Financial Crime

BAFT White Paper Explores Uneven Regulations in the Payments Industry

WASHINGTON – BAFT, the leading global financial services association for international transaction banking, today released a new white paper, “Uneven Regulations in the Payments Industry.” The paper sheds light on the disparities and challenges in regulatory frameworks governing the global payments landscape.

This comprehensive publication offers a deep dive into the complexities of payment regulation and its implications for financial institutions, fintech firms, regulators, and consumers alike.

“In an era of rapid technological advancement and evolving payment methods, the regulatory environment has struggled to keep pace, resulting in a patchwork of regulations across jurisdictions,” said Deepa Sinha, vice president for payments & financial crimes, BAFT. “BAFT’s white paper serves as a vital resource for industry stakeholders seeking to navigate this complex regulatory landscape and advocate for greater harmonization and standardization.”

Key highlights of the white paper include:

  • Overview of Payment Regulations: It examines the diverse approaches taken by regulatory bodies in different jurisdictions around the world. From traditional banking regulations to emerging fintech regulations, it analyzes the regulatory frameworks governing various payment instruments, including cards, digital wallets, real-time payments, and cross-border transactions.

  • Challenges and Inconsistencies: The paper explores the fragmentation, duplicative requirements, and conflicting mandates in existing regulation that hinders interoperability and innovation in the payments ecosystem.

  • Impact on Market Participants: It offers an analysis of the compliance burden, operational costs, and market access barriers imposed by divergent regulatory requirements and how these uneven regulations impact financial institutions, fintech firms, payment service providers and consumers. It also discusses the implications for competition, consumer protection, and financial inclusion in an increasingly globalized payments landscape.

  • Regulatory Convergence: The paper takes a closer look at potential pathways for collaboration among regulatory bodies at the domestic, regional, and international levels.

  • Industry Recommendations: It provides an outline of strategies and practical recommendations to promote regulatory convergence, streamline compliance processes, and enhance the efficiency and effectiveness of payment regulation.

  • Call to Action: Lastly, it includes a push for industry stakeholders to work towards an inclusive, competitive, and fair environment in which consumers will effectively benefit from a broad and safe offering, while still maintaining provider profitability and sustainability. 

Click here to read BAFT’s Uneven Regulations in Payments. The white paper is also available within BAFT’s Library of Documents under the Guidance and Industry Practices section.

About BAFT

BAFT, the leading global financial services association for international transaction banking, helps bridge solutions across financial institutions, service providers and the regulatory community that promote sound financial practices enabling innovation, efficiency, and commercial growth. BAFT engages on a wide range of topics affecting transaction banking, including trade finance, payments, and compliance.

BAFT Media Contact:
Blair Bernstein
Senior Director, Public Relations
[email protected]
+1 (202) 663-5468

Follow Us: @BAFT

Keeping Pace With Payments: Lessons Learned From a Dynamic Landscape

Hear from Deepa Sinha, VP Payments & Financial Crimes at BAFT on the transforming payments industry and the key topics to look for.

Via Trade Finance Global by Deepa Sinha

The payments industry is undergoing a profound transformation, fuelled by technological advancements, shifting consumer expectations, and regulatory developments. 

ISO implementations, instant and real-time Payments, digital currencies, regulatory compliance, and financial crime concerns are all on the top of the agenda this year and for the near future. 

As we navigate this complex ecosystem, it’s essential to reflect on the lessons learned, anticipate future challenges, and embrace opportunities for innovation. In this thought leadership article, we look at key initiatives and insights shaping the payments landscape, drawing from recent publications by BAFT (Bankers Association for Finance and Trade).

ISO 20022 Migrations: Lessons Learned

In January 2024, BAFT released a white paper highlighting lessons learned from ISO 20022 migrations. The adoption of ISO 20022, a global messaging standard for financial transactions, represents a significant milestone in modernising payment systems worldwide. 

However, the migration process comes with its share of challenges, including technical complexities, data mapping issues, and coordination among stakeholders. 

The paper’s target audience are those banks who have not yet started their ISO migration journey, or those who are in the middle of it. The paper is the collaborative work of several banks’ experiences to guide others through these challenges.

A key insight from the white paper highlights the significance of robust project management and the need for effective collaboration among institutions. 

