Correspondent Bank
IntermediateA correspondent bank is a bank that provides services, such as making payments or handling currency transactions, on behalf of another bank, often in a different country.
No bank has branches or accounts everywhere. When a bank needs to send money to a country where it has no presence, it relies on a correspondent bank that does. The two banks hold accounts with each other to settle payments.
For example, a small bank in Kenya wanting to pay a supplier in Germany for a customer might send the payment through a correspondent bank in Europe that has accounts with both the Kenyan bank and the supplier's German bank. The correspondent bank completes the transfer and charges a fee.
Correspondent banking is essential for international trade and cross-border payments, including business transactions, foreign exchange and money sent home by workers abroad.
Because correspondent banks process payments for customers they do not know directly, they are exposed to risks of money laundering and financial crime. Regulators therefore require them to check carefully the banks they work with. Higher compliance costs have led some large banks to reduce correspondent relationships with banks in certain regions, which can make international payments slower or more expensive for those regions.
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