Rising compliance costs, regulatory fragmentation, and de-risking are limiting cross-border banking access, but technology-driven solutions offer a path to restore connectivity and resilience.
For decades, cross-border banking has relied on correspondent banking relationships to facilitate trade, investment, and remittances. However, as regulatory pressures have increased, the system has become fragmented, inefficient, and increasingly inaccessible—especially for small and emerging economies.
The growing phenomenon of de-risking, where global banks withdraw from correspondent banking relationships due to high compliance costs and regulatory uncertainty, leaves entire economies on the brink of financial isolation. While efforts have been made to preserve the existing system, it is becoming clear that small adjustments are not enough. We must take a step back and rethink how cross-border banking should work in a world of evolving risks, technologies, and regulatory landscapes.
Correspondent banking was built for an era when long-term relationships between financial institutions established trust and facilitated transactions. Today, however, it faces two fundamental challenges: rising compliance costs and de-risking, and regulatory fragmentation.
Banks today face rising compliance costs due to stringent anti-money laundering and counter-terrorist financing regulations, which require extensive due diligence on their financial partners.
For small and lower-income economies, the challenge is even greater, as their limited transaction volumes make it difficult to justify the high compliance costs. As a result, large correspondent banks increasingly view these relationships as unviable, leading to a wave of de-risking that disproportionately affects economies reliant on global financial connections for trade, remittances, and economic stability.
Adding to this challenge is regulatory fragmentation, where financial regulations differ significantly across jurisdictions, creating a complex landscape for cross-border compliance. Banks operating internationally must navigate overlapping, inconsistent, and sometimes conflicting regulatory requirements, increasing operational burdens and uncertainty.
This lack of harmonization weakens trust in correspondent banking relationships, exacerbating de-risking trends and further restricting access to essential financial services, particularly for economies already struggling with financial exclusion.
For many economies, this is not just an inconvenience, it is an existential threat. Without access to global financial networks, countries struggle to trade, attract investment, and enable financial inclusion for their citizens.
Rather than trying to patch a system fundamentally misaligned with modern regulatory and technological realities, we must explore alternative models to create a more resilient and inclusive financial ecosystem. These strategies should be pursued:
Regulatory Harmonization Through Digital Solutions. One of the greatest challenges in cross-border banking is regulatory fragmentation, where the absence of a unified and transparent system makes it difficult to interpret and apply compliance rules across different jurisdictions.
This complexity increases the operational burden on banks and financial institutions, making compliance costly and inefficient. AI-powered regulatory knowledge platforms offer a potential solution by enabling banks, regulators, and financial institutions to interpret, standardize, and automate compliance requirements, streamlining the risk assessment process.
By leveraging machine-readable regulatory frameworks, financial institutions could automatically align their processes with varying international regulations, making it easier for smaller banks to meet global standards and maintain access to correspondent banking relationships.
The decline of correspondent banking is a global challenge that highlights the inefficiencies of a fragmented regulatory and financial system.
Smarter Risk-Based Approaches to Compliance. Traditional compliance checks often rely on broad, rigid measures that make it difficult for banks to differentiate between high-risk and low-risk institutions effectively. This approach leads to overly cautious de-risking, where banks withdraw services indiscriminately rather than assessing each case individually.
AI-driven compliance automation presents a more effective alternative by enabling a granular, risk-based approach, allowing banks to make informed decisions rather than resorting to blanket de-risking strategies. This shift would restore trust between correspondent and respondent banks through increased transparency, ensuring that financial institutions remain compliant while avoiding unnecessary service withdrawals, ultimately supporting financial stability and maintaining access to global banking networks.
Next-Generation Payment Infrastructure. The continued reliance on legacy banking systems has made cross-border transactions slow, costly, and susceptible to regulatory bottlenecks. As financial networks evolve, new infrastructure models—such as digital ledgers and interoperability solutions—offer the potential to facilitate direct, low-cost cross-border transactions without the need for multiple intermediaries.
By leveraging these innovations, economies can reduce their dependency on traditional correspondent banking, ensuring sustained financial connectivity even as global banking relationships continue to shift and adapt to changing regulatory and economic conditions.
Strengthening National Financial Infrastructure. Many smaller economies face challenges in maintaining correspondent banking relationships due to a lack of domestic financial infrastructure that meets international standards.
Strengthening digital identity systems, eKYC (electronic Know Your Customer), and national payment networks could enhance compliance processes, making it easier for banks in these regions to connect with global financial partners.
By adopting trusted digital identity verification, financial institutions can reduce reliance on costly manual identity verification procedures, minimizing operational burdens and lowering the risk of de-risking, ultimately fostering more resilient and inclusive financial systems.
The decline of correspondent banking is a global challenge that highlights the inefficiencies of a fragmented regulatory and financial system. Instead of continuing to adjust a framework that no longer serves all economies equally, financial leaders must take a fresh look at cross-border banking and address key issues.
These include the potential for regulatory technology and AI-driven compliance tools to simplify the required compliance, the role of automated regulatory harmonization in reducing compliance costs and restoring trust between banks, and whether next-generation financial infrastructure can provide a viable alternative to correspondent banking.
Solutions to these issues exist but they require a shift in mindset, where financial institutions, regulators, and policymakers move beyond patchwork fixes and start designing a system that prioritizes inclusion, efficiency, and long-term resilience. Because in today’s interconnected world, no economy should be left behind.
Source: blogs.adb.org
