Textbook on Payments Part 4: Why are international remittances slow and expensive? — The world of correspondent banking

Domestic bank transfers arrive in seconds and cost a few hundred yen. However, international remittances take several days, cost several thousand yen, and you are told that 'you don't know exactly how much will arrive.' In this installment, we will dissect the reality behind this gap.

Root cause: There is no 'Bank of Japan for global banks'

The domestic mechanism we looked at up to Part 3 was only possible because there was a common communication network called the Zengin System and a common settlement location called the Bank of Japan current account. Once you cross national borders, these two disappear. The yen and the dollar have different central banks, and there is no such thing as a globally common 'current account.'
Therefore, banks devised a method of holding accounts with each other. Bank A in Japan opens a dollar-denominated account at Bank C in the US, and Bank C also opens a yen-denominated account at Bank A if necessary. This partnership is called a correspondent agreement, and the partner with whom you hold an account is called a correspondent bank. We distinguish between the account our bank holds overseas, called a Nostro account, and the account the other party holds at our bank, called a Vostro account.

The reality of international remittance is a 'string of beads of accounts'

Suppose you are sending money from Bank A in Japan to Bank Z, a local bank in Brazil. In most cases, Bank A does not have a direct correspondent agreement with Bank Z. In that case, the remittance is carried through a string of intermediary banks, such as Bank A → (Bank A's correspondent) major US Bank C → (Bank Z's correspondent) Brazilian Bank D → Bank Z.
Imagine what happens at each relay point. Deduction of fees (the reason the arrival amount decreases), anti-money laundering and sanctions checks (the reason it stops), and business hours and time differences (the reason it is slow). If domestic remittance is a highway, traditional international remittance is a mountain road with checkpoints and currency exchange booths at every border.

Even so, the correspondent network is shrinking

Even more troubling, this mountain road is shrinking rather than growing. Due to the strengthening of anti-money laundering measures, major banks have increasingly tended to cut off correspondent relationships with high-risk countries and banks (de-risking). As a result, in some countries, the remittance routes themselves have thinned out, and remittance costs have risen—this structural problem is the background to why the G20 has made improving international remittances a policy issue.

Three trends for improvement

① Speeding up existing rails. With a mechanism called SWIFT gpi, it has become possible to track remittances, and many remittances now actually arrive in a few hours to a day (more on this next time).
② Ingenuity in 'not sending'. Many emerging remittance businesses do not actually send money across borders. They place pools of funds in each country in advance; yen received in Japan is put into a Japanese pool, and payments are made in local currency from a Brazilian pool. It is the idea of placing warehouses at the foot of both sides of the mountain without going through the mountain road.
③ Rebuilding the rails. Initiatives to directly connect the instant payment networks of various countries (such as the Bank for International Settlements' Project Nexus) and experiments with new routes using stablecoins and tokenized deposits are underway. After graduating from this series, please join us for the 'Decoding AI x On-Chain Finance Series (10 parts in total)'.

Next time, we will look at the true nature of SWIFT, which only appeared by name today. The expression 'send money via SWIFT' is actually incorrect.