What is an Intermediary Bank?

These banks act as middlemen, helping move funds smoothly between financial institutions in different countries. In this article, we’ll break down what intermediary banks are, why they’re used, and how they affect the way international payments are processed. Don’t worry, no financial background needed to understand a bunch of technological terms. While trying to keep things clear and easy to understand, we’ll break down the meaning of intermediary banks so that a wide audience can relate. Read on.

Definition of an Intermediary Bank

In simple terms, an intermediary bank is a third-party financial institution that helps facilitate international money transfers between two banks that don’t have a direct relationship. When you send money across borders, especially between different countries or currencies, your bank might not have a direct connection to the recipient’s bank. In these cases, an intermediary bank steps in to bridge the gap and ensure the transfer goes through smoothly. These banks handle the complex process of routing funds through global financial networks. Sometimes, intermediary banks are called correspondent banks, depending on the specific role they play. They’re essential players in the system, helping to make international payments possible. This setup is part of the broader framework behind what are payment schemes, which govern how money moves safely and efficiently around the world.

How an Intermediary Bank Works in a Transaction

When you send money internationally, the process often involves an intermediary bank to help move the funds smoothly. First, the sender starts the transfer through their local bank. Since the sender’s bank might not have a direct link to the recipient’s bank, the money goes through an intermediary bank, which processes and routes the payment. This bank often holds special accounts called Nostro or Vostro accounts with either the sender’s or recipient’s bank, helping manage the flow of funds between institutions. To make sure the money reaches the right place, routing codes like SWIFT or BIC are used, guiding the transfer through the correct banks. Services like Vellis’ local & international payment service rely on intermediary banks to ensure global transactions are fast and secure. Finally, the receiving bank credits the recipient’s account.

When Is an Intermediary Bank Needed?

An intermediary bank is needed when the sender’s and recipient’s banks don’t have a direct relationship or aren’t connected through the same payment network. This often happens with transfers involving less common or exotic currencies, where a middle bank helps convert and move the money smoothly. Intermediary banks are also commonly used for high-value or cross-border wire transfers to ensure the funds are properly routed and secure. However, not all international transfers require an intermediary, sometimes banks have direct partnerships that allow money to move straight between them. Understanding when and why these banks get involved can also help clarify what is a remittance transfer, for example, and how it reaches its destination safely.

Benefits of Using Intermediary Banks

There are plenty of benefits of using intermediary banks. Firstly, intermediary banks play an important role in connecting financial institutions that don’t have direct ties, helping money move smoothly across different countries. They give banks access to wider global payment networks, making it easier to send and receive funds internationally. What’s more, these banks also handle currency conversion, allowing transfers between different currencies without extra hassle. By managing complex processes and regulations, intermediary banks increase the reliability of transactions, especially in countries with strict or complicated banking rules. Overall, they help make international payments faster, safer, and more efficient.

Limitations and Fees Involved

Using intermediary banks can sometimes mean extra fees, which are usually deducted from the amount being sent. These fees can be charged by one or more of the banks involved in the transfer, including the intermediary. Because the money passes through several banks, the whole process may take longer than a direct transfer. Another downside is that it’s not always clear to the sender or recipient exactly which intermediary banks handled the payment, leading to less transparency. This can make it harder to track fees or delays during the transaction. Despite these limitations, intermediary banks remain essential for many international transfers where direct connections don’t exist.

Real-World Examples of Intermediary Bank Use

Intermediary banks are commonly used in real-world situations where direct bank connections aren’t available. For example, in international B2B payments, a company in one country may need to pay a supplier overseas, but their banks don’t have a direct relationship, so an intermediary bank steps in to move the funds. Freelancers working with clients abroad often receive payments through the SWIFT network, where an intermediary helps process the transaction. Another case is when a local bank can’t handle a specific foreign currency; an intermediary bank helps convert and route the money properly. A typical example: a U.S. company paying a supplier in Nigeria might route the funds through a UK-based intermediary bank to complete the transaction efficiently.

How Intermediary Banks Differ From Correspondent Banks

Intermediary banks specialize in routing international payments between banks without a direct link, mainly during wire transfers. Correspondent banks offer broader financial services, including holding deposits, issuing loans, and supporting foreign currency accounts. While their roles differ, a single bank can act as both an intermediary and a correspondent bank depending on the transaction. The key difference lies in the scope, hence intermediaries focus on payment flow, while correspondents offer full banking services.

Role in Global Financial Infrastructure

Another crucial thing to note is that intermediary banks are a key part of global financial infrastructure, helping money move securely between countries. They support international financial flows by connecting banks that don’t have direct ties, making global trade and payments possible. These banks rely on the SWIFT messaging system to send secure instructions for processing transactions. They also work within larger payment networks and often coordinate with central banks to meet compliance and regulatory standards. In underbanked regions, intermediary banks help expand access to financial services by linking local banks to the global system, promoting financial inclusion and enabling more people and businesses to participate in the international economy.

Future of Intermediary Banks

The future of intermediary banks is shifting as technology continues to reshape international payments. Fintech companies and neobanks are building direct corridors between countries, cutting out the need for middle institutions in many everyday transactions. Blockchain and decentralized finance (DeFi) are also enabling secure, peer-to-peer cross-border transfers without relying on the traditional banking system. Meanwhile, the global rollout of ISO 20022 is improving how payment information is shared between institutions, making transfers faster and more transparent. Despite these changes, intermediary banks still play a critical role, especially in large-value transfers between financial institutions and in countries with less-developed banking networks. While their role may change, they remain an essential part of the global financial ecosystem for the foreseeable future.

FAQs

What is an intermediary bank used for?

An intermediary bank helps transfer money between two banks that don’t have a direct relationship, usually for international payments.

Do all international transfers require an intermediary bank?

No, all in all, only when the sender’s and recipient’s banks aren’t directly connected through a correspondent network.

Who selects the intermediary bank?

Typically, the sending or receiving bank selects the intermediary based on their partnerships and available networks.

Are intermediary banks safe?

Yes, intermediary banks are regulated institutions and follow global compliance standards like AML and KYC.

How can I find out if my transfer involves an intermediary bank?

It would be extremely helpful to check the SWIFT code instructions from your bank or ask them directly if a third-party institution is involved in the transfer.

References

Checkout: What is an intermediary bank?

https://www.checkout.com/blog/what-is-an-intermediary-bank

Corpay: Connecting the World: The Importance of Intermediary Banks

https://www.corpay.com/resources/blog/connecting-the-world-the-importance-of-intermediary-banks

Wise: What is an intermediary bank? Fees and more

https://wise.com/us/blog/international-wire-transfer-intermediary-bank

Tipalti: What is an Intermediary Bank?

https://tipalti.com/resources/learn/intermediary-bank