MEANING
A correspondent bank is a banks that acts as a liaison in between domestic and foreign banks that need to do service together.
Key Takeaways
A reporter bank is a third-party institution that functions as a go-between for domestic and foreign banks that need to carry out business together.
The SWIFT network is referred to as the most protected network of correspondent banks, connecting over 11,000 banks in 200 nations and territories.
For record-keeping functions, a bank describes the cash it’s holding for another bank as a vostro account. Cash that’s being held for it at another bank is called a nostro account.
There are likely fees associated with international wire transfers that are facilitated by the correspondent bank.
Meaning and Examples of Correspondent Banks
A reporter bank is a third-party financial institution that serves as a go-between for domestic and foreign banks that need to perform cross-border payments with each other. These correspondent banks typically have official arrangements in location with both institutions, which allow them to provide a series of services to both banks, including wire transfers, check and payment processing, treasury management, settlements, and loans.1.
Alternate name: Service-providing bank.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) network is the largest network of correspondent banks in the world, connecting over 11,000 banks in 200 nations and territories.2 Through the SWIFT network, individuals and organizations can perform organization worldwide without their banks needing to be in two places.
Let’s say you live in the U.S. and go to your local bank to wire funds to a friend in Italy. An employee at the bank simply browses the SWIFT network to discover a correspondent bank that has a contract in location with the banks in Italy. The correspondent bank helps with the deal.
How Does a Correspondent Bank Work?
A financial institution will use a correspondent bank if it requires to make a payment to a foreign bank and the two banks do not have a formal relationship. This reporter bank functions as a third-party representative between the 2, helping with any kind of payment service that requires to be done.
Say you own a pizza store in the U.S. You source all your active ingredients from Italy, so you frequently require to wire cash to your provider overseas. Your regional bank does not have any branches in Italy so a teller at your bank browses the SWIFT network to find a reporter bank that has an existing relationship with your supplier’s Italian bank.
Next, the teller deducts the cash from your account, together with a fee, and wires the money to the reporter bank. The reporter bank keeps the cost and forwards the remainder of the cash to the bank in Italy.
Vostro vs. Nostro Accounts: How Banks Settle Cross-Border Transactions.
This constant exchange of money can get complicated, so banks utilize nostro and vostro accounts to keep track of all of it.
Keep in mind.
Nostro is Latin for “our,” as in “our money, held by other banks.” And vostro is Latin for “yours,” as in “other banks’ cash, held by us.”.
Any offered bank will have a mix of nostro and vostro accounts on its balance sheet. For example, if a bank in the U.S. is currently holding cash for a bank in Italy, it will tape those funds in a vostro account so that it knows the cash isn’t theirs. The bank in Italy will track those same funds in a nostro account so that it knows the money is theirs; it’s just being held at another bank.
Long story brief? For each nostro account that exists, there’s a corresponding vostro account on someone else’s balance sheet.
Reporter Bank Fees.
If you’ve ever conducted a worldwide transaction at your bank, then you’re aware of the fees included. But what you might not know is that part (or all) of this fee is paid to the reporter bank– not your regional bank.
Many international wire transfers typically cost in between $15 and $50 apiece, though it depends upon the financial institution, whether the transfer is an incoming or outgoing deal, which currency it’s in, and whether it’s initiated online or at a local branch.
At Chase, an outbound international wire transfer in U.S. dollars that is started through the bank’s website or mobile app from your account will cost you $50.3 At Bank of America, an incoming worldwide transfer in another currency might cost you $16– however that quantity might alter based on your account type or the present exchange rate.4 Moreover, some banks will just charge you the rate they pay to the correspondent bank, while others will add their own charge to the cost.
