What does correspondent bank mean?

Correspondent banking plays an important role in facilitating cross-border transactions and managing risk in international banking. It allows banks to transact with one another across borders and gain access to expertise in different markets and jurisdictions.

However, it also requires careful management and compliance with applicable laws and regulations to mitigate risks. If you have ever sent or received money internationally, you may have encountered the term correspondent bank.

In this article, we will answer the question: What does correspondent bank mean? and How does it work?

What does correspondent bank mean?

A correspondent bank is a financial institution that provides services on behalf of another financial institution, usually in another country. It acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank.

Correspondent banks are most likely to be used by domestic banks to service transactions that either originate or are completed in foreign countries.

Domestic banks generally use correspondent banks to gain access to foreign financial markets and to serve international clients without having to open branches abroad.

What does Correspondent Bank mean?

For example, you live in the US and want to send money to your friend in France. Your local bank may not have a direct relationship with your friend’s bank in France, so it needs to use a correspondent bank that has an agreement with both banks.

Your local bank will send the money to the correspondent bank, which will then send it to your friend’s bank in France. The correspondent bank will charge a fee for this service, which may be deducted from the amount you send or added to the amount you pay.

How does a correspondent bank work?

When you initiate an international transfer from your account, there will be your payment instructions to its correspondent bank, which will then forward them to the recipient’s bank.

Depending on the destination country and the currency involved, there may be more than one correspondent bank in the payment chain. Each correspondent bank will charge a fee for its service, which will be deducted from the amount you send or added to the amount you pay.

To identify your payment and ensure it reaches the right recipient, you will need to provide some information, such as the recipient’s name, account number, address, and bank details.

Then, you also need to provide the SWIFT code of the recipient’s bank, which is a unique identifier that tells the correspondent bank where to send the money. SWIFT codes are composed of 8 or 11 characters, such as BKAUJPJT for Bank of Kyoto in Japan.

To avoid delays and errors in your international transfers, you should always check that the information you provide is accurate and complete. You should also ask your recipient for their bank’s SWIFT code and any other details they may need to receive the money.

Some countries may have additional requirements or regulations for cross-border payments, such as providing a purpose of payment or a tax identification number.

However, correspondent banking relationships can also pose risks. Banks must ensure that they are complying with all applicable laws and regulations, including anti-money laundering (AML) and know-your-customer (KYC) requirements.

Failure to do so can result in significant legal and reputational risks for both the correspondent bank and the banks it serves.