risks associated with processing payments involving sanctioned entities. 

Streamlining Cross-Border Payments: The Power of Routing Optimisation Algorithms

By utilising automated data solutions, banks are able to optimise payment routing and take advantage of their global reach and network. Through the use of algorithms and predetermined rules, these solutions can mimic the decision-making process of a human operator when selecting the most efficient route for a payment. 

This allows banks to answer questions such as:

  • Does my bank have an affiliate that can clear this currency?
  • If my affiliate does not have a Commercial Payments SSI option, can I use an FX or Money Market asset class SSI instead?
  • Are any of my network banks able to process this payment?
  • Do I have a choice between Hong Kong and mainland China entities for Yuan/Remnimbi? I prefer Hong Kong, let me select that one. 
  • I have no relationship with this bank's correspondents, which one has the most active presence for this currency? Let me choose that one.

Utilising automated data solutions not only streamlines the payment routing process but also ensures a more efficient and effective use of a bank's global reach and network.

The Benefits of Consistent Payment Routing Policies

Using an algorithm, or rule set, can provide several benefits when determining the selection of the optimal route for a bank's payments. One major advantage is the ability to standardise the data across all applications used by the bank, including regional payment hubs, retail banking and customer applications. This enables a consistent data approach, even with various data feeds and formats, APIs, and web application interfaces.

Additionally, utilising external technology can result in significant savings in time and internal IT costs for the bank when implementing new data policies. 

With BankCheck’s user-friendly dashboard, operations teams can efficiently configure and update policies without the need for internal support. This includes tasks such as adjusting SSI preference rankings, updating greylists, enforcing country exclusions regardless of an entity's sanctions status, and managing the bank's own SSIs. This streamlines the process of rolling out payment policy choices throughout every application in the bank, including physical payment operations teams, from one central command point. 

Thanks to advancements in data technology, banks can easily adapt routing policies to changing circumstances. This ensures that all data variables, such as changes in payment and sanctions statuses, SSI updates, and branch closures, are automatically applied to payment routing options before transactions are processed. 

In conclusion, using algorithm-based routing policies can provide numerous benefits for banks, including streamlined data management, cost savings, efficient policy implementation, and enhanced risk management and compliance. With this approach, banks can ensure consistent and reliable payment routing, ultimately leading to improved customer satisfaction and financial success.


The world of transaction banking is constantly evolving, with the rise of new technologies and increasing pressure on margins. In order to stay relevant and competitive, banks must strive towards efficient and secure payment processes. De-risking and consolidation have become common strategies for reducing risk, but they also have consequences that can impact the global economy. To combat this, accurate and up-to-date routing information and the use of routing optimisation algorithms can greatly improve straight-through processing rates and reduce the risk of failed payments. By implementing consistent payment routing policies, banks can streamline their processes, reduce costs, and strengthen risk management and compliance practices. With the right strategies and investments, banks can successfully navigate the world of transaction banking and stay in the payments game. 

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