Guides

December 30, 2021

Global Banking Guide

Carla McMorris
Director of Content

Why Our Global Economy Depends on Global Banking

What is Global Banking?

Today’s economy is a global economy that depends on global banking. Global banking facilitates the transfer of trillions of dollars across national borders every day helping to fuel global finance, trade, and remittances. 


The concept of global banking has been around since the 16th century when it became clear that to facilitate trade, a banking system that reached across borders was needed around the world. Despite the awareness of the need for global banking centuries ago, most banking systems evolved to be national entities that restricted businesses and individuals to bank within a single country. As the world becomes ever more interconnected there’s added pressure to lift national restrictions to make it easier, faster, and more cost-effective for everyone to bank across borders.

How does Global Banking work?

The engine behind global banking is global payments. Most global payments (also called international payments or cross border payments) are managed by the Society for Worldwide Interbank Financial Telecommunication or Swift who operates an international network of more than 11,000 correspondent banks, financial institutions, and payment systems to process over 35 million transactions per day in 2020 worth $1.5 trillion. 


Swift is essentially a secure and reliable messaging network that sends and receives information about transactions for banks and financial institutions across the globe. Swift processed an average of 42.5 million messages per day year-to-date as of March 2021, a 9.8 percent growth in traffic over 2020.


An example of a typical transaction begins when a business or individual in one country wants to buy products or services from a supplier in another country. 

  • The payer’s domestic bank calculates the foreign currency exchange to facilitate the payment in the currency of the supplier.
  • The domestic bank then withdraws the amount from the payer’s account and moves it to a correspondent account that they have with the foreign bank.
  • The domestic bank tells their correspondent bank to pay the amount to the supplier in the supplier’s currency using the funds in the correspondent bank account. 

 

Global or international payments are more expensive than local payments to process and they take more time to complete. More information is needed to complete international payments including the Business Identifier Code (BIC) or the International Bank Account Number (IBAN) which are needed for routing and payment instruction.

What is a Correspondent Bank?

The network of correspondent banks can provide services for another bank located in a different country. These banks buy, sell and facilitate money transfers for payments or foreign currency transactions using correspondent bank accounts called Nostro and Vostro accounts. 


Despite its dominance in global payments, Swift has seen the number of correspondent banks steadily decline in recent years, falling 22% from 2011 to 2019. This is due to long-standing issues that include high routing fees, a lack of transaction visibility, and delayed payments. In 2017, Swift responded with an initiative called Swift gpi which stands for “global payments innovation”. Swift gpi combines Swift with a new set of rules for the banks that were designed to resolve the issues of slow payment speed, high fees and charges, a lack of end-to-end payment tracking, and no payment confirmation.

What's the difference between a Global Bank and an International Bank?

A bank that operates in its home country conducting mostly cross-border transactions is considered an international bank. A global bank or a multinational bank, operates in multiple countries through many foreign branches, funding them locally in the host countries.

How big is the Global Payments Sector?

In 2020, global payment revenues were $1.9 trillion which was a 5 percent decrease overall from the previous year mostly contributed to the COVID-19 global health crises. Some regions fared better than others, with Latin America declining the most at 8 percent and Europe, the Middle East, and Africa (EMEA) only 3 percent. From 2014-2019, revenues grew 7 percent and are expected to return to this rate post-crisis, reaching approximately $2.5 trillion by 2025.

How are Global Payments changing?

Digital payments are growing at an accelerated rate, fueling new B2B and ecommerce business models that stretch across borders. Some of the use cases include:

  • Enterprises needing to manage global treasury and payments
  • Social entrepreneurs needed pathways to payments across borders
  • Individuals working in cross-border jobs
  • Individuals in countries with high inflation or negative interest rates needing better solutions for wealth retention


These use cases are pushing global payments to speed up, lower fees, and provide transparency around payment tracking and confirmation. Many digital payments solutions are being introduced to the market designed to bring more speed, lower fees, and provide transparency around payment tracking and confirmation. Some Banking as a Service (BaaS) platforms, like Synapse, are providing fintechs with payment solutions that make it possible for their customers to buy, sell and facilitate money transfers in US dollars in 30 countries.

Global Banking Guide

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Carla McMorris
December 30, 2021

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