Are you also eagerly looking for a correspondent bank? If yes, you are in the right place because you will find all the information here.
To handle financial activities like international wire transfers, correspondent banking usually entails domestic banks collaborating with a partner overseas bank.
Let’s begin and know everything in detail about correspondent banks.
What is a Correspondent Bank?
A correspondent bank can also be called an intermediary bank that offers services to banks transferring money internationally. Correspondent banks act as intermediaries to facilitate payments between foreign and domestic banks. They frequently facilitate foreign wire transfers, international investments, and currency exchanges.
Correspondent banks are crucial in tying together disparate banking systems since banks are unable to open branches everywhere. For example, a neighborhood bank in Duluth, Minnesota, might not have a partner in Tokyo, Japan. However, the bank in Duluth can engage in Japanese financial markets and send money to a bank in Tokyo through a correspondent bank.
How Do Correspondent Banks Work?
Correspondent banks are considered the go-between for two financial institutions because they are third-party banks. If there is no formal link between the domestic and international banks, they cannot conduct the transaction without them.
With the necessary cash, the correspondent bank receives instructions on handling various types of transactions, including currency conversion, settlement, and fund transfers. By sending such information to the other bank, it completes the transaction.
When money needs to be sent to a foreign nation, correspondent banks are the most frequently employed. The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is used for this, as it is known that SWIFT is the largest network of correspondent banks worldwide. SWIFT members include around 11,000 financial institutions in over 200 countries and territories.
Suppose the domestic bank does not already have a formal relationship with the foreign bank with which it wants to complete a transaction. In that case, it will look through the SWIFT network for a correspondent bank with a formal relationship with both banks. Once one has been located, the money will be transferred to the designated accounts maintained at the correspondent bank to start the transaction.
Vostro vs. Nostro Accounts
The nostro and vostro accounts are how correspondent banking operates. A domestic bank will open a nostro account — meaning our account, on your records in collaboration with a correspondent bank. The foreign correspondent will refer to the identical account as vostro — meaning your account on our records.
A domestic bank will locate a suitable correspondent bank and transfer funds to that bank’s nostro account to transmit money to a bank abroad. Before sending the money to its intended location, the correspondent will deduct the service charge from the transferred amount.
Example of Correspondent Bank
John wants to buy machinery from Singapore and must pay in Singaporean dollars to the person. The supplier must receive payment in foreign currency in an account denominated in Singaporean dollars. The transaction will have to go via the SWIFT network because the supplier’s Singaporean bank and his US bank don’t have a direct banking relationship.
Using the SWIFT network, the banker at John’s Bank will locate a correspondent bank connected to their establishment and the Singaporean bank. After locating the correspondent, John’s bank will transfer the money to the correspondent’s Nostro account, subtract a fee, and deposit the money into the receiving bank’s Vostro account.
Thus, thanks to correspondent banking, John can do business with a supplier in Singapore even though he does not have a bank account there. In the US, he doesn’t even need to switch banks.
Even if it is not affiliated with the Singaporean bank, his current bank can handle the transaction by using the SWIFT network to find a correspondent bank that can serve as an intermediary.
Do Correspondent Banks Impose Fees?
Correspondent banks’ fees or charges depend on several factors, such as their type of service. The fees for international wire transfers normally vary from $25 to $75 per transaction.
The institutions disclose to customers the fees associated with these transactions. Some may add a markup to the real cost, while others may charge clients what they pay the correspondent bank.
Difference between Correspondent Bank vs. Intermediary Bank
Both correspondent banks and intermediary banks share similarities as they both offer services to other financial institutions for a fee. Conversely, intermediary banks are more likely to provide single-currency services, even though correspondent banks typically deal in foreign exchange transactions.
You may see one or the other referring to the SWIFT payment process because the expressions are fairly interchangeable.
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Correspondent banks significantly facilitate global trade. Domestic banks couldn’t offer the financial services necessary for businesses to operate internationally without them.
No bank can operate branches in every city or maintain direct relationships with every other bank. They can only access the global financial system for their clients via the correspondent banking network.
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