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What is a correspondent bank?
Correspondent banks are financial institutions that act as an agent on behalf of other financial institutions, usually foreign banks. Correspondent banks may perform Treasury services, manage foreign exchange, manage international investments and facilitate international trade and finance on behalf of the foreign bank. The correspondent bank charges the foreign bank for these services.
Foreign banks use the services of correspondent banks when it’s not financially feasible to establish a branch in the country. This allows foreign banks to retain customers while keeping costs down.
The accounts that correspondent banks serve on behalf of foreign banks are referred to by the correspondent banks as vostro, meaning, “your account on our books.” The same account is referred to as nostro, by the foreign bank, meaning, “our account on your books.”
When international wire transfers occur between banks that do not have agreements established, a correspondent bank must be used as an intermediary. Since many worldwide banks do not have established arrangements with one another, most wire transfers are conducted through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.
The originating bank searches the SWIFT network for a correspondent bank that has agreements with both banks. Then, the originating bank sends the transferred funds to the account held at the correspondent bank. After collecting its transfer fee, the correspondent bank sends the money to the receiving bank. The correspondent bank typically charges $25 to $75 for the service.
Correspondent bank example
Jeff has a heating and air conditioning company. He wants to purchase parts from a supplier in Mexico. Jeff goes to his local credit union to make the wire transfer to the supplier’s bank. Since the credit union doesn’t have an agreement with supplier’s bank, the banker at the credit union uses the SWIFT network to find a correspondent bank that both the credit union and the bank in Mexico have agreements with. The credit union transfers the money, including the $50 fee, from Jeff’s account to the correspondent bank. The correspondent bank withdraws their fee and forwards the money on to the supplier’s bank.
Do you live abroad? Read about bank accounts for Americans living abroad.