PwC: Correspondent banking facing existential crisis

04 February 2016

Following the 2008 banking crisis and the more recent Libor rating scandal, as well as the increasing sophistication of international criminal syndicates, regulators have clamped down on international money transfers with a wide range of regulations. These regulations, according to PwC, often raise red flags, which turn out to be false positives, bringing with it considerable burden on the bank – as well as decreased appetite for correspondent banking. To reduce false positives and improve international money flows, the consultancy suggests a more nuanced engagement with compliance, involving closer relationships between compliance officers and relationship managers, as well as improved analytics models.

The 2008 financial crisis, and the high cost to tax payers to bail out banks that were ‘too big to fail’, led to wide spread condemnation of excessive risk taking in the financial industry, followed by a number of high profile investigations and arrests. The more recent Libor scandal has done little to relieve concerns. International criminal networks, terrorism, as well as money laundering also remain systematic issues for nations and the global economy, with their detection not always straightforward. In response to systematic failure within the industry, as well as criminal activity, regulators have implemented a wide range of measures to make sure the banks are sufficiently capitalised to meet various potential stresses, and that illegal activity is considerably more difficult to pull off.

PwC: Correspondent banking facing existential crisis

The regulations have, however, also heaped more pressure on the correspondent banking network. According to PwC’s ‘Correspondence course: charting a future for US-dollar clearing and correspondent banking through analytics’ report, the regulations have come to impact the money transfer business, with poorer countries especially effected. Banks have been pulling their correspondent accounts and ending relationships as a result, with UK banks citing that they would need to close their operations if fines proposed by regulators to exposure to risky businesses are too much of a concern for the banks.

The research shows that the AML (anti-money laundering) and counter-terrorist financing rules, and their respective fines, place considerable risk barriers to banks seeking to engage in cross-border activity. Besides the risk of enforcement action and their penalties, there is also a push for increased scrutiny on the industry; leading to an ‘existential’ crisis, as hundreds of thousands of accounts have been closed since the introduction of AML reviews. The result, according to the consulting firm, is an undermining of the global financial system as the ability to transfer funds across borders for international trade is hampered.

The consultancy suggests a number of possible ways to retain the flow of trade while improving the oversight of correspondent accounts, which include an increased focus on data analytics, automated entity consolidation, alert risk scoring and new model-based approaches to transaction monitoring. These measures improve the ability to identify and manage risks and costs. Other changes could be to improve the coordination between compliance officers and front office relationship managers, allowing institutions to be more selective about their correspondent banking relationships.


Improving the collaboration between financial institutions may too improve the compliance process, by making correspondent banking more transparent, while improving the due diligence process. Examples of such a move include implementing the Swift’s KYC Registry, where all banks are active but are not engaging in competition. A focus on KYC might reduce the risks from false positives that follow from rules-based transaction monitoring, as it provides more context. Visualisation and other digital analytic tools may also reduce the number of false positives.

Other ways of reducing the compliance burden, according to the report, is a focus on factors related to underlying transactions that emanate from geographies deemed to be high risk. Models that provide a more nuanced way of dealing with potential violations, based on statistical models that increasingly escalate red flags based on context, allow investigations to prioritise and improve the efficiency of alerts. According to the reports, “Together these techniques can create a smaller pool of alerts to investigate while still providing sufficient coverage of the alerts that have the highest likelihood of being truly suspicious.”


The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.