Declined transactions can be a costly problem, not just for the consumer, but especially for businesses and, as it happens, even the entire global banking system. When a transaction is denied, statistics show that only a quarter of consumers try another form of payment, and nearly half of them abandon the transaction altogether.
As a business owner, a negated transaction marks only the start of potential mayhem. High refusal rates at the point of purchase can lead to penalties imposed by financial institutions in response to their issuers. While several complex factors determining the refusal ratio, what’s important to note is that, should the trade remain in default, those fines can be compounded even further when payment processors begin imposing additional penalties. This may place your business on a long uphill battle when it comes to regaining standard compliance.
There’s a bevy of common reasons that cause a credit card transaction to decline. It could be a lack of funds, lost or stolen card, unusual location, fraud, or a simple processing error. But when it comes to international wire transfers, understanding the rate of denial is substantially more involved. This is because a denied wire transfer is oftentimes sourced to a recent decline in correspondent banking.
Correspondent banking has been around for a couple of centuries and has, for that same amount of time, constituted the essence of how finance professionals have conducted international wire transfers, business-to-business financing, and fiat currency trade in the FOREX market. The international correspondence banking network is used by businesses of all sizes. It has, for many, many years, been vital in maintaining the healthy flow of services and capital around the globe.
As of 2015, though, according to a report conducted by the World Bank, correspondent banking has experienced a noteworthy decline. Their survey showed that banks have been relinquishing their subsidiaries and severing relationships with smaller banks at a fairly solid clip. The general idea is that by shrinking the correspondence network, larger banks mitigate perceived risk to their own portfolios. Indeed, most banks have reported this trend in recent years, with institutions in the Caribbean being most impacted by the change. The upshot of all this is that correspondent banking services such as check clearing, cash management, and international wire transfers have also recessed.
So why then are banks so willing to expose this sector of their business? Many analysts have conferred that this recent transformation in correspondent banking is attributable to changes in the financial regulatory environment. There has been a special emphasis placed on two key areas of compliance, the know-your-customer (KYC) and anti-money-laundering (AML) regulations. And, decidedly, what’s complicated the facilitation and enforcement of these regulations is the convoluted web of transactions continuously happening over the Internet.
With banks under increasing regulatory strain in a tenuous environment for self-facilitation, a growing supply of money transfer businesses has been denied access to the correspondent network. Because banks reserve the right to terminate relationships they perceive as too risky, this can instigate problems with international transfers and prompt frequent wire declines. Likewise, the users of international money transfer businesses are often considered higher-risk clients themselves. This too contributes to an increased ratio of denial.
Some analysts argue that this trend in terminating customers and banking partners construed as high risk could lead to an “existential banking crisis.” After being denied access to the correspondent network, money transfer companies may find other suppliers, but the increased cost is passed on to the average consumer -typically, small-sized businesses, bankless citizens, and migrant workers.