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.

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. Correspondent banks are often used by domestic banks as their agent abroad.

A correspondent bank can facilitate wire transfers, conduct business transactions, accept deposits, act as transfer agents and gather documents on behalf of a different bank. A correspondent bank is typically used by domestic banks to complete transactions that either begin in or are completed in foreign countries.

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.

The most commonly cited difference between the two is that correspondent banks handle transactions involving more than one currency. For example, if the transferring party is dealing in U.S. dollars and the receiving party is in France, there is a correspondent bank covering all transactions from dollars to euros.

There is another corresponding bank in France that deals in foreign currency for the recipient. Most of the time (though not always), the correspondent banks are located in the country where the two currencies are domestic.

Intermediary banks forward cash for foreign transactions, but these transactions don't involve multiple currencies. Most of these cases involve an originating bank that is too small to deal in foreign transfers, and so the aid of an intermediary bank is enlisted.

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.

Key Takeaways

  • Correspondent banks are authorized to provide services on behalf of another bank and are typically used by domestic banks to act as their agent abroad.
  • Intermediary banks are also third-party banks used to facilitate international transfer and settlement of funds 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.