What Is an Instructing Bank?

An instructing bank is one of the banks that play a role in a transfer of funds between two parties. The instructing bank is the one that initiates the fund transfer process, it acts as the administrator. From the customer, the instructing bank receives instructions on whom to send the funds to and how much to send.

Key Takeaways

  • The instructing bank is one of two banks that are involved in a transfer of funds. The instructing bank acts as the administrator.
  • The customer informs the instructing bank how much and to whom the funds are to be sent. The instructing bank initiates the transfer.
  • The instructing bank is the opposite of the advisory bank, which is the bank that receives the funds and notifies the client that the funds have been received.
  • An international bank account number (IBAN) is used in overseas payments and provides additional detail on a transfer, such as the country code.
  • A SWIFT code is used to identify a specific banking institution in an overseas transfer and is provided by SWIFT through its proprietary communications platform.

How an Instructing Bank Works

An instructing bank is also known as the ordering party as it begins the process of the transfer. It is the opposite of an advising bank, which is the bank that receives the transfer of funds and then notifies the receiving party that the transfer has been completed. The same bank can be both the instructing bank and the advising bank on different fund transfers.

Instructing Bank and Wire Transfers

A common form of a transfer is a wire transfer, which is an electronic transfer of funds across a network, which hundreds of banks worldwide administrate. In a wire transfer, banks or financial institutions do not exchange any physical money, instead, banks pass specific information along about who the recipient is, what their bank account number is, and how much money they are receiving. Banks will then settle all payments on the back end.

IBAN and SWIFT

In addition to a traditional bank account number, an international bank account number (IBAN) can add an extra layer of specificity in certain transfers, particularly overseas payments. The IBAN number consists of a two-letter country code, followed by two check digits, and up to 30 alphanumeric characters. These alphanumeric characters are known as the basic bank account number (BBAN).

Three IBAN examples are:

  • Albania (AL35202111090000000001234567)
  • Cyprus (CY21002001950000357001234567)
  • Kuwait (KW81CBKU0000000000001234560101)

While an IBAN is used to identify a particular account number, a SWIFT code from the Society for Worldwide Interbank Financial Telecommunications identifies a banking institution in complex overseas transfers.

SWIFT is a proprietary messaging network that financial institutions use to securely transmit information. SWIFT assigns each financial organization a unique code with either eight characters or 11 characters. The first four characters are the institute code, the next two characters are the country code (e.g., IT for the country Italy), the next two characters following that are the location/city code, and the optional last three characters correspond to individual branches.

For example, if a customer in a New York Bank of America (BofA) branch wishes to send money to her friend who banks at the UniCredit Banca branch in Milan, the New Yorker can walk into her local BofA branch with her Italian friend’s account number, along with UnicaCredit Banca’s unique Milanese SWIFT code (UNCRITMMXXX). After she delivers this information, Bank of America will send a SWIFT message to the UniCredit Banca branch. Once Unicredit Banca receives the SWIFT message about the incoming payment, it will credit the specific amount of money to the Italian account.