Correspondent banking, a critical provision of international banking that facilitates global trade and cross-border capital flows, is facing a multitude of challenges from regulation and regulatory pressure that threatens the very nature of the industry. The de-risking that has occurred over the last several years has placed tremendous strain on this activity, resulting in lost business opportunities as well as diminished economic growth and financial inclusion.
FIBA spoke with Gabrielle Haddad, COO of Sigma Ratings in a exclusive interview:
What are the main challenges faced by correspondent banking?
There are multiple challenges. Banks seeking to access the international financial system continue to struggle with building trust and reputation separate from the markets where they are located. Independent third-party offerings, like our ratings at Sigma, can play a big role in filling this need. And we believe that increased transparency will lead to more trust and the creation of new business relationships globally.
Regulation and regulatory pressure continue to be a challenge in correspondent banking. Despite regulatory pressures, there appears to be an increased desire to “re-risk” or re-enter many of the markets that were exited in the past. Balancing the desire to increase correspondent banking relationships with effective, efficient and intelligent risk management is critical to re-risking and managing existing correspondent relationships globally.
What’s the future of correspondent banking?
With the rise of Fintech, particularly payments startups and blockchain technology, there are competitors that have and will continue to try to reshape this industry. Yet, many of the regulatory and compliance issues that burden traditional correspondent banking remain. At Sigma Ratings, we also provide ratings to Fintech companies who demonstrate a willingness to be transparent and a desire to differentiate themselves on financial crime and governance risk vulnerabilities.
Why is Sigma Ratings needed today and how are you shaping the future of correspondent banking?
At Sigma, we are catalysts for the future of correspondent banking and cross-border payments. We identify, quantify and normalize non-credit risks (i.e. financial crime and governance risk) in emerging markets. We do this is in two ways. First, we have developed our Insight Platform that organizes publicly available information on companies around the world and applies machine learning to generate daily risk scores on thousands of entities. Our platform enables users to monitor existing counterparties, as well as quickly assess potential counterparties during the onboarding process.
Second, we offer entities the opportunity to “opt in” to provide additional information to generate a deeper risk rating on the entity. These ratings are used by entities to demonstrate to potential correspondents their commitment to financial crime compliance, to differentiate themselves from the risk of a market itself and for internal or board review purposes.
How is Sigma Ratings different than the credit rating agencies?
Credit rating agencies focus on credit risk—an entity’s ability or willingness to pay. At Sigma, we are looking at the non-credit risk, specifically the financial crime, governance and management risk of an entity. Our rating covers the inherent risk (i.e. business lines, geographic exposure, customer base) and the control effectiveness (i.e. management quality, organizational culture, policies and procedures, governance structures) of an entity. If someone puts a Sigma rating side by side with a credit rating report, there would be little to no overlap in the information covered. Today, especially in high-risk emerging markets, many of the fears and reservations of doing business in these markets stem from non-credit risk concerns. Sigma Ratings is the first to offer tools that help entities differentiate themselves on these types of risks while simultaneously building reputation and trust in the market.
What is the socioeconomic impact of the services provided by Sigma Ratings?
Our commitment to addressing the de-risking problem led us to build Sigma Ratings. At a macro level, Sigma Ratings provides global corporations with increased visibility and assurances needed to engage in business in emerging markets, increasing capital flows to spur economic growth and development. At a micro level, Sigma Ratings will increase remittance flows to emerging economies, to allow small businesses, microenterprises and individuals to access commercial financing currently unavailable and to generate significant social impact through financial inclusion. We believe that our ratings will incentivize better, more ethical behavior, leading to a healthier financial system and reductions in global corruption and fraud.
Can you tell us a little bit about your background?
My co-founder and our CEO, Stuart Jones, Jr., spent his entire career before Sigma working on counterterrorism and illicit finance matters and my decision to start the company with him came directly from my experience working in law and international development. I worked in over 30 countries across emerging markets, and during that time, I saw a deep need for more technology-driven, systems-focused solutions to economic growth and development challenges. It is the potential for significant social impact that drives us as founders and our entire mission-focused team.