We explore the meaning of a correspondent bank, how correspondent banking works, and provide an example of how correspondent banking facilitates financial cross-border transactions.
Table of contents
What is a correspondent bank?
The key concept of correspondent banking
Correspondent banking example
What are Vostro and Nostro Accounts?
Is Interpolitan Money a Correspondent bank?
What is a correspondent bank?
The definition of a correspondent bank is an authorised financial institution that provides services on behalf of another financial institution. Services carried out by a correspondent bank may include funds transfer, settlement, cheque clearing, and wire transfers.
A correspondent bank is a third-party financial institution which performs as an intermediary between domestic and international banks.
The Key concept of correspondent banking
The key concept of correspondent banking is that a bank in one country provides a service for a bank in another country. This commonly involves the transfer of funds across different currencies and jurisdictions.
It's conceivable to think banks and financial institutions globally would have a direct relationship with each other. Correspondent banking provides a global solution to conduct international financial transactions and power global trade.
UK domestic banks for example commonly use correspondent banks to deal with transactions that originate or terminate in a foreign country.
Correspondent banking example
1. An example would be if Bank 1 operates in Emirati Dirhams in the UAE, while Bank 2 operates in US Dollars in the United States.
2. If Bank 1 has a customer who wishes to pay a contractor in the United States, then Banks 1 might deduct the Emirati Dirham value from the customer’s account and ask Bank 2 to pay the contractor in US Dollars.
3. Bank 2, known as the “correspondent bank” would typically collect commissions, spreads on exchange rates, or other fees on this transaction.
4. Often the correspondent bank will use what is referred to as a “clearing account”, to allow the beneficiary bank to collect funds in the domestic currency for its customers.
5. Sometimes, the beneficiary bank might also act as a correspondent bank for even more banks and financial institutions, inside or outside the country, which is referred to as “nested” or “downstream” correspondent banking.
What are Vostro and Nostro Accounts?
Banks use Nostro and Vostro accounts to manage cross-border transactions that need settling, these accounts are the frame work behind Correspondent banking.
Nostro and Vostro (Latin for 'ours and 'yours') are accounting terms used to identify the two sets of accounts held by a bank for another entity, typically a foreign bank.
A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency, i.e. US Bank – UAE Account with - US dollars.
A Nostro account is a bank account that a bank holds with a foreign bank in the currency of the country where the funds are held, i.e. UAE Bank – US Account - Emirati Dirhams.
When a domestic bank needs to transfer funds cross-border, it will send the money to its Nostro account at the correspondent bank. Any transaction fees are deducted before the funds are transferred by the correspondent bank, into the receiving bank’s Vostro account.
Is Interpolitan Money a Correspondent bank?
Interpolitan Money is not a bank but offers alternative banking solutions in the form of multi-currency accounts. Our unique named accounts allow clients to pay, collect and hold funds from around the globe, reducing time and admin managing multiple local banks to transact like a local.
We hold client funds in specially designated, safeguarded bank accounts with our tier 1 banking partners, which keep client funds separate from our other assets.
While not a bank, Interpolitan Money operates as a correspondent financial institution in the same way a correspondent bank would in the example above to make financial cross-board transaction for our clients.
Being a part of this global financial system allows us to connect with banks, branches and other financial institutions in every city from +160 countries when required by our clients to move or collect funds from Country A, to Country B.
Interpolitan Money: a truly global alternative banking solution
Interpolitan offers a comprehensive alternative banking solution. We use cutting-edge technology to handle multi-currency accounts from beginning to end, allowing clients to pay, collect and hold funds in 55+ currencies from 160+ countries.
Accelerate your international growth with named local accounts, virtual IBANs and access to FX risk management solutions.
We can open client accounts within 7- 10 working days. Funds are held in designated, safeguarded bank accounts with tier one banking partners.
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