What is a Correspondent Bank? If you are sending wire transfers internationally, you might not know this, but you might have used a correspondent bank. Many people do not know what a correspondent bank is, but they have used their services in one way or another. This is why today we are going to be taking a look at what a CB is and how you can make use of it.
This article will teach you everything you need to know about correspondent banks, including what they are and how they operate. If this sounds like what you are interested in, then let’s go ahead and start taking a quick and closer look at it today.
What is a Correspondent Bank?
The simplest and easiest definition of a correspondent bank is a bank that provides financial services to another bank, which is usually in another country. It is a financial institution that offers services to another customer on behalf of any other bank or other financial institution. What this means is that they basically act as a third-party financial institution between other financial institutions.
When an overseas bank is trying to make a transaction with another bank, it is the correspondent bank that makes that possible between the two banks. Before any transaction can be done through the CB, we have an agreement with the other two banks that are involved. They can simply offer services like wire transfer checks and payment processing to those banks.
How does a Correspondent Bank Work?
A CB is used when any financial institution wants to make a payment to another bank in a foreign country. The main reason for using a CB is that the bank that is trying to make a transaction with a foreign bank does not have any previous relationship. It is the duty of the corresponding bank to act as a third-party agent to facilitate the transaction.
A typical example of this is when you want to make a payment to another bank overseas using your own bank. Your bank goes to a concert with a CB. That customer is trying to do the opposite to a foreign bank. As the branches of your bank in that country responded back, we needed to step in to facilitate that transaction between the two banks.
Finally, the money will be deducted from your account along with the transaction fee and paid to the CB, which is then transferred to the bank overseas. The fee is kept by the CB as payment for facilitating the transaction.
Features of a Correspondent Bank
For a bank to be considered a CB, it means having certain features and qualities to distinguish it from others. Some of the qualities and features are listed below:
- The bank is a band that acts as an agent of the responding bank
- The correspondent bank offers the following services: treasury, clearance of cheques, drawing of demand drafts, processing of documents, and others.
- After a transaction is completed, the correspondent bank charges a specific fee for its services to the respondent bank.
- The CB provides the services when the transaction is needed for international financial transfers or foreign currency exchange.
What are the Correspondent Bank fees?
Anyone that has gone through any international transaction before knows that there are fees involved. Although the fees involved in a transaction where a correspondent bank is involved vary, the CB takes part of the transaction fees. A typical international transaction fee where a CB is involved can vary from $15 to $50.
The difference between a Correspondent Bank and an Intermediary Bank
A CB is simply defined as an intermediary person that is sending money to another bank that is receiving the money. The same also goes for an intermediary bank. It is also a middleman between a sending bank and a receiving bank. That being said, there are two key differences between an intermediary bank and a correspondent bank. Did you look at the differences below?
- The major difference between a correspondent and an intermediary bank is that a CB facilitates transactions in which multiple currencies are involved.
- In the case of an intermediary bank, they facilitate any transaction that involves only a single currency.
What is the need for a correspondent bank?
There is a great need for a CB because there are currently so many companies doing individual international trade. For many businesses going international or planning to do business on a global scale, a CB is needed. Bank transactions between a bank and an international bank will not be possible.
Another reason is that correspondence is needed because you’re looking abroad and cannot have branches everywhere in the world. This means you have to make use of the services of a CB in order to execute your transactions.
What is the role of a correspondent bank?
A CB is basically used when there is a transaction between your local bank and an international bank. As long as your local branch does not have a bank branch abroad, it needs the services of a CB to make a transaction possible. CB usually charges transaction fees for making international transactions possible.
Is a correspondent bank the same as a receiving bank?
A CB is not the same as a bank because the money that you receive is not kept by them nor is it for them it is only to be sent to the receiving bank. The receiving bank is the bank that is abroad where the money is being sent to. The CB only received the money together with the transaction fee and sent it to the receiving bank.
How much do correspondent banks charge?
A CB usually requires a fee for the facilitating of a transaction. A correspondent banking transaction can cost anywhere from $15 to $50, depending on the bank and the amount of money being transferred.