Correspondent Banking

Correspondent banking allows one bank to provide payment and account services to another bank, called the respondent bank. It enables cross-border payments when the payer's and beneficiary's banks lack a direct relationship by routing funds through one or more banks that maintain accounts with each other.

How the payment is routed

When the payer's bank has no account relationship with the beneficiary's bank, it routes the instruction through a correspondent bank with which it does have a relationship. That correspondent may pay the beneficiary's bank directly or use additional intermediary correspondents until a connected bank is reached.

• The payer's bank sends the payment instruction and provides funds through balances or credit arrangements maintained with its correspondent.
• Each intermediary debits one bank's account and credits another account, transferring the claim across the chain.
• The beneficiary's bank finally credits the recipient after receiving the funds and required payment information.

Accounts, messaging and settlement

A bank calls its account held with a foreign correspondent a nostro account. The correspondent describes that same account on its own books as a vostro account.

• Payment instructions commonly travel through secure messaging systems such as SWIFT, but the messaging system itself does not hold accounts or settle the payment.
• Settlement occurs through adjustments in correspondent account balances and, where required, through domestic payment systems at either end.
• A correspondent may also provide foreign-exchange conversion when the sending and receiving currencies differ.

Why intermediaries are necessary and costly

Correspondent networks give banks access to foreign currencies and jurisdictions without maintaining branches or bilateral accounts everywhere. However, every additional link may add fees, processing time, liquidity needs and operational complexity.

• Each participating bank must perform applicable customer due diligence and sanctions screening.
• Incomplete information, different operating hours and multiple intermediaries can delay or reject payments.
• Banks may terminate higher-risk relationships through de-risking, which can reduce some countries' access to cross-border payment channels.