Corridors: liquidity, correspondents, and cost

Graduate · enrolled learners

This lesson opens with The Somalia remittance corridor and de-risking, 2013.

What happened

Somalia had no functioning formal banking system, so millions of Somalis abroad sent money home through money-transfer operators, and those remittances, on the order of 1.3 billion dollars a year, exceeded foreign aid and were a lifeline that roughly 40 percent of the population relied on to eat. But a money-transfer operator cannot move dollars internationally on its own; it needs a bank account with a correspondent bank that will process the transfers into the formal system. In 2013 Barclays, one of the last major UK banks still serving these operators, announced it would close the accounts of around 250 of them, including Dahabshiil, the largest Somali operator, citing money-laundering and terrorism-financing risk. This is de-risking: a bank withdrawing from an entire class of customer or region because the compliance risk and cost outweigh the profit. No money was stolen, which is why the recorded loss is zero, but the corridor itself was threatened with closure, and with it the only way millions had to receive money, all because the correspondent at the top of the chain chose to leave.

The decision point

A corridor is a route money takes between two places, and it is not a piece of technology but a chain of institutions, at the top of which sits a correspondent bank that connects the corridor to the formal financial system. A corridor exists only as long as a correspondent is willing to serve it, and that willingness is an economic and compliance decision the correspondent makes, not a property of the corridor's demand or usefulness. Somalia is the case where a corridor serving millions, carrying more than aid, was threatened not by a technical failure but by a bank deciding the compliance risk of that whole class of customer was not worth the profit, and withdrawing. This is de-risking, and it sets a corridor's cost and access more than any technology does: correspondents charge for the risk they carry, and when they judge it too high they leave, and the corridor becomes expensive, thin, or closed regardless of how many people need it. So the decision when relying on or building a corridor is to assess its correspondent dependency, who provides the banking access at the top, how exposed they are to de-risking, and what happens if they withdraw, because a corridor's real fragility is not its rails but the willingness of the bank that connects it to the rest of the world.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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