What Is a Correspondent Bank? How a Correspondent Bank Works

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What Is a Correspondent Bank?

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What Is a Correspondent Bank?

The term “correspondent bank” simply refers to a financial institution that provides services to another one—usually in another country. It then acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and even gathering documents on behalf of another bank.

Correspondent banks are simply the most likely to be used by domestic banks to service transactions that either originate or are simply completed in foreign countries. Domestic banks generally use correspondent banks to gain access to the foreign financial markets and also to serve international clients without having to open branches abroad.

How a Correspondent Bank Works

Correspondent banks are simply third-party banks. They then act as middlemen between different financial institutions. As such, they will provide treasury services between sending and receiving banks, especially those in different countries—such as:

Correspondent banks might then also act as agents to process local transactions for the clients when they are travelling abroad. At the local level, the correspondent banks might then accept deposits, process documentation, and also serve as funds transfer agents.

The accounts are then held between correspondent banks and the banks for which they provide services and are referred to as Nostro and Vostro accounts. An account that is held by one bank for another is simply referred to by the holding bank as a Nostro account or “our account” on your books.

The same account is then referred to as a Vostro account—your account but on our books—by the counterparty bank. In general, both banks in a correspondent relationship hold accounts for one another in order to track debits and credits between the parties.

Correspondent banks are even a pivotal part of the financial industry, as they simply provide a way for domestic banks to operate when it is not feasible for them to open up branches in a different location—especially in a foreign country.

For example, a small domestic bank with clients in different countries can then partner with a correspondent bank in order to simply meet the needs of its clients internationally. Doing so will also give them access to the foreign financial market. The correspondent bank will, therefore, simply charge a fee for this service, which is then usually passed off from the domestic bank to the customer.

Fees for Correspondent Banks

If you have ever conducted an international transaction at your bank, then you are well aware of the fees involved. But what you might not know is that part (or all) of this fee is then paid to the correspondent bank—not your local bank.

Most international wire transfers generally cost between $15 and $50 apiece, though it simply depends on the financial institution, whether the transfer is an incoming or outgoing transaction, which currency it’s in, and also whether it’s initiated online or at a local branch.

For instance, at Chase, an outgoing international wire transfer in U.S. dollars that is initiated through the bank’s website or using the mobile app from your account will cost you $50.

At Bank of America, an incoming international transfer in another currency can simply cost you $16—but that amount could then change based on your account type or the current exchange rate. Moreover, some banks will even only charge you the price they pay to the correspondent bank, while others will then add their own fee to the cost.

Vostro vs. Nostro Accounts: How Banks Settle Cross-Border Transactions

This constant exchange of money can then get confusing, so banks will now use Nostro and Vostro accounts to keep track of it all. Any given bank will also have a mix of Nostro and Vostro accounts on its balance sheet. For example, if a bank in the U.S. is simply currently holding money for a bank in Italy, it will then record those funds in a Vostro account so that it knows the money is not theirs.

Meanwhile, the bank in Italy will track those same funds in a Nostro account so that it knows that the money is theirs; it’s just being held at another bank. For every Nostro account that exists, there is then a corresponding Vostro account on someone else’s balance sheet.

Correspondent Bank vs. Intermediary Bank

Although there are some similarities between these and both correspondent and intermediary banks—namely that they will act as third parties for other banks—there is also a major difference between the two. While the correspondent banks normally handle transactions involving multiple currencies, an intermediary bank then completes transactions involving a single currency. They are especially important for domestic banks that might then be too small in size to handle these types of transactions.

Example of Correspondent Banking

As a common correspondent banking example, imagine a small domestic bank in Australia has decided to simply accept international clients in Europe and also Asia. However, because it simply does not have any European or Asian branches of its own, it must then use a correspondent bank to transfer money and also conduct financial transactions. This will then give the bank access to the foreign market, in exchange for a fee paid to the correspondent bank.

Difference between Correspondent Bank and Intermediary Bank

Like the correspondent banks, intermediary banks also act as middlemen between sending and receiving banks. Both can then be used to send and even receive money, acting as a third party. Yet there is just one major difference to be aware of when comparing a correspondent bank and an intermediary bank.

  • Correspondent banks facilitate transactions that involve multiple currencies.
  • Intermediary banks facilitate transactions that involve a single currency.

Both can work with domestic banks, but it is usually the correspondent banks that can simply handle international transactions across multiple currencies. An intermediary bank can then send money to help clients complete a foreign transaction, but it would be completed in a single currency.

Wire Transfers and Correspondent Banking in Australia

International wire transfers simply use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. If you are then thinking of sending or receiving international payments, you will then need to know the appropriate SWIFT number for each account.

One final thing for you to keep in mind is that the correspondent and also the intermediary banking definitions vary slightly between countries. This is why when you are arranging wire transfers specifically in Australia, you will primarily see references to the intermediary banking rather than the correspondent. All perform the same role, but it is a good idea to simply verify the terms and conditions before finalizing any transfer.


Why Do Banks Use Correspondent Banks?

Through correspondent banking relationships, banks can be able to access financial services in different jurisdictions and also provide cross-border payment services to their customers, supporting international trade and even financial inclusion.

What’s the Difference Between a Correspondent Bank and a Beneficiary Bank?

A beneficiary bank is a bank that receives the transfer. The main difference between correspondent banks and other banks, including intermediary banks, has to do with the number of currencies that are in use; correspondent banks are simply able to handle more currencies.

How Do You Use the Correspondent Bank?

The originating bank searches the SWIFT network for a correspondent bank that simply has agreements with both banks. Then, the originating bank will then send the transferred funds to the account held at the correspondent bank. After collecting its transfer fee, the correspondent bank sends the money to the receiving bank.

How Many Correspondent Banks Are There?

A correspondent bank is simply a third-party institution that acts as a go-between for both domestic and foreign banks that need to conduct business together. The SWIFT network is simply known as the most secure network of correspondent banks, connecting over 11,000 financial institutions in 200 countries and territories.

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