Cross-borderpayments are complex because national payments systems do not support, as ageneral rule, direct participation by banks in other countries. Therefore,every non-cash cross-border transaction must be handled through internationalcorrespondent banking networks in one manner or another.
If the end parties aredealing directly with their banks, they use the international correspondentbanking system.Most of the world’s majorbanks maintain correspondent banking relationships with local banks in each ofthe important foreign cities of the world. This two-way link between banks isone of many interbank relationships, such as nostro/vostro accounts and theselling of cash management and treasury services to other financialinstitutions. SWIFT playsan important role in the messaging between Correspondent Bank A and Bank B.
SWIFT is a standard messaging system that banks across the globe use tocommunicate regarding a certain type of transaction. Challenges inInternational Correspondent Banking: There are greatadvantages to users of the current system of international correspondentbanking. As virtually all banks participate in some manner, it is global by definition,broadly understood within the banking industry, and comprehensive in its reach.Such a decentralized, non-standardized approach has inherent problems,however—problems that can cause pain for some corporate and retail customers. The pain pointsunder this system are: 1. Nodirect relationship with downstream banks and thus resolution in case of anyissue is not done quickly and reliably.2.
HighCost : Participation of multiple intermediaries lead to a huge cost to the endparty3. Limiteddata transport capabilities along with the transaction data to the receivingparty 4. Barriersto change: Difficult to implement change in a decentralized system at aCorresponding bank level.