What is Correspondent Banking?
Correspondent banks are financial institutions that provide banking or financial services on behalf of other equal or unequal financial institution. These are used to conduct banking operations in foreign countries as the domestic banks have limited access to foreign markets and cannot directly reach clients. They need to either set-up a foreign branch or get into a correspondent arrangement with some foreign entity. The participating banks have to comply with strict regulation and brace for increased competition. The costs have to be suitably supervised and the size of operations be right-sized to fit the growing market. The banks have to strive for excellent customer service and ease of transaction from anywhere and via any mode. The banks have to continuously work on gathering superior business intelligence to understand changing consumer behaviour, maintain an efficient EBAM-Electronic Bank Account Management systems etc. Such innovations will further enhance correspondent models.
Correspondent banking is practiced in over 200 countries as it is an excellent medium for cross-country banking services. It provides measurable, predictable and an increasing revenue as there is little capital requirement and a good profit potential.
Correspondent banking thus involves two banking entities-the correspondent bank and the respondent bank. The services which come under the blanket of correspondent banking are cash/fund management; international fund transfers, clearance of cheques, drawing of demand drafts etc. Both the involved banks should gather all possible details from official and unofficial channels about the goodwill of other bank, major business engagements, regulatory framework, identity of third parties if any, etc. Likewise, the roles and responsibilities of both the banks should be clearly defined and delineated. There is great significance of relevance of verified customer identification data which should be readily available with the respondent partner.
Thus, this allows banks of all sizes to do business in other countries where they don’t have regular branch. These services are made available at prices suitable to the target customers. The banks provide access to banking services offered from a home bank at a wide variety of global locations. This may come at a fee and may involve a lag but it helps retain customers who otherwise will drift away to larger financial institutions to get advantage of international operations. However, this gives chance for disputes regarding incorrect movement of funds or withholding of information regarding payments. Customers have to be proactive to directly contact the correspondent bank for any information if situation calls for.
