It is impossible for every bank and financial institution in the world to have a direct relationship with each other. If having a direct relationship is the only way to conduct financial transactions across borders, global trade will cease.
When sending wire transfers or other forms of international payments, you may need to use a correspondent bank business. So, what is a correspondent bank in a wire transfer and how will the system work? Here’s what you need to know about bank-to-bank transfers and how it relates to the concept of that bank.
What is a correspondent bank?
A bank is a third-party financial institution that acts as an intermediary for domestic and foreign banks that need to make cross-border payments with each other. These banks usually have formal agreements with both institutions that allow them to provide various services, including wire transfers, check and payment processing, financial management, payments, and loans to both banks.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) network is the world’s largest correspondent bank network, connecting more than 11,000 financial institutions in 200 countries and territories. The SWIFT network allows individuals and businesses to do business around the world without the need for two financial institutions.
For example, suppose you live in the United States and go to a local bank to transfer money to a friend in Italy. The BANK WORKER searches the SWIFT network to find those banks that have contracts with financial institutions in Italy. This ensures that the bank will smooth out the transaction.
How does the bank work?
The bank deals mainly with money transfers abroad through the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
YOU CAN THINK THAT SWIFT PAYMENTS are like your money using a SERIES of connecting flights to get you to the destination.
If the sending bank has no connection to the correct receiving bank overseas, it will find its operator, just as it will find the connection if there is no direct flight. Your bank will then send the money to the operator, and the money will be transferred to the recipient’s account. And, like the traveler at the end of the trip, your payment has arrived.
The big disadvantage of this system is that it takes time for the bank to process the payment and it deducts a fee from the transfer amount. This means it is a safe and secure option, but it is slow and expensive.
Relationship with the correspondent bank.
An appropriate banking relationship allows the respondent to purchase services from the relevant business. These effective interbank relationships allow respondents to provide services to customers that require connections to specific areas where they do not have branches or locations, and to meet their needs through local correspondent banks. These benefits of bank relationships are provided in a variety of ways, including:
- The number of customers increases.
- Revenue increases.
- Gain a competitive advantage.
- Reduce the costs of geographic expansion of the banking organization.
Using the services of such a financial institution is much cheaper than opening a branch in a foreign country. Therefore, if the bank is not interested in starting operations locally, outsourcing international payments or other banking services is a convenient way to avoid losing customers when customers require international transactions.
Bank correspondent versus brokerage bank.
There are similarities between a communication bank and a brokerage bank, but there is a big difference between the two banks in that they act as a third party for another bank. The bank typically handles transactions involving multiple currencies, but the intermediary bank completes transactions involving a single currency. This is especially important for domestic banks, which may be too small to handle these types of transactions.
An example of Correspondent bank transaction.
You need to purchase a car in Japan for business. Payment to the supplier must be made in a foreign currency to an account denominated in yen. His bank in the U.S. has no direct relationship with the supplier’s Bank of Japan, so the transaction must be done through the SWIFT network.
Jim Bankers will use the SWIFT network to find those banks that have connections to both their institutions and the Bank of Japan. If the carrier is found, Jim Bank will send the funds to their Nostro account, owned by the carrier, then deduct the fee and deposit the money into the recipient bank’s Bostro account.
In this way, the carrier’s bank allows Jim to trade with suppliers in Japan without having a bank account in Japan. He doesn’t even have to change banks in America.
HIS existing bank can only process transactions by selecting that bank through the SWIFT network, which can act as an intermediary even if it has no relationship with the Bank of Japan.
Correspondent bank fees.
If you have made international transactions with your bank, you will be familiar with the fees involved. However, you may not be aware that some (or all) of this fee will be paid to that bank, not your local bank.
Most international transfers are usually between $15 and $50 apiece, but whether the transfer is an inbound or outbound transaction, what currency it’s in, and whether it starts online or at a local branch depends on the financial institution.
At Chase, for example, overseas dollar transfers that start from your account through your bank’s Web site or mobile app cost $50. At Bank of America, international transfers in other currencies may cost $16, but the amount may vary depending on your account type or the current exchange rate. Also, some banks charge only the amount paid to that bank, while others add their own fees to the cost.