International payments often involve multiple financial institutions working together. When two banks do not have a direct relationship, they rely on a correspondent bank — an intermediary that enables the transfer of funds between them. This system is the foundation of today’s global payment infrastructure and allows even small regional banks to operate worldwide.
What a Correspondent Bank Does
A correspondent bank acts as a bridge between two financial institutions located in different countries. Its main purpose is to facilitate cross-border payments, foreign exchange settlements, and trade finance operations.
For example, if a company in Argentina needs to send funds to a supplier in Finland, its local bank may not have a direct account with the Finnish bank. Instead, the Argentine bank uses a correspondent bank — perhaps one based in London — that maintains accounts with both institutions. This intermediary manages the transfer securely, ensuring that funds flow from one system to another.
Nostro and Vostro Accounts Explained
The correspondent banking system operates through two special types of accounts: Nostro and Vostro.
- A Nostro account (“our account with you”) is how a domestic bank holds money in a foreign bank, denominated in the foreign currency.
- A Vostro account (“your account with us”) is how the foreign bank records the domestic bank’s funds on its books.
These mirrored accounts are essential for tracking the flow of funds and for ensuring that both sides record the same balances. They also allow banks to execute transactions on behalf of their clients without physically transferring cash across borders each time.
Why Correspondent Banks Are Necessary
The world has more than 200 jurisdictions, each with its own banking rules, currencies, and clearing systems. Without correspondent banks, financial institutions would need to establish direct relationships with every foreign bank they interact with — an impossible task.
Correspondent banks solve this by maintaining global networks of partnerships and liquidity pools. They can execute payments in multiple currencies, process checks or trade settlements, and provide access to foreign financial markets.
Their services are especially critical for smaller or regional banks that do not have the volume or resources to maintain international branches. Through correspondent partnerships, these banks can offer their clients access to global money transfers, international loans, and foreign currency exchange.
How the Process Works
When a cross-border payment is initiated, the sender’s bank sends a SWIFT message to the correspondent bank that it holds a Nostro account with. That correspondent then forwards the payment to another intermediary or directly to the recipient’s bank, depending on existing relationships.
Each bank in this chain deducts a service fee and updates account balances accordingly. The process continues until the funds reach the final destination.
While this may sound complex, automation through the SWIFT network and standardized messaging ensures traceability and accuracy throughout the transaction chain.
Multiple Intermediaries in One Transfer
In some cases, more than one correspondent bank is involved. This happens when there is no single institution that holds relationships with both the sender’s and the receiver’s banks.
For instance, Bank A in Peru may use a correspondent in New York, while Bank B in South Korea uses a different correspondent in Singapore. The payment then passes through both intermediaries, which adds steps and can extend the settlement time.
Each intermediary bank performs several essential checks:
- Verification of compliance documents (AML and sanctions lists).
- Conversion of currency if required.
- Transmission of SWIFT messages confirming the progress of funds.
Despite the complexity, this model allows global finance to function seamlessly, even between the smallest institutions on opposite sides of the world.
Transparency and SWIFT gpi Tracking
Historically, correspondent banking was criticized for its lack of visibility. Payments could take days, and clients had little information about where funds were at any given moment. The SWIFT gpi (Global Payments Innovation) initiative changed that.
With SWIFT gpi, every payment receives a unique end-to-end reference number. Banks and clients can now track transfers in real time, viewing timestamps for each stage — initiation, routing, and final settlement.
This level of transparency reduces uncertainty and improves trust in cross-border operations, especially for businesses managing international supply chains or recurring global payments.
Risks and Compliance Challenges
While correspondent banking remains vital, it also carries compliance and regulatory risks. Because correspondent banks process transactions on behalf of many institutions, they must maintain strict oversight.
Key challenges include:
- Anti-Money Laundering (AML) compliance across multiple jurisdictions.
- Counter-Terrorism Financing (CTF) controls and sanctions screening.
- Customer Due Diligence (CDD) for foreign partner banks.
If a correspondent bank fails to detect suspicious activity or violates sanctions, it may face substantial fines or even lose access to the SWIFT network. As a result, many institutions have reduced the number of correspondent relationships — a trend known as “de-risking.”
The Impact of De-Risking
Over the past decade, regulatory pressure and high compliance costs have led to the decline of correspondent banking corridors, especially in developing regions. Banks in Africa, the Caribbean, and parts of Asia have faced challenges maintaining international payment access.
To counter this, new fintech solutions and regional payment hubs are emerging. They aim to provide faster and cheaper alternatives while still ensuring compliance. Yet, correspondent banks continue to play an irreplaceable role for major currencies like the US dollar, euro, and yen.
The Future of Correspondent Banking
Technological innovation is gradually reshaping how correspondent networks operate. Blockchain-based settlements, real-time payment platforms, and API-driven communication between banks are reducing the need for multiple intermediaries.
However, these solutions are still built on the same foundation — trust between financial institutions. Correspondent banking remains central to this ecosystem because it combines reliability, liquidity, and regulatory oversight that newer systems still depend on.
In the future, we are likely to see a hybrid model: established correspondent banks integrating advanced digital platforms to improve transparency, reduce costs, and deliver instant settlement. Rather than being replaced, they will evolve into more data-driven and automated hubs for international finance