Everything FinTechs and payments companies need to know about risk mitigation

Mitch Trehan, UK Head of Compliance & MLRO, banking circle explored…

Large banks are rapidly de-risking to protect against compliance risks such as anti-money laundering. But what does that mean for everyday life in the FinTech or payments business?

What is risk mitigation?

To put it bluntly, de-risking is a term for what often leads to the abrupt end of a business relationship. Driven by the 2008 financial crisis and subsequent money laundering penalties and pressure on margins, some major banks reduced their risk by withdrawing individual customers or entire sectors and regions. This often means cutting off smaller banks and non-bank financial institutions (NBFIs) – like a fintech in payments – that are deemed “too risky”, leaving them unable to serve their customers in those sectors or geographies.

Where did it all start?

After the financial crisis of 2008, the world experienced a transformation. The political agenda changed and with it the agenda of financial regulators. They began to target banks more than ever before. To protect themselves from hefty fines from regulators, many big banks minimized their risk by eliminating customers, markets and entire regions that exceeded their new risk tolerance.

Banks have been implementing such risk mitigation strategies for decades, but the high level of activity we are seeing now began around nine years ago. in 2012, HSBC paid US authorities a staggering £1.2bn in a money laundering settlement that sparked a global de-risking movement that still motivates big banks today.

But that creates financial exclusion, which is not good for the global economy. New study commissioned by Banking Circle found that in recent years, payment companies have seen their network of correspondent banks shrink, with very little notice before ending their service, leaving them stranded.

Why should you care?

Recent research into the impact of de-risking at Tier 1 banks found that Tier 2 and Tier 3 banks, as well as NBFIs such as payment companies, have done so fewer correspondent banking relationships in 2021 than in 2011. For some, it may have been a decision to proactively reduce the number of relationships, but some have certainly fallen victim to risk mitigation strategies.

Unfortunately, it is often easier for banks and their customers to distance themselves from an entire group, industry 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.

If companies are “de-risked” and left without correspondent banking partners, they will not have access to fair and affordable international banking solutions. The result is that already financially vulnerable societies and businesses are further marginalized and disadvantaged than ever before.

But that’s not all. FinTechs, payments companies and Tier 2 and Tier 3 banks are so often the innovators and challengers in new markets. They are agile and are not held back by bureaucracy or legacy systems. Frustratingly, however, these are the companies that can fall victim to the de-risk culture.

How can we move forward?

An alternative solution to traditional correspondent banking is needed to address these challenges and help improve the financial inclusion of businesses and consumers around the world.

That’s why Banking Circle is taking on a task that few other banks or FinTechs want to tackle – investing in integrating a vast network of on-premises clearing and payment systems to build a one-of-a-kind super-correspondent banking network.

What can you do next?

If you’re a payments company or fintech, you need to consider what’s less risky for you. While some big banks might veto an entire region, at Banking Circle we do our risk analysis very differently.

We do not automatically shut out customers and impede the progress of businesses that would be very valuable to the economy simply because of a single risk factor. Even the highest-risk emerging markets can include low-risk customers – when it comes to risk, a one-size-fits-all approach is neither right nor appropriate. We want to encourage innovation, not suppress it.

Partner with an organization that offers you secure, low-cost cross-border payments without the possibility of extensive risk mitigation 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 can stay ahead of the curve and compete effectively in such an exciting and fast-paced industry.

Download Banking Circle’s Risk Mitigation report Click here.

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Fry Electronics Team

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