Everything FinTechs and Payments Businesses Need To Know About De-Risking

Mitch Trehan, UK Head of Compliance & MLRO, Banking Circle explores…

Big banks are rapidly de-risking in a bid to protect themselves from compliance risks such as anti-money laundering. But what was does this mean for the everyday FinTech or Payments business?

What is de-risking?

To put it bluntly, de-risking is a term for what often results in an abrupt end to a business relationship. Driven by the financial crisis of 2008 and subsequent money laundering fines as well as pressure on margins, a number of big banks have reduced their risk by removing individual clients or entire sectors and regions. This frequently means cutting off smaller banks and non-bank Financial Institutions (NBFIs) – like a Payments business FinTech – who are deemed ‘too risky’ with the knock-on effect that they can’t serve their customers in those sectors or regions.

Where did it all start?

In the aftermath of the 2008 financial crisis, the world experienced a shift. The political agenda was changing and so too was the agenda of the financial regulators. They began to see the banks as more of the target than ever previously experienced. To protect themselves from facing hefty fines from regulators, many big banks minimised their risk by eliminating clients, markets and whole regions that sat beyond their new risk appetite.

Banks have been executing such de-risking strategies for decades, but the high level of activity we’re seeing now began approximately nine years ago. In 2012, HSBC paid US authorities a staggering £1.2bn in a settlement over money laundering, sparking a global de-risking movement that is still motivating big banks today.

But this is creating financial exclusion that is not good for the global economy.  New research commissioned by Banking Circle found that Payments businesses have seen their network of correspondent banks dwindle in recent years, with very little notice before their service is cancelled, leaving them high and dry.


Why should you care?

Recent research into the impact of Tier 1 bank de-risking found that Tier 2 and 3 banks, as well as NBFIs like Payments businesses, had fewer correspondent bank relationships in 2021 than they did in 2011. For some it may have been a choice to proactively reduce the number of relationships, but some have certainly become victims of de-risking strategies.

Unfortunately, for banks and their customers alike, it is often simpler for an institution to distance itself from an entire group, sector or region than to face the workload of assessing each one individually. This means smaller banks, NBFIs and the people they serve face the consequences.

When organisations are ‘de-risked’ and left without correspondent banking partners, they are unable to access fair and affordable international banking solutions. The result is already financially vulnerable societies and businesses are further excluded and put at a greater disadvantage than ever.

But that’s not all. FinTechs, Payments businesses and Tier 2 and 3 banks are so often the innovators and challengers in new markets. They are agile and not held up by corporate red tape or legacy systems. Yet, frustratingly, these are the businesses that can find themselves victims of the de-risking culture.

How can we move forward?

An alternative solution to traditional correspondent banking is needed to overcome these challenges, helping to increase financial inclusion among businesses and consumers around the world.

That’s why Banking Circle is taking on a job that very few other banks or FinTechs want to tackle – investing in integrating a vast network of local clearing and payments schemes to build a unique super-correspondent banking network.

What can you do next?

If you’re a Payments business or Fintech, you need to consider what is less risky for you. While some big banks could veto a whole region, at Banking Circle we perform our risk analysis very differently.

We don’t automatically exclude customers and impede the progress of businesses that would be highly valuable to the economy, based solely on a single risk factor. Even the highest risk emerging market can include customers that are low risk – when it comes to risk a “one size fits all” approach is not correct or appropriate. We want to champion innovation, not stifle it.

Partner with an organisation that gives you secure, low cost cross-border payments, all without the possibility of sweeping de-risking activities. Banking Circle has access to direct clearing in a number of markets, and you can take advantage of this, rather than having to use the outdated and expensive correspondent banking network. This means you’ll stay ahead of the curve, able to compete effectively in such an exciting and fast-paced industry.
To download Banking Circle’s report on de-risking click here.