Global Workforce

Don’t Bank on It: Why Fintechs Are Replacing Correspondent Banks

As banks become increasingly reluctant to provide correspondent banking services, new players fill the void in the cross-border payments space

Key takeaways:

  1. Cross-border payments are highly dependent on correspondent banks.
  2. The number of correspondent banking relationships has fallen by 29% between 2011-2022.
  3. Fintech are stepping in for correspondent banks in specific market verticals.

The Faster Payments Council (FPC) is an industry-led membership organization open to all stakeholders in the US payment system. A culmination of a multi-year initiative by the Federal Reserve System, the FCP identifies and evaluates practices, principles, and guidelines that enable new payment opportunities, increased security, and greater access in the United States.

In its latest research report, the FCP “puts forth some practicalities and realities to consider when dealing with cross-border payments in a faster payment environment. “One of the realities highlighted in the report is the shrinking of the correspondent banking network; between 2011-2022, according to the Bank for International Settlements (BIS), the number of correspondent banking relationships has fallen by 29%.

Correspondent banks act as the middleman between two financial institutions from different jurisdictions that don’t have a direct relationship with each other. Cross-border payments are highly dependent on correspondent banks, dating back to the late 19th century. However, as the regulatory burden across the payment chain grew, banks became increasingly reluctant to provide correspondent banking services.

“Twenty years ago correspondent banking was a widespread activity even among smaller banks because the compliance requirements were far lower,” said Alex Silver, managing director of Stern International Bank in Puerto Rico. “Nowadays, it’s far harder for banks to justify given the higher risk profile and the greater costs involved. Even for the larger banks, there are going to be customers they can’t service.”

Filling the correspondent banking void

While the supply of correspondent banking services is dwindling, the demand for cross-border payments is growing. Over the last decade, per BIS’ committee on payments and market infrastructures, the volume and value of cross-border payments have increased by 61% and 37%, respectively.

Multiple service providers, most notably fintech companies, have stepped in to fill the correspondent banking void. “These new players,” notes FCP’s research report, “leverage innovative technologies and alternative approaches to move money across networks, servicing specific corridors or market verticals.”

One such player is Papaya Global, the only fintech designed for cross-border workforce payments. With its mix of specialized infrastructure and proprietary technology, Papaya has turned the workforce payments vertical on its head, despite – or maybe because of – the challenges faced by companies that operate in the cross-border payments space.

Here are the main challenges, per FCP’s report, and how Papaya overcomes them:

  • Regulatory compliance 

“Fintech companies must navigate a complex web of international and local regulations, which can vary significantly from one country to another. Meeting compliance requirements for anti-money laundering (AML), know your customer (KYC), and sanctions screening is crucial, and failure to do so can result in significant legal and financial penalties.”

As a regulated financial services company, Papaya holds money transfer licenses across the globe. Money transfer licenses are issued by local governments, which means Papaya’s handling of client funds is subject to strict regulation. We also perform KYC and AML processes for each new client and worker being paid via our platform – and run rigorous screenings for every payment, every cycle – to ensure compliance.

  • Security

“Fintechs must establish a secure payment infrastructure capable of handling diverse currencies and complying with various regulatory frameworks. Encryption, tokenization, and secure APIs play a critical role in securing payment gateways and ensuring the integrity of transactions.”

Papaya’s platform provides the highest level of security. Customers’ funds are kept in segregated client money accounts (CMAs) at J.P. Morgan Chase. We hold SOC 1 Type 2 and SOC2 Type 2 audit reports and a CSA STAR certification. All the data on the platform is encrypted – at rest and in transit. And the platform itself was built on overlapping systems, each of which can access only the information necessary for its part of the payment journey.

  • Data privacy

“Operating across multiple jurisdictions means fintechs must navigate diverse legal landscapes, which can pose challenges in interpreting and adhering to different laws and regulations related to data protection. Compliance with various data protection laws, such as the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA), adds additional layers of complexity.”

In addition to complying with GDPR and CCPA, Papaya is certified by the ever-vigilant International Organization for Standardization (ISO). The ISO is the highest standard for information security, providing the framework for identifying privacy risks. Currently, Papaya holds ISO 27001 (the leading international standard for information security management) and ISO 27701 (a framework for protecting personal data) certifications.

  • Foreign exchange rate risk 

“Cross-border payments involve diverse currencies, multiple intermediaries, varying payment infrastructures, and different clearing systems. Finding competitive rates and minimizing fees for customers can be a challenge for fintechs. Fintechs need to create solutions that can seamlessly navigate these complexities to ensure timely and cost-effective transactions for their customers.”

In recent years, AI-driven tools have transformed FX risk management by analyzing large amounts of data, such as price changes, economic indicators, and news events’ impact. Papaya’s transfer processing algorithm leverages AI to account for FX fluctuations as late as possible in the payment process, reducing currency conversion costs to a minimum.

  • Lack of transparency

“The lack of transparency can present significant challenges for fintechs involved in cross-border payments. Fintechs might find it challenging to provide real-time transaction tracking and visibility for cross-border payments and communicate potential delays or processing times transparently to customers.”

To protect its clients from hidden fees, Papaya established the world’s first workforce-dedicated rails. On Papaya’s rails, all fees are known in advance. This allows us to guarantee full value transfer, meaning your workers receive every cent they are entitled to. In addition, payment data can be tracked from start to finish on Papaya’s self-serve, user-friendly interface.