Banks are probably the oldest and most solid institutions in the finance industry. They are perceived as the foundation for economic growth and stability (or at least the role they play is essential). This has led them to become the most dominant players in the finance industry. But today, banks are facing multiple threats from multiple fronts. Although “threat” may be an overstatement, it’s obvious that banks are operating in a world with increased competition.

In an era of changing circumstances and competition, banks are trying to redefine themselves and their role in the finance world, while struggling to overcome the challenges they face and remain competitive.

Fintechs have introduced considerable competition into the game, thanks to their innovative usage of technology. In the beginning, many were completely free from the constraints that were binding or holding back the banks. Today, the situation is different and in most countries, fintechs are subject to regulations and laws just like the banks.

Then the ever-increasing digitisation of money allowed the fintechs to gain momentum. With people becoming more and more accustomed to the concept and convenience of cashless payments, fintechs were able to implement more innovative and varied business models, services and processes.

Banks have their business traditions, history and reliability that goes back for centuries in some countries. However, that history is a double-edged sword. Many banks operate with complex bureaucratic processes, which slows down their capacity for innovation and creativity. And it’s hard to change both traditions and bureaucracies.

Banks are like the giants in fairy tales… they are slow to start moving but once they gain momentum, they progress confidently, steadily and purposefully. Today, banks are redefining and rebranding themselves as they progress towards an innovation-first mindset. There are also collective initiatives like SWIFT, which helps to increase their momentum.

Banks are a fundamental part of the economy. That’s why they are always under the focus of governments and financial regulatory bodies.

The sheer size of banks and the authorities’ steady focus on them seems to be holding the banks back. However, the fact remains: they are too valuable to risk losing and they are invaluable mediators when it comes to international financial operations. This brings us to the matter of correspondent banking.

Most regulations holding the banks back today are pre-emptive measures against either anti-money laundering or terrorism financing. These laws and regulations. are so strict that they push the banks into withdrawing to their home territory instead of risking a fine, especially for banks operating in the United States.

This situation is called de-risking. And it’s understandable why banks prefer de-risking. HSBC was fined $1.9 billion in 2012 after the accusations of money-laundering in the United States. Other banks like Standard Chartered, BNP Paribas, ING, and Barclays have also received fines from breaking various regulations. It’s obvious that the stakes are too high for them so they prefer de-risking.

However, de-risking is not the only thing holding the banks back. It’s also holding the world’s economy back. There is a correlation between a country’s trade share and income per capita. A 1% increase in a country’s trade share increases the income per capita by 2%. And banks, correspondent banks to be exact, are the key mediators in international trade. Money needs to be “liquid” for trade to be as free as possible, and correspondent banks are the key to providing that liquidity.

Today, banks being forced or encouraged to prefer de-risking to protect themselves. This is clogging the channels of trade and currency flow. In the best case scenario, they are causing an increase in operational costs for correspondent banks.

Considering there is a correlation between international trade and income per person and both crime and terrorism feeds on poverty, the regulatory bodies straining the banks’ ability to provide currency flow (in the name of preventing anti-money laundry and terrorism) has the risk of creating a feedback loop. If governments start preventing or crippling trade and currency flow operations with the intention of preventing AML and terrorism, the circumstances they create will start feeding both. The intent is correct but the balance must be maintained to be truly effective.

There is a glimmer of hope. Banks are trying to overcome the barriers set around them and move ahead of the competition. For this reason, they have turned to technology. Today, there are not only simple software solutions for AML available but solutions supported by machine learning and AI as well.

Technology seems to be the answer to all of our problems. However, due to the magnitude of operations and currencies that need to be managed by banks, technology has become essential.

A basic rule of free trade: When there is demand, there is supply. Banks are demanding ways to conduct international operations and technology without having any compliance and regulatory issues – and software providers are doing their best to supply the demand. This also transforms the banks, even the most traditional ones, to embrace technology and start adopting it faster. There are also initiatives like SWIFT gpi, which offers a fully traceable, and cost transparent money transfer operations and provides credit confirmations.

In conclusion, the finance industry is being reshaped and reformed by the changing political and economic circumstances of the world. New threats and new competitors are emerging. As the most dominant players in the finance industry, banks are being reformed by these circumstances too. To stay ahead of the competition, banks are grasping the key ingredients of success in a world run by technology and they are not alone in this journey.

Serkan ARSLAN, Solution Manager, CAMS