Correspondent Banking Services Agreement
Most international transfers are made through the Interbank Financial Telecommunications Corporation (SWIFT) network. Knowing that there is no working relationship with the target bank, the original bank can search the SWIFT network for a corresponding bank that has agreements with both banks. After the search for a corresponding bank that has entered into agreements with both parties of the transfer, the original bank sends the money transferred to its Nostro account to the corresponding Bank. Correspondence banks can also act as agents to process local transactions for customers when they travel abroad. At the local level, correspondence banks can accept deposits, process documents and act as transfer agents. While there are some similarities between correspondence banks and intermediary banks – that they act as a third party for other banks – there is a big difference between the two. While correspondence banks typically trade with multiple currencies, an intermediary bank enters into transactions with a single currency. They are particularly important for domestic banks, which may be too small to handle these types of transactions. Correspondence banks are a central part of the financial industry, as they offer domestic banks the opportunity to operate if they cannot open branches on another site, particularly in a foreign country. For example, a small national bank with customers in different countries can work with a corresponding bank to meet the needs of its customers internationally. It also gives them access to the foreign financial market. The corresponding Bank therefore collects a fee for this service, which is usually passed on by the national bank to the customer. Correspondence banks are third-party banks.
They act as intermediaries between different financial institutions. As such, they provide cash services between sending and receiving banks, especially in different countries – such as: for example, in the example above, the corresponding bank deducts its transfer fee, usually between 25 and 75 dollars, and transfers the money to the bank that receives in Japan. In the case of transactions like this, the corresponding bank adds added value in two ways. It reduces the need for the national bank to establish a physical presence abroad and avoids the work of establishing direct agreements with other financial institutions around the world. The corresponding term of bank refers to a financial institution that provides services to another, usually in another country. It acts as an intermediary or intermediary, facilitates transfers, conducts commercial transactions, accepts deposits and collects documents on behalf of another bank. Correspondence banks are most likely to be used by domestic banks for services originating or being concluded abroad. Domestic banks generally use correspondence banks to access foreign financial markets and serve international customers without having to open branches abroad. Accounts between correspondence banks and the banks for which they provide services are called Nostro and Vostro accounts.
An account managed by one bank for another is designated by the holding bank as a Nostro account or our account in your books. The same account is called the Vostro account by the counterparty bank – your account, but in our books.