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Media hypes Banks vs Fintechs, but real battle could be big banks vs small banks

By Bernard Lunn

Tomorrow I get on a flight to Singapore for SIBOS to speak at one session and moderate another.

SWIFT (which runs SIBOS) has about 9,000 member Banks. Correspondent banking networks have been integral to global banking and trade since the days we sent messages over telex machines. This got me thinking:

What would a world without correspondent banking look like?

There is a good news, bad news, good news story:

So banks will do just fine as long as they add value beyond payment.

There are four possible scenarios:

If you want to understand how cross border payments work today via SWIFT and correspondent banking relationships, read this excellent explainer by Richard Gendal Brown. If you have labored at the core banking coal face and can explain Nostro and Vostro accounts and Letters of Credit….move right along.

The language of Letters of Credit really takes you back to Victorian days such as “bills of lading & “payment day”. This got modernized via workflow systems and scanned documents. To a millennial, the scanner is like a fax machine – an analog relic and historical footnote. The future is clearly digital trade finance.

Actually, a lot of the Letter of Credit business has already moved over to Open Account trading. Maybe the new cross border payment rail is simply the credit card? I don’t think so. My children may remember their parents pulling out credit cards to pay for stuff, but it is hard to imagine them doing that as adults.

The practical questions for the Daily Fintech community are:

This is where we come to that provocative headline that the real battle could be between big banks vs small banks. Global banks have less need for relationships with regional banks whereas payment companies will need those regional banks.

Payment companies view themselves as one layer in the stack and want to partner with those 9,000 consumer-facing banks.

I think we will still see something like correspondent banking networks (basically mutually beneficial cooperation agreements) but operating in real time (which totally changes the game as we explore in this post).

A global bank is a vertically integrated entity that can do everything from payment to customer service. At the payment level, the transaction banking level, they look like a Fintech (almost totally digital and automated). Will that part of the bank operate like an independent Fintech and partner with those 9,000 consumer-facing banks? Or will the global Bank cross subsidize and compete with those 9,000 consumer-facing banks? In other words, will big global banks be tightly coupled or loosely coupled?

I will be off air for hours in the air on route to Singapore, then looking forward to some interesting conversations next week at SIBOS – and great pepper crab.

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