For decades, typically large regional or money center banks served as correspondent banks that enabled smaller banks to offer cross-border payments. It was rare for credit unions, community banks, and other smaller financial institutions to offer cross-border payments. And if they did, it was a money-losing proposition, offered out of necessity to prevent their customers from leaving for larger banks.

It’s notable that the problem for originating institutions has become much worse. Over the past decade, the number of correspondent banks supporting originating institutions for cross-border payments has fallen by more than 25%, even as international bank transfer volumes have surged.

Small or even medium-sized financial institutions struggle to find a correspondent bank. And even if one is found—the commercial terms, product issues from the opaqueness of these payments, customer complaints about slow delivery of funds and high fees, as well as service from correspondent banks—make the experience painful for everyone involved.

But things have changed. 

New software and new paradigms address “legacy bank systems”, “legacy product thinking”, and “legacy risk” in terms of cross-border payments.

And for the first time, smaller financial institutions, credit unions, and community banks can offer their retail customers, SMEs, fintechs, and others cross-border payments that are faster, transparent, and less costly than the “big banks”.  Moreover, they’re very profitable as well as easy to implement and support with new paradigms and new tech—and no correspondent bank required.  

In a PaymentsJournal podcast, Gary Palmer, President, CEO, and Chairman of Payall, and Hugh Thomas, Lead Analyst of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed how smaller banks can compete and win in the cross-border space.

Fixing the Root Cause Issues at Correspondent Banks

What could reduce both the risk and the cost of cross-border payments? Fixing manual workflows is the first step. Digitizing and enhancing a correspondent bank’s ability to manage counterparty risk, transaction risk, and multi-jurisdictional compliance lowers the cost of processing each transaction and improves outcomes.

Alternatively, some have introduced stablecoins in an attempt to fill the gap of fewer correspondent banks. But without fixing the underlying risk and compliance issues—they’ve added new risks.

“A professor from a renowned European institution tracking various violations or issues with crypto operators in the areas of sanctions and money laundering has noted a marked increase in violations,” said Palmer. “And even though financial institutions may feel somewhat insulated from risk, this hasn’t been fully tested, and the payment system is exposed to manipulation.”

Payall has developed end-to-end infrastructure and enterprise software for banks of all sizes and all roles, which removes what Gary calls “the fear and friction” from cross-border payments—whether these payments are processed through correspondent banks, new alternatives such as Mastercard Move, or stablecoins.

Hugh Thomas observed: “Smaller banks often lack the technical resources to handle the complex demands of cross-border. What’s notable is how purpose-built solutions digitize these processes, lowering costs and opening participation in ways that weren’t possible before.”

This means that smaller and medium-sized banks can now safely, efficiently, and profitably become correspondent banks or originating institutions.

Banks Are Asking Too Much from Their Employees

Millions of times each day around the world, an originating bank employee receives a payment instruction from their core system indicating that a customer wants to transfer funds to the U.S. to make a payment for goods and services. From here, this transaction is manhandled through an overgrown jungle of paper processes across multiple departments at the originating bank and its correspondent bank.

It’s each bank’s responsibility to establish reasonable risk controls to mitigate money laundering, terrorist financing, and sanctions violations. Based on the size of the payment and other attributes, employees must decide what data to collect—contracts, invoices, bills of lading, customs declarations, tax receipts, or something else. They must then determine whether the documents are authentic or have been altered or forged. And apply judgment to decide if what’s been provided reflects an economically legitimate transaction. The bank employee also looks for sanctioned people, companies, ports, vessels, and products in this pile of documents, from an ever-changing list of sanctions. 

Now consider the time, cost, and risk of error involved—even for a few documents/pages. Multiply that by 5, 10, or 50 pages, and the problem becomes overwhelming.

And where do they record, share, and store the results—along with all the related data, documents, photos, and more? Not in core systems or digital bank platforms—because it’s impossible—but instead, in paper files, shared folders, and emails. What a mess. It’s a slow, costly, opaque, cumbersome, and risky process.

The solution? Digitizing counterparty risk, transaction risk, compliance, and a long list of other previously manual processes eliminates the slow, costly, and error-prone reliance on humans to protect each bank and the payment system.

New, Purpose-Built Software is a Game Changer

“It’s easy to understand how AI and digitization could transform cross-border compliance,” said Thomas. “Software that automates data collection, verification, and document analysis has the unique potential to reduce risk and change the economics of participation for smaller banks.”

Payall’s software digitizes all the originating institution’s rules, data collection, verification, and internal, as well as external, sharing needs. Soon, advanced AI will examine PDFs, audio files, videos, and photos, extract unstructured data—such as names of companies, ports, vessels, people, and currencies—and compare them against sanctions lists.

For the first time, an originating institution, even a small bank, can fully digitize its Know Your Transaction (KYT) process for 100% of transactions in real time. Until Payall, these processes could only be executed by a bank’s employees. It’s too much.  

Also, from the perspective of a correspondent bank working with originating institutions, nothing is more powerful than “see-through”—or 100% visibility into each rule at the originating institution, how it was executed, the supporting data and artifacts, including the results of 3^rd party verification services—orchestrated by Payall.

Additionally, correspondent banks configure their individual risk, compliance, or other rules to this incredibly data-rich payment set and take action. Instead of operating on “trust”—validated by occasional audits on as few as 0.0001% of all transactions, months after a payment—imagine the power of complete visibility into the originating institution’s application of their rules, processes, and supporting documentation on 100% of all transactions in real time.

And based on this, the correspondent bank can choose to either accept the payment or independently execute additional transaction due diligence, including a new form of Know Your Customer’s Customer (KYCC). This is only possible with new software that enables instant, on-demand multi-country KYC, KYB, as well as specialty KYT.

What was previously impossible to see is now not only transparent but can be directly and independently interrogated and decisioned by the correspondent bank—this is Know Your Customer’s Customer reimagined. 

This is particularly powerful for correspondent banks that support originating institutions from regions flagged by FATF as having material weaknesses in preventing money laundering, executing KYC, or sanctions screening.

Also, during periods of geopolitical events, bad actors can infiltrate banks. What’s the outcome? In the absence of comprehensive payment data and knowledge, U.S. correspondent banks are compelled to exit from the region or stop just about all payments. But in doing so, legitimate businesses can’t make payments or get paid, and life-saving remittances are stopped. The result? Chaos as commerce is crippled, and everyday citizens struggle to survive. While the bad actors are stopped, a country can be decimated.

“For correspondent banks, Payall enables proactive, data-driven oversight of every transaction, not just retrospective audits or occasional spot-checks. For the first time, correspondent banks can go beyond trust,” said Palmer. “We’ve completely reimagined and redefined Know Your Customer’s Customer so that correspondent banks have 100% see-through into the rules and outcomes of an originating bank partner, and they can directly engage and decision data. This changes everything: it eliminates reliance on inefficient back-office workflows, subjective trust, and guesswork. It creates confidence in the safety of cross