3 major changes in Transaction & Correspondent Banking

“Every year in transaction banking the demands are the same; either the same for less or more for the same”  An accepted wisdom in our industry that I first heard quoted from a fellow Goldman Sachs alum and doyen of the custody business, Robert Kay.

Well, those days are over. Transaction services, or correspondent banking, are becoming more expensive and that is if you can even get access to the service. A few observations from recent conversations with industry practitioners:

Nostro services are costing more: certainly if you need access to timed payments, for example to CLS. That banks will charge for usage and add on monthly account fees is not new; what is new is seeing the service offered at prices that are very high and on what amounts to a take it or leave price level.

Access to CLS is not a given: one of the largest providers of CLS services has given notice to every single one of its clients. I know of at least one of those clients, with daily volume in 4 figures, that has received a polite “no bid” from virtually every potential provider.

Liquidity management will get more complex: Some FX market players will lose their access to CLS, making the cash management task for banks that much harder.

Lessons to be Learned: Correspondent banking, the Nostro network and the liquidity that goes with it, is something we have all just taken for granted. Transaction costs were more or less ignored.

That is now all changing. Prices will go up. limits will come down, some FX market players will find they no longer have access to CLS, making life much harder for all market participants.

CLS has been the great FMI, financial market infrastructure, success in the financial services world. If potential users cannot get access via Settlement Members, then everybody will suffer. The market needs another tool for reducing gross cash flows and removing risk. Without it, large intraday overdrafts are a must and that constrains supply.

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