What are the structural inefficiencies of the correspondent banking system, and how can regional payment linkages address them?

Correspondent banking — the chain of intermediary bank accounts through which cross-border payments travel when sender and receiver banks hold no direct mutual account — is the world's default settlement rail. Yet active relationships fell nearly a third between 2011 and 2022 [1], exposing structural flaws that regional payment linkages now seek to correct.

Sender bank -> Correspondent (London/New York) -> [Intermediary] -> Beneficiary bank
   each hop = fee + FX spread + compliance check + time lag

Structural inefficiencies

• Multi-hop routing: payments pass through intermediaries usually headquartered in London or New York; every hop adds a fee, an FX spread and a delay.
• High cost: sending remittances averaged about 6.4% of the amount in 2025 [2], far above the G20/SDG target of 3% by 2030 [3].
• Opacity and delay: batch processing, time-zone cut-offs and weak end-to-end tracking leave payers unsure of final cost and arrival time [3].
• De-risking and concentration: thin profitability and rising AML/CFT compliance costs push global banks to exit small and emerging markets, shrinking access for the Global South [1].
• Trapped liquidity and currency dependence: banks pre-fund nostro/vostro accounts, while routing through a vehicle currency imposes double conversion and sanctions-chokepoint risk.

How regional payment linkages address them

• Bilateral interlinking of fast payment systems: the UPI–PayNow link (2023) enables instant, low-cost reciprocal transfers without either user joining the other system [5], collapsing the intermediary chain.
• Multilateral hubs: BIS Project Nexus replaces costly bilateral tie-ups with one standardised connection, with India among the implementing partners [4].
• Local-currency and CBDC settlement: the BRICS Payment Task Force, mandated by the 2025 Rio de Janeiro Declaration to advance payment-system interoperability [6], is exploring rapid-payment linkage and CBDC interoperability — cutting conversion costs.
• 24x7 real-time settlement frees trapped liquidity and makes pricing transparent upfront.

Such linkages, however, succeed only with harmonised AML, legal and data-protection standards among participating regulators. India's 2026 BRICS Chairship [6] offers an opportunity to anchor interoperable, low-cost rails within the G20 roadmap rather than in competing blocs — advancing SDG 10.c and financial inclusion for the Global South.