How Card Networks Outsmart Correspondent Banking

Cross-border payments are essential for global trade and commerce, but they can also be complex and costly. Traditional correspondent banking relies on intermediary banks to facilitate cross-border payments, adding layers of fees, delays, and risks. 

Correspondent banking, a system where one financial institution carries out transactions on behalf of another, often in different geographies, has been the backbone of international trade and finance for centuries. However, this model is increasingly perceived as outdated, especially in an era where digital innovation is paramount.

Card networks, such as Visa and Mastercard, offer a smarter alternative that bypasses correspondent banks and enables direct member-to-member settlements. Card networks, such as Visa and Mastercard, have capitalized on this opportunity by leveraging their advanced technological platforms to facilitate direct cross-border payments. These networks have introduced innovative solutions that bypass the need for intermediary banks, thereby reducing transaction times and costs. Moreover, they offer enhanced security features and the ability to handle multiple currencies, making them attractive alternatives for businesses and consumers alike.

This translates to faster transaction processing, lower costs, and improved transparency for businesses. In this article, we will explore how card networks avoid correspondent banks and how this compares to traditional correspondent banking. We will also look at some of the innovative B2B products and services that card networks provide to streamline cross-border payments further.

How Card Networks Avoid Correspondent Banks

Card networks are payment systems that connect card issuers, acquirers, merchants, and cardholders. They facilitate the authorization, clearing, and settlement of transactions made with payment cards, such as credit, debit, or prepaid cards. Card networks also provide rules, standards, and security measures to ensure the smooth and safe operation of the payment system.

One of the key advantages of card networks is their ability to provide real-time, digitally enabled cross-border payments. This is a significant improvement over the traditional correspondent banking system, which can be slow and cumbersome, often taking several days to complete a transaction. Card networks, on the other hand, can process payments almost instantaneously, providing a level of convenience and efficiency that is highly valued in today's fast-paced economy.

Unlike correspondent banking, which involves multiple intermediaries and bilateral agreements, card networks enable direct member-to-member settlements. This means that the card issuer and the acquirer can settle their transactions directly through the card network, without involving any correspondent banks. This reduces the number of steps and parties involved in the payment process, making it faster, cheaper, and more efficient.

Card networks also use various features and technologies to eliminate the need for correspondent banks, such as:

Pre-funding arrangements

Card networks require their members to pre-fund their settlement accounts with the network, ensuring that there is enough liquidity to settle transactions. This eliminates the credit risk and the need for correspondent banks to provide credit lines or guarantees.

Tokenization

Card networks use tokenization to replace sensitive card data with unique identifiers, called tokens, that are used for authorization and settlement. This enhances the security and privacy of the payment data, reducing the fraud risk and the need for correspondent banks to perform compliance checks or investigations.

Direct FX conversion

Card networks offer direct foreign exchange conversion services, allowing their members to settle transactions in their preferred currency. This simplifies the payment process and reduces the FX risk and the need for correspondent banks to provide FX services or hedging.

How Card Networks Compare to Correspondent Banking

Card networks offer several benefits over correspondent banking for cross-border payments, such as:

Faster transactions

Card networks can process and settle transactions in near real-time, while correspondent banking can take days or weeks to complete. This improves the cash flow and the customer experience for businesses.

Lower costs

Card networks charge lower and more predictable fees for cross-border payments, while correspondent banking involves multiple and variable fees for each intermediary bank. This reduces the operational costs and the overheads for businesses.

Increased transparency

Card networks provide clear and consistent information about the status, fees, and FX rates of cross-border payments, while correspondent banking often lacks visibility and certainty. This increases the trust and the accountability for businesses.

However, card networks also have some limitations compared to correspondent banking, such as:

Limited coverage

Card networks depend on the availability and acceptance of payment cards in different regions and markets, while correspondent banking can reach any bank account in the world. This may limit the access and the choice for businesses, especially in emerging or niche markets.

Regulatory challenges

Card networks have to comply with different and changing regulations and standards in different jurisdictions, while correspondent banking follows the established and harmonized rules and practices of SWIFT. This may create complexity and uncertainty for businesses, especially in areas such as data protection, anti-money laundering, or sanctions.

How Card Networks Innovate B2B Payments

Card networks are not only competing with correspondent banking, but also innovating and expanding their B2B payment solutions. They are leveraging their network advantage and their technological capabilities to offer new and improved products and services for cross-border payments, such as:

Visa B2B Connect

Visa B2B Connect is a non-card-based payment network that enables seamless bank-to-bank cross-border business transactions. Visa B2B Connect is built on Visa’s capabilities and formidable core payments experience with distributed ledger technology to provide direct settlements of large-value transactions. Visa B2B Connect leverages this network advantage by streamlining the B2B payment process further, offering features like built-in compliance checks and pre-funding arrangements.

Mastercard Track™ Business Payments Service

Mastercard Track™ Business Payments Service is a suite of B2B products and services that reduces complexity and risk, cuts costs, and automates processes for businesses around the world. Mastercard Track™ Business Payments Service connects buyers and suppliers through a single platform, enabling them to exchange payment-related data, manage invoices, and settle transactions in multiple ways, including card, bank transfer, or blockchain-based payments.

Card networks are transforming the way cross-border payments are made and received, offering a smarter alternative to correspondent banking. By avoiding correspondent banks and enabling direct member-to-member settlements, card networks provide faster transactions, lower costs, and increased transparency for businesses. Card networks also innovate and expand their B2B payment solutions, offering new and improved products and services that leverage their network advantage and their technological capabilities. While correspondent banking still plays a role in certain scenarios, card networks represent a significant step towards a more efficient and cost-effective future for B2B payments.

This I explained how card networks avoid correspondent banks and how this compares to traditional correspondent banking. It also discusses some of the innovative B2B products and services that card networks provide to streamline cross-border payments further.