Correspondent banking: how it works today

How correspondent banking works is straightforward in principle: a bank known as the correspondent holds an account for another bank, the respondent, and provides payment and related services through that relationship. The arrangement remains a core link between national payment systems, supporting cross-border trade, finance and remittances, according to the Bank for International Settlements.

A respondent bank uses a correspondent when it needs to send or receive a payment through a market or currency where it does not hold a direct account relationship with the other bank. The Congressional Research Service says correspondent services can include wire transfers, cheque clearing and payments, trade finance, cash and treasury management, and settlement of foreign exchange, securities and derivatives.

How does correspondent banking work?

Consider a customer whose bank needs to pay a beneficiary served by an overseas bank. If the two banks do not hold accounts with each other, they can use a third bank as correspondent. The respondent sends payment instructions to the correspondent, which holds the relevant accounts and records the settlement by debiting and crediting balances on its books. The recipient bank can then credit its customer.

The underlying arrangement requires the respondent to maintain an account at the correspondent and for the institutions to be able to exchange messages needed to settle their obligations, the BIS says. The account is called a nostro account by the respondent, meaning its account held on another bank's books. The correspondent calls that same account a vostro account, meaning the respondent's account on its own books.

This is an accounting and settlement structure, rather than a transfer of physical money across a border. A correspondent may also be one of several banks on a payment route. In that context, an intermediary bank is a bank used for a particular transaction, while correspondent banking describes the standing service relationship.

Does SWIFT settle the payment?

No. SWIFT supplies common standards and messaging channels for institutions to exchange the financial information needed for payments. It is neither a bank nor a clearing and settlement institution, and it does not hold funds or manage accounts, according to the Congressional Research Service. The correspondent banks' account entries are the settlement layer; SWIFT is commonly part of the communications layer.

Why is correspondent banking under pressure?

Financial-crime controls are central to the model. The CRS says correspondent banks face anti-money-laundering and counter-terrorist-financing obligations, along with customer-due-diligence, liability, reputational and cyber-risk considerations. Those costs and risks have led some large banks to withdraw relationships with smaller institutions, a process often described as de-risking.

The latest global trend data in the research record are dated. BIS data published in 2020 showed the number of active correspondent banks fell about 22% worldwide between 2011 and 2019, even as cross-border payment value and volume rose. The BIS described the result as a smaller, more concentrated network. It found that countries with more limited access could face higher payment costs, while complete loss of access was rare and payments could often still travel through longer chains.

That distinction matters for businesses and households: a cross-border payment can depend on several institutions, each with separate compliance checks, account records and operating arrangements. The system's mechanics have endured, but the documented contraction in relationships has made access to those links a policy concern.

This story draws on original reporting from Finextra Research.