Tech, ExplainedFintech
Concept

Correspondent banking

A cross-border payment, hopping bank to bank.

HOW IT WORKSThe sender's bank hasno account with thereceiver's bankIt sends apayment message,usually over SWIFTA correspondent bankdebits one bank'saccount and creditsthe nextEach bank checkssanctions lists andmay take a feeThe last bank creditsthe receiver, minutesor days laterBanks that hold accounts with each other let money reach a bank that the sender's bank has neverdealt with.HOW IT WORKSThe sender'sbank has noaccount withthereceiver'sbankIt sendsa paymentmessage,usuallyover SWIFTAcorrespondentbank debitsone bank'saccountand creditsthe nextEach bankcheckssanctionslists and maytake a feeThe last bankcredits thereceiver,minutes ordays laterBanks that hold accounts with each other let money reach a bank that the sender's bank has neverdealt with.HOW IT WORKSThe sender's bank has no account with thereceiver's bank↓It sends a paymentmessage, usually over SWIFT↓A correspondent bank debits one bank'saccount and credits the next↓Each bank checks sanctions lists and maytake a fee↓The last bank credits the receiver,minutes or days laterBanks that hold accounts with each other let money reach abank that the sender's bank has never dealt with.
A cross-border payment message travels over SWIFT, and the money hops through banks that hold accounts with each other, each adding a fee and checks.
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Correspondent banking is the arrangement in which banks in different countries hold accounts with each other, so that a payment across a border can pass from bank to bank until it reaches the receiver's bank. Most banks do not hold an account with every bank abroad. So a cross-border payment often passes through one or more banks in between, called correspondent banks. Each one adds time, a fee and its own checks.

Here is how it works in general. The sender's bank does not hold an account with the receiver's bank. It sends a payment message, usually over SWIFT, a global network that carries payment messages between banks. The message goes to a correspondent bank, with which the sender's bank does hold an account. The correspondent debits the sender's bank's account and credits the account of the next bank in the chain. The money is converted from one currency to the other on the way. Every bank checks the payment against sanctions lists, and may deduct a fee. The last bank credits the receiver's account. This can take from a few minutes to several days.

SWIFT carries only the messages. The money itself moves as debits and credits in the accounts that the banks hold with each other. Inside each bank, a payment hub sends and receives these cross-border payments.

Take, for example, an Indian student paying tuition to a university abroad. An international education payments company lets the student pay in rupees, and matches the payment to the right invoice.

Consider an exporter in India waiting to be paid by a buyer abroad. With trade finance, the buyer's bank promises the payment, and the money then travels through the correspondent chain.

Say a company must pay freelancers in fifty countries. A cross-border payout network holds money in local accounts in each country, so most payments avoid the long chain.

How is correspondent banking different from a remittance app or UPI links? A remittance app usually holds money in both countries and pays out locally. Linked real-time payment systems, such as UPI linked to Singapore's system, move a transfer from one country's system to the other's in seconds, without a chain of banks. Part of a transfer's cost is also hidden in the rate, as described in forex markup.

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