Correspondent Banks vs. Intermediary Banks:An Overview
Correspondent banks and intermediary banks both serve as third-party banks and are used by beneficiary banks, or receiving banks, to execute international fund transfers and transaction settlements.
The differences between correspondent and intermediary banks aren't consistent. Depending on where in the world the account holder is from, correspondent banks are either distinct from intermediary banks, or they can be a type of intermediary bank—indistinguishable from intermediary banks. The main variance between correspondent banks and intermediary banks is the number of currencies that are in use in a transaction.
In both cases, a person or entity would have an account at an issuing bank. That bank then uses a correspondent or intermediary bank to complete the process of moving funds from the issuing bank to a beneficiary bank.
Key Takeaways
- Correspondent banks and intermediary banks are third-party banks that facilitate international fund transfers and transaction settlements.
- The main difference between correspondent banks and intermediary banks has to do with the number of currencies that are in use in a transaction.
- A person or entity has an account at an issuing bank.
- The issuing bank then uses a correspondent or intermediary bank to complete the process of moving funds to a beneficiary bank.
- In some countries, correspondent banks are simply a type of intermediary bank.
Correspondent Banks
Provide services on behalf of another bank
Play role of middleman between issuing and receiving banks
Can execute several transactions on behalf of domestic banks
Intermediary Banks
Provide services similar to correspondent banks
Act as a middleman between issuing and receiving banks, possibly in different countries
Often needed for international wire transfers between two banks
Correspondent Banks
A correspondent bank provides services on behalf of another bank, serving the role of a middleman between the issuing bank and the receiving bank. Domestic banks often use correspondent banks as their agent abroad to finish transactions that either start or end in foreign nations.
The correspondent bank can execute a number of transactions on behalf of the domestic bank. These include completing wire transfers, accepting deposits, serving as transfer agents, and coordinating documents for another bank.
Nostro and vostro are Latin terms used to describe the bank account that is shared by the correspondent or intermediary bank and the beneficiary bank. Nostro means ours, while vostro means yours.
Intermediary Banks
Intermediary banks serve a similar role as correspondent banks. An intermediary bank is also a middleman between an issuing bank and a receiving bank, sometimes in different countries.
An intermediary bank is often needed when international wire transfers are occurring between two banks, often in different countries that don't have an established financial relationship.
Key Differences
In the U.S. and some other countries, there is sometimes a delineation between the specific roles that intermediary and correspondent banks fulfill.
One difference is that correspondent banks are often responsible for transactions that involve several currencies. For example, if the individual initiating the transfer is based in the U.S. and is sending money to someone in Denmark, a correspondent bank would be responsible for all transactions from the U.S. dollar to the Danish Krone. A correspondent bank in Denmark that handles foreign currency would collect the money for the recipient.
Often, correspondent banks are located in the countries where the two currencies are domestic, but occasionally a bank will be in a different country.
Intermediary banks send cash to complete foreign transactions, but the transactions are just for one currency. Usually, in this instance, adomestic bank is too small to handle international transfers, so it reaches out to an intermediary bank.
Special Considerations
Wire transfers—an electronic method of sending cash to another person or entity—are very common transactions with all banks, but international wire transfers are costlier and more difficult to execute.
In certain parts of the world, such as Australia or EU member nations, banks that deal in international transfers are called intermediary banks. No distinction is made between intermediary and correspondent banks.
Most international wire transfers are handled through theSociety for Worldwide Interbank Financial Telecommunication (SWIFT)network. If there no working relationship between the issuing and receiving bank, the originating bank can search the SWIFT network for a correspondent or intermediary bank that has arrangements with both financial institutions.
Is a Correspondent Bank the Same Thing as an Intermediary Bank?
There are many differences between correspondent banks and intermediary banks, but these two types of banks mostly are distinguished by the number of currencies they handle.Correspondent banks typically work with many currencies. Intermediary banks usually handle one local or domestic currency.
Why Do I Need a Correspondent Bank?
Using correspondent banking relationships,banks can help you gain access to financial services in different jurisdictions and provide cross-border payment services, which also can support international trade and improve financial inclusion.
What Is an Example of an Intermediary Bank?
Intermediary banks are often some of the world's largest banks, with connections to accounts and countries worldwide. For example, HSBC can receive money from a U.K.-based bank and then facilitate the transfer to the recipient's bank in Asia.
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The Bottom Line
Both correspondent and intermediary banks are third-party banks, and are used by beneficiary banks to execute international fund transfers and transaction settlements. Depending on where the account holder is from, correspondent banks are either different from intermediary banks, or they may be a type of intermediary bank themselves. The number of currencies being used in a transaction are the main difference between correspondent and intermediary banks.
