When sending wire transfers or other forms of international payments, you might need to use correspondent banking. So, what is a correspondent bank in wire transfers, and how does this system work? Here’s what you need to know about moving funds between banks and how it relates to the concept of correspondent banking.
What is a correspondent bank?
The definition of correspondent banking varies slightly between countries, but generally the term refers to any financial institution providing services to another bank. A correspondent bank performs many different functions, typically between different countries. This might include facilitating wire transfers, accepting deposits, conducting financial transactions, or merely gathering the documents needed to enable these transactions.
For example, a domestic bank might not have branches in a foreign country. When it needs to conduct transactions on behalf of international clients, it would use a correspondent bank for access. The correspondent bank serves as middleman between the issuer and the receiver.
Correspondent banking relationship definition and purpose
When looking at the correspondent banking relationship definition, we’ve noted above that correspondent banks act as a third party. Yet another way to define this relationship is by comparing it to a foreign service agent. If the correspondent bank’s client is travelling abroad, they can use their account to process documents or transfer funds to receive international payments.
Correspondent banking also facilitates currency exchange, cheque clearing and wire transfers. If the sending and receiving banks don’t have any agreements in place to facilitate wire transfers, they can turn to correspondent banking for assistance.
Correspondent banking involves ‘Nostro and Vostro accounts’ which are shared between banks. If one bank holds an account for another, it’s called a Nostro account, which means ‘our’ account in Latin. The counterparty bank would call it a Vostro account, or ‘your’ account. Shared access allows banks to track debits and credits during international transactions.
Correspondent banking example
As a common correspondent banking example, imagine a small domestic bank in Australia has decided to accept international clients in Europe and Asia. However, because it doesn’t have any European or Asian branches of its own, it must use a correspondent bank to transfer money and conduct financial transactions. This gives the bank access to the foreign market, in exchange for a fee paid to the correspondent bank.
Difference between correspondent bank and intermediary bank
Like correspondent banks, intermediary banks also act as middlemen between sending and receiving banks. Both can be used to send and receive money, acting as a third party. Yet there is one major difference to be aware of when comparing a correspondent bank and intermediary bank.
Correspondent banks facilitate transactions that involve multiple currencies
Intermediary banks facilitate transactions that involve a single currency
Both work with domestic banks, but it’s usually the correspondent banks that handle international transactions across multiple currencies. An intermediary bank can send money to help clients complete a foreign transaction, but it would be completed in a single currency.
Correspondent banking and wire transfers in Australia
International wire transfers use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. If you’re thinking of sending or receiving international payments, you’ll need to know the appropriate SWIFT number for each account.
One final thing to keep in mind is that correspondent and intermediary banking definitions vary slightly between countries. This is why when you’re arranging wire transfers specifically in Australia, you’ll primarily see references to intermediary banking rather than correspondent. All perform the same role, but it’s a good idea to verify terms and conditions before finalising any transfer.
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