What if tomorrow your bank no longer allowed you to make transfers in dollars? This isn’t a fictional hypothesis: even today, certain banks are already having great difficulty processing flows of the American currency, while there are many concerns centred around the dollar. To understand the situation, we need to look at how banks operate among themselves and with their ecosystem.
First alert: the machine has ground to a halt
More than ever, the gap between financial establishments has grown wider, in particular for three types of players in the banking world: broadly speaking, the big American banks become increasingly hegemonic, medium-sized European banks are suffering, while small banks are in their death throes. Access to dollars, the international exchange currency par excellence, plays a leading role in this phenomenon, which is rocking the banking world on a global scale.
The big American banks such as JP Morgan or Citi (to name just two), that we can call the Tier 1 banks, are champions of investment banking. They have a global footprint and impact.
The Tier 2 banks, meanwhile, are close behind them in terms of size and banking products. On the whole these are European and Asian institutions which not long ago had major ambitions, including Deutsche Bank and Société Générale. Tier 3 contains the ordinary banks, those which do not seem to have played their cards right.
When looking at dollars, only the leading banks are “dollar clearers”, authorised to perform clearing in this currency. In other words, access to dollars is only available through these banks, which therefore serve as an unavoidable intermediary.
To do this, Tier 1 banks offer Tier 2 banks a “correspondent banking” service. In a cascade effect, these banks in turn act as intermediaries for smaller or local Tier 3 banks. Year after year, this precarious Russian doll system worked to a point.
Until 2008, to be precise, when the financial crisis brought the machine to a shuddering halt, blocking the gears of what was, until then, a well-oiled system. The outcome? Complaints from numerous clients, unable to make or receive transfers or payments in dollars.
Second red flag: a system on the verge of imploding due to regulatory pressure
In order to combat money laundering, better identify funding of terrorism and increase the transparency of the entire financial system, the authorities – led by Americans – have considerably increased their requirements, and the resulting sanctions. This austerity is merely a reaction to the global pressure being applied: this pressure has become so great that an increasing number of Tier 1 banks no longer fulfil their role as intermediaries. Why? Insufficient guarantees of transparency, and too great a risk of fines if, by chance, they inadvertently play a role in transferring finances from dubious sources. The operation is too risky, based on (too) many sacrifices, in particular if they take on the challenge of onboarding. Through a domino effect, they thus oblige Tier 2 banks to have increasingly strict compliance procedures, require the reorganisation of entire departments, or insist on the redesign of colossal information systems, with extremely high development and maintenance costs. For reasons of financial movement traceability, Tier 2 banks are in turn fatally reluctant to act as intermediaries for Tier 3 banks, thus depriving these banks of access to the biggest currencies, in particular the dollar.
For company funding operators, it has to be said: this is good news. As fintech companies, starting from a blank page, they succeed where banks fail in checking all the boxes required by the dollar clearers. Nowadays if you want reliable access to this currency, you only have two options: a relationship with a Tier 1 bank, or turn to alternative players, who are creating the boundaries of a new world of banking.
Correspondent banking is an example of the tremors rocking the banking world. New procedures and new legislation are creating an exceptional playing field for fintech companies: a playing field in which the groundwork has not yet been completed.