Effective communication and coordination help mitigate risks and ensure a smooth transition to ISO 20022 standards. Additionally, investing in training and education for staff members is vital to enhance awareness and proficiency in handling the new messaging format.

Uneven regulations in the payments industry

Despite the progress made in standardisation, regulatory frameworks governing the payments industry remain fragmented and uneven. BAFT is actively engaged in addressing these regulatory disparities to foster a more cohesive and transparent environment for payments players, including banks and non-bank financial institutions. 

By advocating for harmonised and even regulations across jurisdictions, and among banks and non-bank financial institutions, BAFT aims to facilitate collaboration and promote financial inclusion on an even playing field for all.

The payments roadmap and G20 initiatives

BAFT’s Payments Roadmap aligns with the priorities outlined by the G20 to enhance the efficiency, resilience, and security of payment systems globally. This strategic initiative encompasses a range of objectives, including promoting interoperability, leveraging emerging technologies, and enhancing cybersecurity measures. 

By aligning with G20 initiatives, BAFT seeks to drive consensus and collaboration among policymakers, regulators, and industry stakeholders. It is also the first of its kind as a collaborative effort among banks to outline their payments initiatives in place now, and what they have planned in the near future.

Digital currencies and financial crime concerns

The proliferation of digital currencies presents both opportunities and challenges for the payments industry. BAFT is actively researching the implications of digital currencies on financial crime prevention and compliance measures. As digital payment methods gain traction, concerns about money laundering, terrorist financing, and fraud have become more pronounced.

BAFT’s white paper on Digital Currencies and Financial Crimes, which will be published by summer 2024,  will aim to provide insights into mitigating risks associated with the adoption of digital currencies. 

By leveraging advanced analytics, artificial intelligence, and blockchain technology, financial institutions can enhance their ability to detect and prevent illicit activities. Moreover, collaboration between the public and private sectors is essential to develop robust regulatory frameworks that balance innovation with security.

ISO 20022 Migrations: Guidance and best practices

As a sequel to the lessons learned paper, BAFT is developing a guidance and best practices white paper, which will include use cases, for ISO 20022 migrations to support financial institutions throughout the transition process. 

This comprehensive resource will offer practical insights into data mapping, testing procedures, and change management strategies. By leveraging the collective expertise of industry stakeholders, BAFT aims to provide a guide to facilitate a seamless migration to ISO 20022 standards.

Sanctions: Lessons learned

In its ongoing commitment to fostering best practices and enhancing compliance standards within the financial industry, BAFT will release a groundbreaking white paper focusing on “Sanctions: Lessons Learned.” 

This publication will serve as a guide, drawing from real-world experiences and case studies, to illuminate the complexities and nuances surrounding sanctions compliance. 

The new guide will take insights and best practices and focus on providing financial institutions with knowledge and practical strategies to manoeuvre through the constantly changing sanctions regulations landscape.

From mitigating risks associated with sanctions violations to implementing robust compliance frameworks, this white paper will offer guidance for industry professionals striving to uphold the highest integrity and regulatory compliance standards.

Key drivers for shaping the future of payments

The payments industry is undergoing a period of unprecedented change, driven by technological innovation, regulatory reform, and evolving customer preferences. As we navigate this dynamic landscape, collaboration, innovation, and adaptability are essential to driving progress and ensuring the resilience of payment systems. 

By harnessing insights from these various white papers, and fostering collaboration and cooperation, financial institutions can navigate challenges, capitalise on opportunities, and shape the future of payments. Together, we can build a more inclusive, efficient, and secure payments ecosystem that meets the needs of a rapidly evolving digital economy.

BAFT Releases New White Paper on Lessons Learned from ISO 20022 Migrations

White paper analyzes several banks’ experiences with ISO 20022 Migrations, identifies lessons learned, and highlights do’s and don’ts for future migrations.

WASHINGTON, DC – BAFT, the leading global financial services association for international transaction banking, today released a new white paper, ISO 20022 Migration: Lessons Learned, which offers a deep dive into the experiences, challenges, and best practices from organizations that have successfully navigated the transition to ISO 20022.

The International Organization for Standardization (ISO) introduced ISO 20022 as a global standard for financial messaging. This migration promises greater efficiency, interoperability, and enhanced data-rich capabilities, but it also comes with its own unique challenges.

