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A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank. The correspondent bank acts as the foreign bank’s agent to perform treasury services, manage foreign exchange, facilitate international trade and finance, manage international investments, and conduct other transactions on the foreign bank’s behalf. The correspondent bank then charges for its services.                                        

Banks will use a correspondent bank when it is not economically feasible to establish a branch in the correspondent bank’s location.

For instance Small Bank has one customer that has a number of different overseas locations.  Rather than open branches in those countries, Small Bank contracts World-Wide Bank to act as its correspondent bank in the countries where its customer has overseas locations. This way, Small Bank keeps its customer and the customer gets its banking needs met. Meanwhile, World-Wide Bank earns fees for providing these services.

Additionally, many larger banks perform back-end banking service for smaller banks in the same country that do not have the operational expertise to perform the services. In this situation, the correspondent bank provides services that help the smaller bank comply with newly enacted government banking regulations.  Often, the small bank lacks the financial and human resources necessary to set up the systems and infrastructure it needs to comply.

 

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