What is a correspondent bank?

Looking for a correspondent bank definition? You’re in the right place.

Correspondent banking typically involves domestic banks working with a partner foreign bank to process financial transactions like international wire transfers.

A correspondent can act as an intermediary to help a financial institution send or receive payments in a foreign currency, without the domestic bank needing to set up foreign branches themselves.

This guide runs through the full correspondent banking meaning and definition.

We’ll also introduce Wise as a fast and safe way to send international payments, which can help you save money – you can save up to 6x compared to regular banks.

Save up to 6x with Wise

How does a correspondent bank work?

Correspondent banks are usually involved when sending payments to foreign countries through SWIFT (Society for Worldwide Interbank Financial Telecommunication).

You can imagine a SWIFT payment being like your money taking a series of connecting flights to arrive at its ultimate destination.

If the originating bank doesn’t have a relationship set up with the right receiving banks overseas, they’ll look for a correspondent which does - just like finding a connection if there are no direct flights. Your bank will then send the money to the correspondent which will pass on the right amount to the destination account - and like a traveler at the end of their journey, your payment has arrived.

The big downsides to this system are that t takes time for correspondent banks to process payments - and they’ll deduct a fee from the transfer amount as they do. That means that while this is a safe and reliable option, it’s often slow and costly too.

💡 Read on to learn more about alternatives to SWIFT payments - or check out this guide to exchanging currency for more ideas.

Vostro vs. Nostro Accounts

Correspondent banking works through what are known as nostro and vostro accounts. A domestic bank will work with a correspondent bank to set up a nostro account - meaning our account, on your books. The foreign correspondent will call the same account a vostro account - meaning your account, on our books.

When a domestic bank needs to send a payment to a bank overseas, they’ll find an appropriate correspondent bank and pay the money to their nostro account at that bank. The correspondent will deduct their service fee from the transferred funds before passing it on to its final destination.

Correspondent bank example

Here’s an illustration of how correspondent banks work.

Sam wants to send a payment to a supplier in France, which must be received in EUR in a EUR denominated bank account. Sam’s bank doesn’t have a direct relationship with the supplier’s bank. As the payment will be passed through the SWIFT network, his bank is able to look up correspondent banks which have a relationship with both their institution and the receiving bank.

Once they’ve found one, Sam’s bank will send the payment to their nostro account, which is held by the correspondent bank. The correspondent deducts a fee, and deposits the money into the recipient bank’s vostro account, which they also hold. This way, the recipient bank gets the funds and is able to deposit them in the supplier’s own individual account.

💡 Learn more about how the interbank financial telecommunication SWIFT network is involved in international transactions here.

Correspondent bank fees

We mentioned earlier that correspondent banks can deduct a service fee when they pass on international transfers through the SWIFT system. These charges may be declared upfront by your own bank when you set up your payment - but it’s not always possible to know in advance exactly what the correspondent bank fees may be.

Correspondent bank fees vary widely depending on where you’re sending money to, and the relationship your own bank has agreed with its preferred partners. Costs of 25 USD - 75 USD are common - on top of the transfer fee and exchange rate markup you’ve already likely paid upfront.

If the correspondent bank fees are higher than you expected, it’ll mean your recipient gets less in the end than you expect - and your transfer costs more than you’d planned.

Save up to 6x on international transfers with Wise

Nobody wants to spend more than they have to on international payments - but how can you avoid intermediary fees, exchange rate markups and expensive transfer charges? Meet Wise.

Wise doesn’t work like traditional banks. Instead of relying on old school payment systems, Wise has built a network of local bank accounts which are every bit as safe as SWIFT - but cut out the intermediary costs, and speed the process, so your payment can arrive faster.

Open your Wise account in just a couple of minutes online or in the Wise app. Then, when you want to make a payment, you transfer your funds in USD to the Wise local US account. Once it’s arrived, Wise will pay out the equivalent amount from their local bank account in the destination country. No money actually crosses borders, making it cheaper and faster than SWIFT.

There are no markups on the exchange rate, and no hidden fees. Just a transparent, low charge for the transaction, which can mean you save significantly compared to using your normal bank.

See how much you can save with Wise:

What is the difference between correspondent bank vs intermediary bank?

Confused between correspondent banks vs intermediary banks?

Both correspondent banks and intermediary banks are similar in that they are banks providing services to other financial institutions for a fee. However, while correspondent banks usually deal in foreign currency transactions, intermediary banks are more likely to offer single currency services.

All that said, the phrases are used fairly interchangeably, so you may see either referring to the SWIFT payment process.

Bottom line

Correspondent banks provide an invaluable service to traditional banks which need to process international payments through the SWIFT network. However, SWIFT payments are typically slow and expensive, and may not be the best way to get your money where it needs to be. Instead, look at a provider like Wise which uses an entirely different system to move payments quickly, safely, and without intermediary costs.

Get a free Wise account