Correspondent vs. Intermediary Banks: An Overview

Correspondent and intermediary banks both serve as third-party banks that coordinate with beneficiary banks to facilitate international fund transfers and transaction settlements. In both cases, a person or entity would have an account at an issuing bank; that bank then uses a correspondent or intermediary bank to complete the process of moving funds to a beneficiary bank.

The differences between correspondent and intermediary banks are not consistent; depending on where in the world the account holder is from, correspondent banks are either distinct from intermediary banks, or they can be a type of intermediary bank—indistinguishable from intermediary banks.

Key Takeaways

  • Correspondent banks are authorized to provide services on behalf of another bank.
  • Typically, domestic banks use correspondent banks to act as their agent abroad.
  • Intermediary banks are also third-party banks used to facilitate international transfer and funds settlement between two banks.
  • The main difference between the two has to do with the number of currencies that are in use, with correspondent banks able to handle more currencies.

Correspondent Banks

A correspondent bank provides services on behalf of another bank, serving as a middleman of sorts between the issuing bank and the receiving bank. Domestic banks often use correspondent banks as their agent abroad to finish transactions that either start or end in foreign nations.

The correspondent bank can execute a number of transactions on behalf of the domestic bank. These include completing wire transfers, accepting deposits, serving as transfer agents, and coordinating documents for another bank.

Nostro and Vostro are terms used to describe the bank account that is shared by the correspondent or intermediary bank and the beneficiary bank. Nostro is Latin for ours and Vostro is Latin for yours.

Intermediary Banks

Intermediary banks serve a similar role as correspondent banks. An intermediary bank is also a middleman between an issuing bank and a receiving bank, sometimes in different countries.

An intermediary bank is often needed when international wire transfers are occurring between two banks, often in different countries that don't have an established financial relationship.

Key Differences

In the United States and some other parts of the world, there is sometimes a delineation between specific roles for intermediary and correspondent banks.

One difference between the two that is often cited is that correspondent banks are responsible for transactions that involve several currencies. For example, if the person putting through the transfer is based in the U.S., sending money to someone in Denmark, a correspondent bank would be responsible for all transactions from the U.S. Dollar to the Danish Krone. A correspondent bank in Denmark that handles foreign currency would collect the money for the recipient.

Often the correspondent banks are located in the countries where the two currencies are domestic, but occasionally a bank will be in a different country.

Intermediary banks send cash to complete foreign transactions, but the transactions are just for one currency. Usually, in this instance, a domestic bank is too small to handle international transfers, so it reaches out to an intermediary bank.

Special Considerations

Wire transfers—an electronic method of sending cash to another person or entity—are very common transactions with all banks, but international wire transfers are costlier and more difficult to execute.

In certain parts of the world, such as Australia or EU member nations, banks that deal in international transfers are called intermediary banks. No distinction is made between intermediary and correspondent banks.

Most international wire transfers are handled through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. If there no working relationship between the issuing and receiving bank, the originating bank can search the SWIFT network for a correspondent or intermediary bank that has arrangements with both financial institutions.