Correspondent Bank: Definition and How It Works

Acting as a trusted intermediary, it helps process international payments between financial institutions that otherwise couldn’t transact directly. In this article, we’ll break down what a correspondent bank is, how it works, its importance in cross-border finance, and when businesses or individuals might encounter one in practice.

What Is a Correspondent Bank

A correspondent bank is a third-party financial institution that acts on behalf of another bank, typically to complete transactions the originating bank can’t handle directly. These services often include processing international payments, accepting deposits, or managing wire transfers for client banks. Correspondent banks are especially vital in cross-border transactions where the sending and receiving banks don’t have a direct relationship. For individuals or businesses exploring global payment routes, or even wondering how to send money to someone without a bank account, understanding the role of correspondent banks can help clarify how funds move through the international system.

How Correspondent Banking Works

When a bank needs to send money internationally but doesn’t have a direct relationship with the recipient’s bank, it relies on a correspondent bank to complete the transfer. Here’s how it works: the originating bank holds a nostro account (our money in your bank) with the correspondent bank, while the recipient’s bank may hold a vostro account (your money in our bank) in return. These accounts help track balances and ensure accurate settlement between the parties.

The correspondent bank moves the funds between accounts, enabling the transaction to clear, even across borders and currencies. This system is key to global finance and differs from newer models like what is a payment hub, which aims to centralize and streamline such flows. Hence, the concept would go as follows:

Sender’s Bank → Correspondent Bank(s) → Recipient’s Bank

Each step reflects a handoff where funds are routed and confirmed before reaching the final destination.

Services Provided by Correspondent Banks

Correspondent banks provide essential behind-the-scenes services that keep international finance moving. They handle currency exchange and help settle cross-border trades between banks in different countries. They also process SWIFT messages and manage wire transfers, ensuring money flows securely and accurately.

Another key function is maintaining nostro and vostro accounts, which help banks keep track of each other’s balances during international transactions. Additionally, correspondent banks conduct compliance screening to detect potential issues related to money laundering or sanctions violations. For businesses or individuals relying on fast and secure local and international payment service such as Vellis has to offer, correspondent banks often form part of the network that makes those transactions possible, quietly powering the global system behind the scenes.

Correspondent Bank vs Intermediary Bank

While both correspondent and intermediary banks help facilitate international payments, they serve different roles in the global banking network.

Correspondent Bank

• Maintains a long-term, bilateral account relationship with another bank.
• Holds nostro/vostro accounts to support ongoing services like currency exchange, wire transfers, and settlement.
• Example: A U.S. bank uses its correspondent in Germany to send euros regularly to clients.

Intermediary Bank

• Acts as a pass-through for a one-time or occasional transaction.
• Doesn’t maintain account relationships—just routes funds between two banks that can’t connect directly.
• Example: A Canadian bank sends money to a smaller African bank via a European intermediary just for that transaction.

Importance in International Payments

Correspondent banks are critical in extending the global reach of smaller or domestic banks that lack direct connections with foreign institutions. By partnering with correspondent banks, these local institutions can offer international payment services without needing a physical presence abroad. They help settle transactions across different countries and currencies, acting as a bridge between banks operating in separate financial systems. In complex cross-border corridors, correspondent banks also provide access to liquidity, assist with regulatory compliance, and enable faster settlement, making international banking smoother, safer, and more reliable for businesses and individuals alike.

Risks and Challenges in Correspondent Banking

Despite its importance, correspondent banking faces several challenges. One major issue is de-risking, which is when large banks cut ties with smaller institutions due to the high cost of meeting compliance requirements. This can leave regions underserved and limit financial access. Transaction fees can also be higher, especially in less common currency corridors, and payments may experience delays due to multiple intermediaries. There’s also rising regulatory pressure, as correspondent banks must comply with strict AML and KYC obligations, making due diligence more complex and costly. Finally, global events, sanctions, and policy shifts can reshape or restrict correspondent networks overnight, affecting how and where money flows. These factors combined create uncertainty, especially for institutions relying heavily on cross-border financial infrastructure.

Examples of Correspondent Banking in Practice

Correspondent banking plays out in real-world scenarios every day, helping banks and businesses move money across borders where direct connections don’t exist. Such in examples:

• A small bank in Africa may not have direct access to the U.S. financial system, so it partners with a correspondent bank in the U.S. to process USD payments on behalf of its clients.
  
• A European business wiring funds to a supplier in Asia might rely on a chain of correspondent and intermediary banks to move the money through different currencies and jurisdictions.
  
• Large global banks like Citibank or HSBC often maintain correspondent relationships with regional banks in Latin America, Eastern Europe, or Southeast Asia to provide seamless international payment capabilities without establishing a local branch.

Alternatives to Traditional Correspondent Banking

As global payments evolve, several alternatives have emerged to reduce reliance on traditional correspondent banking networks:

• Digital payment platforms and fintechs offer faster, user-friendly solutions for cross-border transfers, often with lower fees and better transparency.
• Blockchain-based systems like Ripple or Stellar enable real-time settlement and direct bank-to-bank transfers without intermediaries.
• Regional systems such as SEPA in Europe, ACH in the U.S., or national clearing networks help streamline domestic and intra-regional payments.
  

While these alternatives improve speed and reduce costs, they may lack global coverage, regulatory clarity, or the infrastructure needed for high-value transactions. As a result, many institutions still rely on correspondent banks for complex or large-scale international payments despite the growing appeal of newer options.

How to Identify or Choose a Correspondent Bank

When selecting a correspondent bank, look for proper regulatory licensing and coverage in relevant jurisdictions. Check for currency availability and strong FX support based on your needs. A solid track record of reliable, transparent transactions is essential. Also, assess the bank’s compliance systems, robust AML and KYC measures help ensure stability and reduce regulatory risk. The right partner should support your global payments with speed, security, and trust.

FAQs

What is a correspondent bank?

A correspondent bank is a third-party institution that facilitates transactions and services between two banks that lack a direct relationship.

Why do banks use correspondent banks?

Banks use correspondent banks to send and receive international payments, process transactions in foreign currencies, and access global markets.

Are correspondent banks and intermediary banks the same?

Not exactly, correspondent banks maintain ongoing account relationships, while intermediary banks act as temporary bridges for specific transactions.

Can individuals use correspondent banks directly? 

No, correspondent banks serve other financial institutions, not individuals. However, individuals benefit when their bank uses one for global payments.

Is correspondent banking safe? 

Yes, but it’s heavily regulated to prevent money laundering and fraud. Most correspondent banks operate under strict compliance frameworks.

References

Congress: Overview of Correspondent Banking and “DeRisking” Issues

https://www.congress.gov/crs-product/IF10873

Vance: Correspondent Bank: Understanding the Role & Services Offered

https://www.vance.tech/blog/correspondent-bank

Investopedia: Correspondent Bank: Definition and How It Works

https://www.investopedia.com/terms/c/correspondent-bank.asp

Wise: What is a correspondent bank?

https://wise.com/us/blog/what-is-a-correspondent-bank