The white paper is intended to be a valuable resource for financial institutions, payment service providers, corporations, and technology vendors that are in the process of migrating to ISO 20022 or planning to do so in the near future. It provides actionable guidance and best practices to help organizations ensure a successful transition and maximize the benefits of ISO 20022 adoption.

“Implementing ISO 20022 is a complex endeavor that demands careful planning, execution and continuous improvement,” said Deepa Sinha, Vice President, Payments and Financial Crime, BAFT. “That’s why we chose to feature insights and key takeaways from industry leaders, experts and organizations that have already undergone the migration process in our white paper. We hope this will become an essential tool for those preparing for migration in the year ahead.” 

The white paper covers the essential aspects of migration: 

  • High-level Governance: Solid governance is the key to any successful project, and includes organization planning, communications, operations, technology and external engagement.
  • Data Strategy and Adoption: Understand the importance of data transformation and integration and how organizations have managed data harmonization during the migration. Discover how innovative technology solutions and infrastructure enhancements played a vital role in ensuring smooth transition.
  • Business Phasing Strategy: Explore the strategies employed by successful organizations in approaching the ISO 20022 migration, from project initiation to final execution.
  • Testing and Validation Strategies: Gain insights into the validation strategies and comprehensive testing methodologies that have proven effective in reducing potential disruptions.
  • ISO 20022 Post Implementation and Evolution: Benefit from real-world experiences, successes, and challenges encountered by organizations throughout their ISO 20022 migration journeys.

Click here to read ISO 20022 Migration: Lessons Learned. The white paper is also available within BAFT’s Library of Documents under the Guidance and Industry Practices section.

About BAFT

BAFT, the leading global financial services association for international transaction banking, helps bridge solutions across financial institutions, service providers and the regulatory community that promote sound financial practices enabling innovation, efficiency, and commercial growth. BAFT engages on a wide range of topics affecting transaction banking, including trade finance, payments, and compliance.

BAFT Media Contact:
Blair Bernstein
Senior Director, Public Relations
[email protected]
+1 (202) 663-5468

Follow Us: @BAFT

BAFT Releases New Guidance to Stem Correspondent Banking Decline

An updated guideline for respondent banks has been released by BAFT in a bid to better equip them to maintain their correspondent banking relationships in a complex regulatory environment.

Via Global Trade Review (GTR) by Eleanor Wragg

BAFT (Bankers Association for Finance and Trade) has released an updated version of its guidelines for respondent banks in a bid to better equip them to maintain their correspondent banking relationships amid an increasingly complex regulatory environment.

The Respondents’ Playbook 2.0: A Correspondent Banking Relationship Guide serves as a roadmap for respondent banks on international anti-money laundering (AML) and combating the financing of terrorism (CFT) standards. It outlines the decision-making process of correspondents establishing new and reviewing existing relationships and the measures that respondents may take to increase the likelihood of a favorable outcome.

Correspondent banking relationships are crucial for the financing of global trade, as they enable banks that may not have a presence in certain countries to still facilitate transactions, such as issuing or confirming letters of credit, in those regions.

However, although both the volume and value of cross-border payments have surged in the last decade – the Bank of International Settlements estimates increases of 61% and 37%, respectively –the number of correspondent banking relationships has fallen by 29%.

This decline is largely due to a heightened focus by banks on regulatory, reputational and financial risks from AML and CFT. With compliance costs increasing, for many banks, the risk presented by a sprawling network of interbank relationships – particularly in emerging markets – is too great to bear.

The BAFT playbook, which reflects the expectations and recommendations of a majority of the 20 largest global correspondent banks, clarifies correspondent bank expectations and provides constructive guidance for respondents to reduce their perceived financial crime compliance risk.

The new document replaces BAFT’s first set of guidelines, published in 2019, and includes adjustments to bring the guidelines in line with current regulatory concerns and correspondent bank risk appetite.

The 2023 version also includes information on the migration to the new ISO 20022 standard for financial messaging which will boost bank screening and filtering capabilities via a single format for transactions across different systems, platforms and geographies.

Cracking the Correspondent Banking Code

BAFT has updated its playbook to help respondents establish and maintain correspondent banking relationships — not an easy feat under current stringent financial crime compliance regimes.

Via The Banker by Joy Macknight

According to a 2018 Financial Stability Board report, the number of correspondent accounts declined by 15.5% from 2011 to 2017, which is of growing concern worldwide.

