Intermediary banks and correspondent banks also function as third-party banks. Beneficiary banks utilize them to help facilitate money transfer and settlement of transactions. The beneficiary bank acts as the bank with which an individual or entity holds an account. In both instances, an individual or organization would have an account with the issuing bank. This bank would then utilize an intermediary or correspondent bank to finish the transfer of money from the issuing bank to the beneficiary bank.

Correspondent Banks

A correspondent bank is a bank that provides services for another bank, acting as a middleman between the bank issuing the loan and the receiving bank. Most banks in the U.S. use bank correspondents as their agents overseas to conclude transactions that start or finish in foreign countries. The correspondent bank can carry out various transactions for the bank in its home country. They can do this by completing wire transfers and accepting deposits, acting as agents for transfers, and even coordinating documents for banks that have different.

How a Correspondent Bank Works

They serve as intermediaries between financial institutions. They provide Treasury services between the sending bank and the receiving one, particularly those from different countries. For instance:

• Transfer of funds
• Settlement
• Check to clear
• Wire transfers
• Currency exchange

Correspondent banks also function as agents for local transactions for clients who travel across the globe. On a local scale, the correspondent banks can accept deposits, handle documentation and act as money transfer agents. Accounts held between correspondent banks and banks that offer services are known as Vostro and Nostro accounts. A bank account held by the bank of one for another bank is referred to by the bank that holds it as a Nostro bank account or one of our accounts on the books. The same account is known as a Vostro account, which is your account in our books by the bank that is the counterpart. In general, both banks within the relationship of a correspondent maintain accounts for each other to track the debits and credits of both partners.

Correspondent banks form a crucial aspect of the financial sector as they offer a means for banks in the domestic market to function in situations where it's not feasible for them to establish branches in a different area, especially in a foreign nation. For instance, a smaller domestic bank with clients from different countries could partner with an international correspondent bank to serve the needs of its international clients. This also grants them access to the financial markets in foreign countries. The correspondent bank will consequently charge a fee to provide this service. The bank in the country typically passes on this fee to the client.

Intermediary Banks

Intermediary banks play a similar function to correspondent banks. A bank acts as an intermediary between the issuing and receiving banks, often in various countries. A bank intermediary is typically needed when international wire transfers occur between banks, usually in countries that do not have a formal financial connection.

Key Differences

Within the U.S. and some other countries, there's sometimes a distinction between the different functions that intermediaries and correspondent banks play. The distinction can be that banks that are correspondents are typically in charge of transactions that use multiple currencies. For instance, if the person who initiated the transfer is located within the U.S. and is sending money to a person in Denmark, A correspondent bank is responsible for all transactions that go from that U.S. dollar to Danish Krone.

Most of the time, correspondent banks are located in countries where both currencies are local; however, often, banks are located in another country. Intermediary banks provide money to finish transactions in foreign currencies; however, transactions are only for one currency. In this scenario, the local bank isn't big enough to manage international transfers and relies on intermediary banks.

Special Considerations

Wire transfers, an electronic method of cash transfer to another person or an entity, are a common transaction for all banks; however, international wire transfers cost more and are more difficult to perform. In some parts of the globe, like Australia and E.U. member states, banks that handle international transfer transactions are referred to as intermediary banks. There is no distinction between correspondent and intermediary banks.

The Society handles most international wire transfer transactions for the SWIFT network. If there isn't a working connection between the issuing and banks receiving the funds, then the issuing bank can look through the SWIFT network to find an intermediary or correspondent bank with arrangements for both banks.