In plain words
Imagine you live in London and want to pay a builder in Brazil, but you have no bank account there. You could ask a friend in Brazil to pay the builder for you, and pay your friend back in London. Correspondent banking is that arrangement, run between banks, at scale.
A bank cannot hold accounts at every bank in the world, and it cannot send pounds into a country that settles in reais. So banks open accounts with each other in other countries and currencies. When a customer sends money abroad, the sending bank does not ship the money anywhere. It asks its correspondent to pay out of the account it keeps there, and the two banks update their books. 1
The SWIFT network carries the instructions. Correspondent accounts are where the money actually sits and moves. Between them, they handle most international bank transfers.
How it works
How a payment moves through correspondents
No money crosses a border. Balances change in accounts that banks already hold with each other.
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1
The sending bank debits its customer
A UK bank takes £10,000 from its customer and converts it to US dollars at its FX rate.
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2
It instructs its correspondent
The UK bank holds a dollar account at a US bank. It sends a SWIFT message asking the US bank to pay from that account.
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3
The correspondent pays onwards
The US bank checks the payment, then credits the recipient’s bank directly, or passes it to another correspondent if it has no relationship with that bank.
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4
The recipient’s bank credits the customer
Each bank in the chain has updated its accounts. The recipient sees the dollars, minus any fees deducted on the way.
Nostro and vostro accounts
Nostro and vostro are two names for the same account. “Nostro” is Latin for ours: our account with you. “Vostro” means yours: your account with us. Which word a bank uses depends on which side of the account it is on.
Keeping these accounts costs money. The sending bank has to leave enough of each currency sitting in its nostro accounts to cover the day’s payments, money that could otherwise earn a return. It also has to reconcile every account, every day, against the correspondent’s statements.
Why it is slower and more expensive
A domestic instant payment has two banks and one system. A correspondent payment can have three, four or more banks, each with its own rules.
| Domestic instant payment | Correspondent banking payment | |
|---|---|---|
| Banks involved | Two | Two plus one or more intermediaries |
| Speed | Seconds | Minutes to several days |
| Fees | Low or none | Sending fee, FX margin, and possible deductions by each intermediary |
| Compliance checks | At each end | At every bank in the chain |
| Opening hours | 24/7 in most markets | Business hours and cut-offs in each country |
| Tracking | Instant confirmation | Possible with SWIFT gpi, if every bank uses it |
Who pays the intermediaries depends on the charge code the sender chooses. With SHA or BEN, the recipient may receive less than was sent, which is one of the most common complaints about international transfers.
De-risking: why correspondents say no
Every correspondent bank is responsible for the payments it processes, including payments for its respondent bank’s customers whom it has never met. International anti-money-laundering standards set by the Financial Action Task Force (FATF) require enhanced due diligence on correspondent relationships. 2
That is expensive. When the compliance cost or the risk outweighs the revenue, many banks simply close the relationship. This is called de-risking. The Bank for International Settlements has documented a long decline in the number of correspondent relationships worldwide, hitting smaller countries and money transfer businesses hardest. 1
For a fintech, de-risking is a real business risk. If your partner bank loses a correspondent in a currency you rely on, a payment corridor can close with little notice. Read why sponsor dependency looks different in the UK and UAE for how that dependence plays out.
Alternatives to correspondent chains
Option 1
Local accounts and local rails
A provider holds money in accounts inside each destination country and pays out on the local system, such as Faster Payments or SEPA. Fast and cheap, but it needs pre-funding and partners in every market.
Option 2
Regional systems
Shared systems such as AFAQ between Gulf countries and the Arab Monetary Fund’s Buna connect banks across a region without a separate correspondent for each pair of countries.
Option 3
A provider that combines both
Many payment providers use local rails where they have them and correspondents where they do not. For most fintechs, choosing the right provider per corridor matters more than the technology underneath.
Correspondent banking in the UK, EU and the Gulf
| Region | What changes |
|---|---|
| United Kingdom | Pounds move domestically on Faster Payments and CHAPS. Most other currencies, and payments out of Europe, go through correspondents. |
| European Union | Euro payments across the SEPA area no longer need correspondents. Non-euro and non-European payments still do. |
| UAE and Saudi Arabia | Large remittance and trade flows rely heavily on correspondents, especially for US dollars. Payments between Gulf countries can also use regional systems such as AFAQ and Buna, depending on the banks and currencies involved. |
Example: a remittance app in two corridors
Nadia runs a remittance app for workers in the UAE sending money home.
- The easy corridor. For one country, her payment provider holds a local account and pays out on the domestic instant system. Money arrives in minutes, and the fee is low.
- The hard corridor. For another, the provider sends US dollars through a correspondent in New York, which passes them to a local bank. It takes a day or two, and an intermediary fee is deducted.
- A closed door. The provider’s correspondent stops serving one small receiving bank. Nadia’s app has to block that bank and tell affected customers within days.
- The lesson. Nadia now shows the expected arrival time and fees per corridor, and keeps a second provider ready for her largest routes.
Common misconceptions
“Money physically travels between countries.”
It does not. Banks change balances in accounts they already hold with each other.
“SWIFT and correspondent banking are the same thing.”
SWIFT carries the messages. Correspondent accounts hold and move the money. A payment usually needs both.
“Once a corridor works, it will keep working.”
Correspondents can and do withdraw from banks, countries and business types, sometimes with little notice.
FAQ
What is a correspondent bank?
A correspondent bank is a bank that holds an account for a bank in another country and makes and receives payments on its behalf. It lets a bank send money to places where it has no branch or account of its own.
What is the difference between a nostro and a vostro account?
They are the same account seen from two sides. A UK bank calls its dollar account at a US bank its nostro, meaning ours with you. The US bank calls that same account a vostro, meaning yours with us.
Why do international transfers take so long?
Many pass through one or more correspondent banks. Each one has its own cut-off times, holidays and compliance checks, and any of them can hold the payment to ask questions.
Why did my international transfer arrive with less money?
Correspondent banks in the chain can deduct their own fees as the payment passes through, unless the sender chose to pay all charges with the OUR charge code.
What is de-risking in banking?
De-risking is when banks close or refuse relationships with whole groups of customers, such as smaller banks, money transfer firms or certain countries, because the compliance cost or risk seems too high compared with the revenue.
Can a fintech have its own correspondent accounts?
Some larger payment firms do, but most fintechs rely on a partner bank or payment provider that already has correspondent relationships in the currencies they need.
Related terms
Sources
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1
BF
Bank for International Settlements Correspondent banking (CPMI report, 2016)
https://www.bis.org/cpmi/publ/d147.htm -
2
F
FATF Financial Action Task Force
https://www.fatf-gafi.org/