According to the Bank for International Settlements, de-risking could push users to less regulated or unregulated channels such as cryptocurrency and cash, potentially adversely affecting global financial integrity.

While regulators have been mindful of the adverse impact of bank de-risking on correspondent banking worldwide, there are no obvious and easy solutions to reversing the trend, according to John Everington’s recent article. Yet something needs to be done.

To address this problem, BAFT (Bankers Association for Finance and Trade) has released an updated version of its 2019 ‘Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship’.

As the largest global correspondent banks generally set the standard expectations for all respondent banks, BAFT convened a core working group of 10 global correspondent banks and one industry body that collectively represents 13 of the largest global correspondent banks. The association canvassed their advice for when respondents are looking to establish a new relationship or maintain an existing relationship, as well as options for respondents unable to obtain or maintain a relationship.

For example, when establishing a new relationship, BAFT research found that approximately two-thirds of surveyed correspondent banks consider three major commercial factors when evaluating a prospective partnership: potential profitability; expected costs (including financial crime compliance costs) of service delivery; and the creditworthiness of the respondent.

One suggested best practice for respondents is to ensure that there is sufficient opportunity for the correspondent with respect to the book of business being offered, including a good mix of transaction flows and associated risks. As such, a respondent should concentrate its business on fewer correspondents.

Maintaining a relationship may prove difficult, as correspondents are expected to conduct a periodic review and refresh of customer due diligence information. At any point, a correspondent could change its business strategy and exit a jurisdiction, a respondent could fail to meet the correspondent’s commercial expectations, or the respondent’s risk profile could adversely change. In such cases, regular and open communication is key, according to the playbook, including proactively identifying the increasing risk and notifying the correspondent.

But what if circumstances make it challenging for a respondent bank to obtain or maintain a correspondent relationship? This could be because the respondent doesn’t generate enough revenue for the correspondent, or the jurisdiction or respondent present an exceptionally high risk for financial crime.

In the former instance, one suggestion is for the respondent to convince the jurisdiction’s central bank or an organisation that covers several jurisdictions within a region to establish an institution to serve small banks in the jurisdiction or region. For respondent banks located in jurisdictions that do not have sufficient regimes for combatting financial crime, the playbook’s recommendation is to join a national or global banking association to promote awareness and adoption of best practices, as well as encourage the government to engage in capacity building.

The Respondent’s Playbook 2.0 incorporates current regulatory changes in the marketplace around international anti-money laundering and combating the financing of terrorism standards. The updated version also features a new section on the migration to the ISO 20022 messaging standard.

BAFT forewarns that a respondent’s use of the playbook does not guarantee its ability to secure a correspondent relationship. However, its aim is to provide constructive guidance for respondents to reduce their perceived financial crime compliance risk.

Navigating the Labyrinth: BAFT’s Updated Playbook on Correspondent Banking Relationships

Correspondent banking relationships (CBRs) are the linchpin of international trade and finance, enabling cross-border transactions and providing a gateway to foreign financial markets. 

Via Trade Finance Global by Deepesh Patel

Correspondent banking relationships (CBRs) are the linchpin of international trade and finance, enabling cross-border transactions and providing a gateway to foreign financial markets. However, these relationships have come under scrutiny in recent years, with a decline in CBRs observed in many parts of the world.

This decline has raised concerns about financial exclusion and the rising costs of trade finance, issues that have only gained urgency in the face of evolving regulatory landscapes and technological advancements.

The playbook serves as a roadmap for respondent banks navigating international anti-money laundering and combating the financing of terrorism (AML/CFT) standards.

BAFT (Bankers Association for Finance and Trade) has released an updated version of its Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship in this complex environment. 

This update, a successor to the 2019 guidance document, incorporates current regulatory changes and introduces a new section on ISO 20022 migration.

Sweet Symbiosis: Correspondent and Respondent Banking

In CBRs, one correspondent bank holds deposits and offers payments and other services to another bank, referred to as the respondent. Typically, respondent banks are smaller entities, often located in emerging markets, that rely on their correspondents for international transactions. 

This symbiotic relationship is essential for the functioning of global trade, yet it is fraught with complexities, particularly in compliance and risk management.

De-risking – A Double-edged Sword?

While risk management is the cornerstone of any financial institution, the strategy of de-risking or terminating CBRs to avoid risk has had unintended consequences. 

