The partner bank model is a smart starting point. But it can quietly become the biggest obstacle to growth, profit, and client retention.
For US banks entering the world of international banking, the path seems obvious: partner with a larger financial institution. It’s a strategy that has worked for decades. Large money-center and super-regional banks provide the tools, expertise, and technology for cross-border payment processing. They also offer global payment networks, without a major investment. On paper, it’s an ideal arrangement. Your institution can work with FX specialists. It can use a proven global payments network. It can access online client portals. It can make payments in dozens of currencies.
The operational burden is minimal. With today’s technology, correspondent banking integration is relatively straightforward. While, you don’t need an extensive FX team, you still need enough FX expertise and experience to get it right. Clients can make international payments through a trusted banking partner, while your bank earns more fee income with low upfront costs. Everyone wins. At least – for a while.
The partner bank model has a shelf life
For many financial institutions, outsourcing FX operations is the right choice early in building an international banking business. It minimizes risk and accelerates market entry, but it greatly limits your bank’s FX products and services.
Foreign exchange is far more than sending international wires.
There are additional FX products – Spot, Outright, Window Forwards, FX Swaps, NDFs and FX Options. There are additional services like FCA accounts, batch file and treasury system integrations.
When does the partner bank model shift from a benefit to a liability for your bank’s global business?
Every bank reaches it at a different stage depending on client demographics, transaction volumes, and international strategy. However, three performance indicators consistently reveal when it may be time to bring FX operations in-house.
1. Revenue: Are you sharing too much of the profit?
Every outsourced FX transaction generates revenue – not only for your institution, but also for your partner bank. Most correspondent FX providers keep a spread on every transaction, often about 1%, before pricing reaches your customer.
Initially, this trade-off makes sense. Building an internal FX operation requires investment in technology, operations, compliance, and experienced personnel.
As transaction volumes increase, so does the amount of revenue leaving your institution. There comes a point where retaining that spread internally more than offsets the costs of running your own FX desk.
Revenue analysis is often the easiest business case to present to senior management. Ironically, it is also one of the last warning signs to appear.
2. Pricing: The hidden threat to client relationships
Pricing isn’t simply about increasing margins. It’s about remaining competitive.
Banks operating under a single partner model are limited to the pricing provided by that institution.
In the partner bank model, you are limited in your pricing – very limited. If you have one partner bank, then you can only use their price – if they are adding one percent to each trade, then that’s the lowest price you can show.
Your partner bank may work with you if you have a larger transaction, but your ability to ‘shop’ prices is zero. If your provider’s spread is built into every transaction, your flexibility disappears. You can’t compare liquidity providers. You can’t negotiate aggressively. You can’t consistently provide best execution. Clients notice. Initially, they may ask for better pricing. Later, they simply stop asking.
Many businesses won’t tell you they’re using other FX providers. They will just move transactions to competitors with better rates. The problem is that this often goes unnoticed in the broader scheme of things. By the time you see what is happening, you may have already lost a large share of your clients’ international business.
When clients question your pricing, that’s an early warning sign that your FX strategy deserves attention.
3. Services: The growth opportunity most banks underestimate
Revenue and pricing are measurable. Service capability is harder to quantify – but often far more valuable. When banks begin operating their own FX infrastructure, they gain access to an entirely different level of client solutions.
These include:
- Foreign currency accounts
- Enhanced treasury integrations
- Automated payment workflows
- Additional settlement options
- Expanded hedging products
- Greater payment flexibility
If you don’t offer foreign currency accounts, integration options, and multiple payment options, clients may choose a fintech. They may also choose a competitor that offers these services. If it’s a fintech, you’re fortunate – you’ll only lose some of the non-interest income. However, if it’s a competing bank offering these services, the impact is far greater. Without comparable capabilities, you risk losing not just a few transactions, but the entire banking relationship.
The cost of limited FX capabilities extends well beyond lost fee income. It becomes a client retention issue.
Owning the FX experience: A growth opportunity for banks
One of the biggest benefits of bringing FX in-house is capturing more of the customer relationship. It also helps grow FX revenue as international activity expands.
Banks often see growth above 50% in the first few years. This happens after they take more control of FX.
Why? Because they are no longer competing on a single product. They are competing on a comprehensive international banking solution.
Expanded services deepen existing relationships. Improved client experience drives higher transaction volumes. Better pricing increases business retention and attracts new business. And stronger client retention creates long-term revenue growth that often outpaces the bank’s overall expansion for years.
The bottom line
Partner banks are a smart starting point, but they shouldn’t be the finish line. As demand for global banking and cross-border payment services grow, banks that own the FX relationship will also own the customer relationship. Ready to take control of your FX business? Talk to our FX payment experts today.
