Expanding Bank Outreach through Retail Partnerships: Correspondent Banking in Brazil

This paper explores the extent to which formal, regulated financial institutions, such as banks, have been able to partner with “correspondents”, commercial entities whose primary objective and business is other than the provision of financial services. The paper illustrates the case of Brazil, where banks have developed extensive networks of such correspondents. It shows that such arrangements result in lower costs and shared risks for participating financial institutions, making these arrangements an attractive vehicle for outreach to the underserved especially for certain financial services such as payments and transactions. The paper:

• Describes the correspondent banking model and its various forms in Brazil,
• Evaluates each form in terms of reductions in costs or risks,
• Demonstrates the flexibility of the model, which permits its use by private as well as public banks, and its use of conventional as well as the special accounts created by Brazilian legislation to expand access,
• Summarizes the dimensions of the growth of correspondent banking.

The paper states that:

• The correspondent banking model has succeeded in expanding access to geographically remote areas and the poorer segments,
• Regulatory changes towards banks, their correspondents, and towards the rest of the financial system, influenced the development of the correspondent system,
• Correspondent banking requires a supporting enabling environment to emerge, and poses some regulatory challenges and some increase in risk.

The paper concludes that the example from Brazil may be replicable elsewhere if appropriate regulatory adjustments are undertaken.