Financial exclusion, particularly in emerging markets, and the resultant increase in trade finance costs have raised ethical and economic concerns. De-risking has effectively hampered global trade and development, creating a ripple effect that extends beyond the banking sector. Here, industry standards, such as those set by the Wolfsberg Group, become particularly relevant. 

This association of thirteen global banks has been instrumental in developing frameworks for managing financial crime risks, offering a layer of uniformity in an otherwise fragmented landscape.

Factors Contributing to the Decline in CBRs

Several factors have contributed to the decline in CBRs, including:

  • Increased Regulatory Scrutiny: Correspondent banks are subject to strict regulatory requirements, particularly with AML/CFT compliance. Compliance costs have risen significantly in recent years, making it more difficult for some banks to maintain correspondent banking relationships.
  • De-risking: Some correspondent banks have adopted a de-risking strategy, which involves terminating CBRs with banks that are perceived to be high-risk. This has been particularly common with banks in emerging markets.
  • Technological Advancements: Fintech companies are developing new solutions for cross-border payments, which could reduce the need for correspondent banking relationships.

Fintech companies are playing an increasing role in the cross-border payments landscape. Some fintech companies are developing alternative solutions for respondent banks, such as providing access to global payment networks or offering digital escrow services.

While fintech companies could help address some of the challenges faced by respondent banks, it is essential to note that they are also subject to regulatory scrutiny. Additionally, fintech companies may need help to provide the full range of services that correspondent banks offer, such as trade finance and cash management.

Updating the 2019 Playbook

BAFT’s original playbook, released in 2019, was a timely intervention. It provided respondent banks with actionable insights and guidelines on maintaining correspondent banking relationships, particularly in the face of stringent AML/CFT regulations. 

The document was a comprehensive guide covering everything from establishing new relationships to the intricacies of compliance.

Regulatory landscapes are not static; they evolve in response to emerging risks and economic realities. Four years later, the updated playbook, the Respondent’s Playbook 2.0, reflects these changes.

It incorporates current regulatory shifts and introduces a new section on ISO 20022 migration, an international standard for electronic data interchange between financial institutions. This update is not merely an addendum but a recalibration designed to equip respondent banks for the challenges ahead.

ISO 20022 Migration

One of the critical updates in the 2023 playbook is the inclusion of a section on ISO 20022, a standard set to revolutionize the way financial messages are transmitted across the globe. ISO 20022 is a new international standard for electronic data interchange between financial institutions. It is set to revolutionize how financial messages are transmitted globally.

The adoption of ISO 20022 is not just a technical upgrade but a strategic move that will enhance the efficiency and transparency of international transactions. 

Respondent banks should start planning for ISO 20022 migration now, as the standard is expected to be widely adopted in the coming years.

The benefits of ISO 20022 for respondent banks include:

  • Enhanced efficiency and transparency: ISO 20022 uses a common data language to streamline cross-border payments and reduce the risk of errors.
  • Reduced costs: ISO 20022 will help reduce cross-border payment costs by eliminating the need for multiple data conversions.
  • Improved compliance: ISO 20022 will help respondent banks comply with international AML/CFT regulations.

The challenges of ISO 20022 migration for respondent banks include:

  • Technical complexity: ISO 20022 is a complex standard, and migrating to ISO 20022 will require significant investment in technology and resources.
  • Time and cost: Migrating to ISO 20022 will be time-consuming and costly.
  • Coordination with correspondent banks: Respondent banks must work closely with their correspondent banks to ensure they are both ready to migrate to ISO 20022.

The playbook also details compliance practices, providing both correspondent and respondent banks with a toolkit to navigate the complexities of international finance and regulatory compliance.

The future of correspondent banking relationships is still being determined. However, respondent banks must adapt to the changing landscape to remain competitive.

The BAFT Respondent’s Playbook is a valuable resource for respondent banks, guiding how to obtain and maintain correspondent banking relationships in compliance with international AML/CFT standards.

It addresses the ‘what’ and the ‘why’, offering insights into the rationale behind best practices and regulatory requirements. In doing so, it provides banks with the tools to adapt and thrive in an environment of constant change. The playbook serves as a timely reminder that in the fast-evolving world of international finance, staying ahead is not just about keeping pace with change but anticipating it.

The BAFT Respondent’s Playbook 2.0 can be read here.