What Is a Correspondent Bank?

Chances are that you don’t think about the banks involved when you’re giving money to a friend. That can be especially true if you’re using a service like Venmo or PayPal to transfer money. Banks can’t use Venmo, but they have their own ways of moving money. When a bank needs to transfer money to another bank internationally, they turn to a correspondent bank to make the connection.

Banking is just one part of a comprehensive financial plan. A financial advisor can help you create a strategy that meets all your needs and goals.

What Is a Correspondent Bank?

A correspondent bank is an intermediary that provides services to international and domestic banks transferring funds across borders. Transactions such as international wire transfers, global investments, and currency exchanges are often aided by correspondent banks.

Because banks can’t open branches everywhere, correspondent banks play an essential role in connecting different banking systems. For instance, a local bank in Duluth, Minnesota, may not have a partner in Tokyo, Japan. By using a correspondent bank, the bank in Duluth can transfer funds to a bank in Tokyo, as well as participate in Japanese financial markets.

Correspondent Banks vs. Intermediary or Agent Banks

In the world of international finance, the terms “correspondent bank,” “intermediary bank,” and “agent bank” are sometimes used interchangeably, but they don’t always mean the same thing. Understanding the differences can help you better navigate the process of sending or receiving money across borders.

A correspondent bank is a type of bank that facilitates transactions between two financial institutions that do not have a direct relationship. For example, if your local bank in the U.S. needs to send money to a bank in a foreign country but doesn’t have a direct partnership, it will rely on a correspondent bank that does have access to the recipient’s banking network.

An intermediary bank performs a similar role but is often used specifically in SWIFT wire transfers to help route the payment between the sending and receiving banks. In many cases, an intermediary bank is a correspondent bank, it simply functions in that capacity for a particular transaction.

An agent bank, on the other hand, is typically used in different contexts, such as loan syndications or credit card processing. In these cases, the agent bank manages administrative tasks on behalf of a group of lenders or investors rather than facilitating fund transfers.

In practice, correspondent and intermediary banks are more relevant for wire transfers and currency exchanges, while agent banks play a role in more complex financial arrangements.

How Do Correspondent Banks Work?

A man looks up how correspondent banks work.

Correspondent banks specialize in relationships with domestic and international banks. Typically, a domestic bank will utilize a correspondent bank when a transfer begins or ends across borders. You can think of them as the middle person allowing these banks to process transactions.

As a middle person between domestic and international banks, a correspondent bank can help you when banking internationally. They work at the local level to help you make withdrawals/deposits, transfer funds, and process documentation.

How Banks Transfer Money Across Borders

Correspondent banks use a secure network, like SWIFT (The Society for Worldwide Interbank Financial Telecommunications), to transfer these funds. SWIFT is a global messaging network of 11,000 financial institutions which banks can use to send instructions, such as details for wire transfers.

They also keep what are called nostro and vostro accounts. “Nostro” and “Vostro” are Latin words that translate literally to “ours” and “yours.” They’re the same account but recorded differently by each bank involved in the funds transfer. “Nostro” is used by the bank sending the funds, saying, “this is our money on deposit at your bank.” “Vostro” is the inverse: “your money at our bank.”

Currency is an essential aspect of nostro and vostro accounts. With a nostro account, a correspondent bank holds a domestic bank’s money in a foreign currency. With a vostro account, the correspondent bank holds a domestic currency for a foreign bank.

Example Transaction

Let’s work through an example to further understand the correspondent bank’s role. Say you own an electronics company in Duluth, Minnesota. You establish a contract with a manufacturer in Taiwan, and you need to wire money to them. You go to your local bank to send this money, and here’s where the correspondent bank comes in.

Your bank doesn’t have a connection to any bank in Taiwan. They contact a correspondent bank to send the funds. The correspondent bank takes your U.S. dollar and works with the Taiwanese to make the funds available to the manufacturer as a New Taiwan Dollar.

Keep in mind that it’s important to understand the currency risk and exchange rate, especially with large currency exchanges.

Do Correspondent Banks Charge Fees?

You may be well aware of the fees associated with banking internationally. You may not know that most of those fees come from correspondent banks. For their services, correspondent banks charge a fee. This wire transfer fee is passed on by the domestic bank to the client.

Per transaction, you can expect to see a fee ranging from $15 to $75. The difference in fees depends on where the transfer is coming from or going to, the type of currency exchange, and whether it’s an online transfer.

Bottom Line

Correspondent banks offer a valuable service to domestic banks, facilitating the transfer of funds internationally. Their established relationships with foreign banks allow them to complete transactions such as currency exchanges, wire transfers and more. They use the SWIFT network to make these transfers and establish nostro and vostro accounts to keep track of them. These services don’t come free. The fees you’re charged by your bank to send money across the border are often the same fees they’re charged by the correspondent bank. Your bank may even charge an additional sneaky fee of its own.

Tips for Personal Finance

If you need advice on transferring money internationally, a financial advisor can help. Finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Need help choosing a bank? SmartAsset rounded up a list of top banks to help you compare different checking accounts for your needs. With this information, you can avoid fees, grow your savings and have a strong foundation for your financial freedom.
If you do business in a specific country, opening an offshore bank account may make sense. They allow you to hold money outside your home country for various purposes. Other reasons to open an offshore bank account include if you’re paid for work in a foreign currency, hold property or investments in another country or are planning to retire abroad. Offshore bank accounts can offer a tax-advantaged way to save money for investors while keeping your money secure.