Hold On to Your Hats
Volume 11, Number 12
December 29, 2021
Advocacy News You Can Use
It is the end of 2021, which has many of us thinking about what 2022 might look like. We are all in the midst of dealing with COVID-19, and surely our challenges next year adjusting to and with the pandemic will continue. International standard setters and national-level regulators likewise are grappling with the necessary regulatory adjustments. One point of data recently released by the Committee on Payments and Market Infrastructures shows that the number of correspondent banking relationships continue to decrease by 4% from the previous year, representing a 25% total decrease between 2011 and 2020. Meanwhile cross-border payment volume and value increased by 2% and 7%, respectively. This shows an increase in volume but a decrease in the number of banks offering the services.
This trend is significant for credit unions because the loss of correspondent relationships and consolidation of providers can significantly impact credit unions’ ability to offer payments services. In turn, this directly hurts financial inclusion, raises the cost of payments and likely pushes payments activity into less regulated areas. We know that next year, at the direction of the G20, the international standard setting bodies will be focused on providing faster, cheaper, more transparent and more inclusive cross-border payments. That means we are likely to see numerous transformations in the payments area over the next several years.
We will also see changes related to sustainable finance, AML/CFT, open banking/privacy, cybersecurity, crypto/digital currencies and many other areas. Looking to 2022, it would be easy to say, “hang on to your hats and get ready for the ride,” but that indicates that credit unions will be a passive participant in these changes. The truth is more optimistic. Credit unions have a long history of being resilient and exist to serve their members. Because of this member-centric value, not only will they adjust, but they will be at the forefront of leading changes in many of these areas. People helping people always leads the way. So yes, “hold on to your hats.”
BIS Releases Commentary Crediting COVID-19 for the Acceleration of Digitalization of Payments
The Bank for International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI) released a commentary entitled, “COVID-19 Accelerated the Digitalisation of Payments,“ asserting that the current acceleration of the digitalization of payments is a consequence of the COVID-19 pandemic. In summary, the commentary contends that the CPMI’s latest Red Book Statistics demonstrate a consumer shift from cash to digital/contactless payment options at an “unprecedented” rate and that the value of circulated cash has surged.
Key take aways from the commentary:
- "The COVID-19 pandemic has boosted the use of digital and contactless payments.
- Cash in circulation reached a decade high due to a surge in demand for high-value banknotes, suggesting that cash was increasingly held as a store of value rather than for making payments.
- The pandemic has added to the motivations of central banks to develop central bank digital currencies (CBDCs)."
More information on the CPMI’s commentary is available here.
Why this matters to your credit union: Digitization plays an important role in allowing credit unions to grow and serve their members in a modern world. As the trend has accelerated due to the effects of COVID-19, it is important for credit unions to be aware of the changing trends.
IMF and World Bank Release Draft Framework for ML/TF Risk Assessment of a Remittance Corridor
The International Monetary Fund (IMF) and World Bank released a Draft Framework for Money Laundering and Terrorist Financing Risk Assessment of a Remittance Corridor, consisting of methodologies with the potential of identifying these corridors as “safe remittance corridors,” which are not intended define an absence of risk but a lower risk level. The goal of the framework is to simplify AML/CFT measures in lower risk remittance transactions. For example, If the corridor risk assessment identifies an overall lower level of ML/TF risk, it can be treated as a safe remittance corridor and receive less stringent regulation, such as simplified customer due diligence (CDD).
The draft framework serves as “a contribution to the FSB’s Roadmap for Enhancing Cross-Border Payments that was endorsed by G20 Leaders in 2020 and that aims to achieve faster, cheaper, more transparent, and more inclusive cross-border payment services.” The framework also addresses global correspondents’ tendency to terminate and restrict certain entities, as well as the use of de-risking to avoid ML/TF management. Credit unions have been increasingly subject to this treatment and World Council has consistently advocated for regulators to address the issue of de-risking. In response to the IMF-World Bank draft framework, the Financial Stability Board stated that, “the identification of safe remittance corridors based on a robust corridor risk assessment CRA can reconcile two important policy goals in relation to remittances: first, to support poverty alleviation and economic growth in low-income countries by safeguarding cost-effective transfer mechanisms; and second, to minimize the risk that these mechanisms will be used for criminal or terrorist purposes.”
More information on the IMF-World Bank draft framework is available here.
Why this matters to your credit union: International remittances have always presented challenges for smaller financial institutions such as credit unions. This important work can help establish channels that will make it easier and safer for credit unions to serve their members vis-à-vis remittances.
BIS CPMI Report Highlights Challenges with Retail Fast Payments
The implementation of retail Faster Payment Systems (FPS) across the globe is continuing at a rapid pace and may have significant implications for the financial sector pursuant to a report published by the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI). The report, Developments in retail fast payments and implications for RTGS systems, takes stock of recent developments, discusses the implications for financial institutions and examines the role of central banks in these systems.
The report highlights the following findings and implications:
- global implementation of fast payments is continuing at a rapid pace;
- the use of a given FPS (i.e. adoption rate) is generally low in the early stages of its implementation, although some recent FPS have been more rapid in their take-up;
- FPS can have significant implications for the operations and services of RTGS systems in the same jurisdiction, such as the modification of access criteria and extension of operating hours;
- FPS are increasingly settling obligations between banks and, where relevant, non-bank FPS participants on a gross (i.e. payment-by-payment) basis in real time;
- most jurisdictions have either adopted or are moving towards ISO 20022 as the messaging format for their FPS; and
- while differences in approaches remain, central banks tend to play important roles in facilitating the operations of FPS.
The report also highlights that designing, implementing and operating an FPS is complex, with challenges, including the need to ensure high system availability (e.g. during nights and weekends) and reliability requirements.
A copy of the release can be viewed here.
Why this matters to your credit union: Retail Faster Payment Systems are undergoing transformational changes with some areas of the world considering mandating the provision of these services. This could have a direct impact on a credit union’s operations.
Correspondent Banking Relationships Continue to Decline
Correspondent banking trends continued in 2020, with the volume and value of transactions increasing despite the changing payments landscape during the pandemic, according to new data recently published by the Committee on Payments and Market Infrastructures (CPMI).
Cross-border payment volume and value increased by 2% and 7%, respectively, in 2020. Correspondent banking relationships declined by 4% from the previous year, taking their total contraction to about 25% between 2011 and 2020.
Following a decline in early 2020, when the beginning of the pandemic induced a bout of market turmoil, the volume and value of correspondent banking rebounded, and the downward trend in relationships stabilized.
Some of the key factors contributing to the rapidly changing payments landscape, such as innovation, are discussed in detail in the Bank for International Settlements March 2020 Quarterly Review.
As the increase in volume and value of transactions shows, correspondent banking relationships continue to play a pivotal role in cross-border payments, despite their worldwide decline.
They offer an important payment channel for firms and households, and a critical loss of relationships could hurt financial inclusion, raise the cost of payments and push payments activity into less regulated areas.
The data was provided by SWIFT based on payment messages from more than 200 countries and jurisdictions.
A copy of the Release can be viewed here.
Why this matters to your credit union: Correspondent banking relationships are key to many services offered by credit unions. The continued decline of these relationships places hardships on credit unions as they may need to withdraw services or alternatively pay higher prices for services. This hurts financial inclusion and may push payments activity to unregulated areas.
Andrew T. Price, Esq.