When you expand your business to new countries, international payments become an important part of your operations. To process and complete an international transaction, you may need to rely on one or more intermediary banks. According to the Federal Reserve, more than 50% of international payments are in US dollars, while over 60% of wholesale payments are routed through one or more intermediaries.
These banking relationships are supported by Nostro and Vostro accounts, which allow banks to hold and manage funds with other banks, often in foreign currencies. They help facilitate payment settlement and other banking transactions across borders.
In this article, you’ll learn what Nostro and Vostro accounts are, how they differ, how they support international payments, and how these accounts are reconciled to verify transactions and balances.
What Is a Nostro Account?
A Nostro account is an account that a bank holds with another bank, usually in a foreign currency, to make and receive international payments and settle foreign-currency transactions.
For example, suppose a German bank needs to make and receive payments in US dollars. It may hold a US-dollar account with a correspondent bank in the United States. From the German bank’s perspective, this is its Nostro (“our”) account, meaning “our account with you.” The account allows the German bank to settle USD payments through its US correspondent without establishing its own US branch.
What Is a Vostro Account?
A Vostro account is an account that a bank maintains on behalf of a foreign bank. These accounts allow a foreign bank to hold funds with a local bank and access agreed local payment, clearing, and settlement services.
Consider the same German bank that holds a US dollar account with a correspondent bank in the United States. The German bank sees this as its Nostro account, whereas the US bank sees it as a Vostro (“your”) account. The US bank manages the funds, records the transactions and balance, and makes US dollar payments as instructed by the German bank.
Nostro vs. Vostro Accounts: How Do They Differ?
Nostro and Vostro accounts can refer to the same account balance, recorded from opposite perspectives. A nostro account is viewed from the perspective of the bank whose funds are held with another bank, while a Vostro account is viewed from the perspective of the bank holding those funds.
Take a look at the table below to see how they differ.
| Aspect | Nostro Account | Vostro Account |
| Meaning | Our account with your bank | Your account with our bank |
| Main purpose | Hold funds in a foreign currency and settle payments in that currency | Hold a foreign bank’s funds and provide indirect access to agreed local payment, clearing, and settlement services |
| Bank’s role | Respondent bank | Correspondent bank |
| Accounting view | Usually an asset for the respondent bank | Usually a liability or obligation for the correspondent bank |
How Nostro and Vostro Accounts Work for International Payments
The fundamental role of Nostro and Vostro accounts is to assist in the settlement of international transactions between correspondent banks.
For example, a US business needs to pay a supplier in Germany in euros. A typical payment process may look like this:
- Payment instruction: The business gives its bank the amount, currency, recipient details, and beneficiary bank details. It may also need to provide the payment purpose and information required for compliance checks. The bank debits the business’s account and converts the funds to euros if needed.
- Payment route: The US bank checks the payment and compliance details and identifies an appropriate correspondent banking relationship for sending euros to Germany.
- Fund settlement: If the US bank maintains a euro account with its European correspondent, it instructs that bank to debit the account and route the euro payment to the supplier’s bank. For the US bank, this is its Nostro account. For the correspondent, it is a Vostro account.
- Payment processing: The correspondent bank processes the payment through the relevant local payment system or banking network.
- Fund receipt: The supplier’s bank receives the payment and credits the supplier’s account.
The exact payment route can vary depending on the banks involved, the currencies, and the available correspondent banking relationships. Additional intermediary banks may also be involved when the sending and receiving banks do not have a direct relationship.
The Role of Nostro and Vostro Accounts in Banking
Nostro and Vostro accounts support the processing and settlement of many international payments. Apart from that, they are also used in:
- Foreign holdings: With Nostro accounts, banks can hold funds in foreign currencies for international transactions.
- Payment settlement: Banks can use funds held with correspondent banks to settle payment obligations in the relevant currency.
- Local banking access: Vostro arrangements allow foreign banks to indirectly access agreed local payment, clearing, and settlement services through a domestic correspondent bank.
- Banking relationships: These accounts support correspondent banking relationships between banks operating in different jurisdictions.
Nostro and Vostro Account Reconciliation Process
The respondent bank reconciles its Nostro account against the correspondent bank’s statements. The correspondent bank separately reconciles the related Vostro customer-account records against its own ledger and transaction records. The process has three broad stages:
1) Match Transactions
The bank compares its internal debit and credit entries with the counterparty’s statement, confirming reference numbers, dates, amounts, and currencies.
2) Resolve Discrepancies
Banks review the payment instructions, confirmations, statements, and correspondence. Records are adjusted only when the investigation determines that a correction is needed.
3) Verify Final Balances
The next step is for the bank to compare its balance with the balance reported by the correspondent bank. It should identify any valid differences caused by timing and resolve any discrepancies. Any outstanding issues can then be documented and monitored until they are resolved. Some banks may have an automated or semi-automated system set up in place to perform this process, enabling them to match their transactional balances and spot any discrepancies without having to manually perform all tasks.
FAQs: Nostro and Vostro Accounts
Here are some answers to the frequently asked questions on Nostro and Vostro accounts:
How Do Foreign Exchange Rates Affect Nostro Account Balances?
Changes in foreign exchange rates can affect the reporting value of funds held in a Nostro account when the foreign-currency balance is translated into the bank’s reporting or functional currency. Depending on the accounting framework, banks may recognize foreign-exchange gains or losses when revaluing these balances.
What Happens When the Currency of a Payment Differs From the Currency of the Nostro Account?
If the payment currency differs from the currency held in the Nostro account, the bank generally can’t settle the payment from that account directly. It typically converts the funds into the required currency through its own FX desk or another bank or payment provider, or it uses another Nostro account that already holds that currency. The payment is then settled from the account holding the right currency.
How Do Banks Manage Intraday Balances in Nostro Accounts?
Nostro accounts are regularly monitored by banks to check the funds available and forecast their cash flows for making payments and meeting clearing obligations. They also monitor expected incoming and outgoing payments while considering applicable regulations, settlement dates, correspondent cut-off times, local holidays, and currency requirements.
What Are the Risks of Inaccurate Nostro and Vostro Account Reconciliation?
An inaccurate, incomplete, or delayed reconciliation means that transactions might be left unmatched and account balances could become misstated. Unresolved discrepancies can also have a negative impact on liquidity planning and payment settlements.
Handle International Business Payments More Easily With Cheqly
Nostro and Vostro accounts play an important role in cross-border payments between banks. Businesses may experience the effects of these arrangements through factors such as payment timelines, intermediary fees, and currency requirements.
Cheqly offers business users the ability to send and receive funds internationally via wire transfers. It also provides them with physical and virtual Visa debit cards for business spending. Both the physical and virtual debit cards can be added to Apple Pay, Google Pay, and Samsung Pay for contactless payments.
Open a Cheqly business account today to send international payments and manage everyday expenses in one place.