CORRESPONDENT BANKS: WHAT THEY ARE AND HOW THEY WORK 2024

Correspondent banking is an agreement between two banks to help each other with their services, usually across foreign borders.

A correspondent bank does things for another bank, like processing payments, dealing with local transactions, exchanging currency, and other financial tasks.

This arrangement is very important for making international trade and investment run smoothly. It lets banks reach more people without having to open real branches in every country.

How Does Correspondent Banking Facilitate International Transactions?

Let’s say you need to send money to an international supplier’s business account in New York from your bank in Lagos. Unless it has a local US branch, your bank will use a US correspondent bank. This bank in New York will receive the money, convert it if necessary, and complete the transaction on your behalf. This process ensures that your money gets where it needs to go quickly and safely, traveling between different countries and banking systems.

Correspondent banking is what makes international payments work. It makes it easy for businesses and people to do business across borders. Financial institutions can offer their customers a wider range of services by leveraging the networks and services of partner banks. This helps global trade and economic growth.

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What Are Correspondent Banks?

Correspondent banks are banks that collaborate with other banks, typically in different countries, to provide services. They help with transactions that the bank that sent the money can’t do because it doesn’t have a presence or local resources in the recipient’s country. This setup enables banks to provide services worldwide without having to open branches in each country.

What Services Do Correspondent Banks Provide?

Correspondent banks offer a variety of services to their client banks, including:

Payment Processing: Handling international wire transfers and payments.
Currency Exchange: Facilitating the exchange of currencies for international transactions.
Trade Finance: Providing support for international trade, including letters of credit and documentary collections.
Local Banking Services: Offering local banking operations for foreign banks, such as clearing checks and processing deposits.

These services are crucial for enabling cross-border financial activities, ensuring that funds and transactions move smoothly between different banking systems.

How Do Correspondent Banks Differ from Intermediary Banks?

While the terms are often used interchangeably, there are subtle differences:

Correspondent Banks: These banks have direct agreements with other banks to handle specific transactions and services. They maintain accounts for each other to facilitate these operations.
Intermediary Banks: Any bank that stands between the sender and the recipient bank in a transaction is considered an intermediary bank. This term is broader and includes correspondent banks but also other banks that may participate in the transaction chain.

UNDERSTANDING CORRESPONDENT BANK CHARGES

When conducting international transactions, understanding the fees involved is crucial. Correspondent bank charges can significantly impact the total cost of a transaction, and knowing how they work helps in planning and managing these expenses effectively.

What Are the Different Types of Correspondent Bank Charges?

There are three primary types of charges associated with correspondent banking transactions: OUR, BEN, and SHA. Each type determines who bears the cost of the transaction fees.

OUR Charges: In this scenario, the sender (originator) pays all the transaction fees. This ensures that the recipient receives the full amount sent, without any deductions. This method is often preferred when the recipient needs to receive a specific amount, such as in trade payments or remittances.

Example: If you send $1,000 with OUR charges and the fee is $30, you will pay $1,030, and the recipient will receive the full $1,000.

BEN Charges: With BEN (beneficiary) charges, the recipient bears all the transaction fees. The sender sends the gross amount, and the fees are deducted from the recipient’s funds. This method is less common for business transactions as it can result in the recipient receiving less than the intended amount.

Example: If you send $1,000 with BEN charges and the fee is $30, you will pay $1,000, and the recipient will receive $970 after the fee is deducted.

SHA Charges: SHA (shared) charges mean that the sender and the recipient share the transaction fees. Typically, the sender pays the fees charged by their bank, and the recipient pays the fees charged by their bank. This method provides a balanced approach to fee distribution.

Example: If you send $1,000 with SHA charges, and both banks charge $15 each, you will pay $1,015, and the recipient will receive $985.

How Are Correspondent Bank Fees Calculated?

Correspondent bank fees can vary based on several factors:

Transaction Amount: Larger transactions might incur higher fees, though some banks offer tiered pricing where the fee percentage decreases with larger amounts.
Currency Conversion: If the transaction involves currency exchange, additional fees or less favorable exchange rates may apply.
Number of Intermediary Banks: Transactions involving multiple intermediary banks can accumulate additional fees at each step.
Bank Agreements: The specific agreements between the sending and receiving banks can influence the fee structure.

Managing Correspondent Bank Charges

To manage and potentially reduce correspondent bank charges, consider the following strategies:

Compare Banks: Different banks have different fee structures. Comparing banks can help you find the most cost-effective option for your transactions.
Negotiate Fees: For frequent or high-value transactions, negotiate fees with your bank. Some banks offer discounts for loyal customers or bulk transactions.
Use Online Transfers: Some online banking platforms and fintech companies offer lower fees for international transfers compared to traditional banks.
Choose the Right Charge Type: Selecting the appropriate charge type (OUR, BEN, SHA) based on the transaction’s context can help manage costs effectively.

KEY PLAYERS IN CORRESPONDENT BANKING

When it comes to correspondent banking, there are a few banks that stand out in the complex ecosystem of international payments. These financial institutions have the large networks and expertise needed to make international transactions easy. Discovering these key players and their roles can help you understand the correspondent banking environment.

Who Are Some of the Major Correspondent Banks Globally?

Several banks are recognized for their prominent roles in correspondent banking due to their extensive global reach and comprehensive service offerings. These banks include:

Citibank: Known for its vast network and strong presence in both developed and emerging markets, Citibank serves as a correspondent bank for numerous financial institutions around the world.
JP Morgan Chase: With a significant international footprint, JP Morgan Chase provides comprehensive correspondent banking services, including payment processing and trade finance.
HSBC: As one of the world’s largest banks, HSBC offers a wide range of correspondent banking services, particularly excelling in facilitating transactions in Asia, Europe, and the Americas.
Barclays: Barclays has a robust correspondent banking network, especially strong in Europe and Africa, providing a variety of services including currency exchange and international payments.
Bank of America: With a strong presence in the Americas and connections worldwide, Bank of America plays a crucial role in the correspondent banking ecosystem.

What Role Does Citibank New York Play in Correspondent Banking?

Citibank New York is a pivotal correspondent bank, especially for transactions involving USD. Due to its extensive network and robust infrastructure, it serves as an intermediary for banks that do not have direct access to the U.S. financial system. Citibank New York’s capabilities include:

USD Clearing: Handling the clearing of USD transactions for international banks.
Foreign Exchange: Facilitating currency exchange services for various currencies.
Trade Finance: Providing letters of credit and other trade finance instruments to support global trade.

How Do Banks Like JP Morgan Chase Serve as Intermediary Banks?

JP Morgan Chase often acts as an intermediary bank in international transactions, leveraging its extensive network and expertise. Its roles include:

Facilitating Payments: Ensuring that funds are transferred securely and efficiently between banks.
Managing Risk: Mitigating risks associated with cross-border transactions through stringent compliance and monitoring processes.
Providing Liquidity: Offering liquidity solutions to banks, helping them manage their foreign currency reserves and cash flow.

How Does HSBC Manage Its Correspondent Banking Network for USD Transactions?

HSBC’s correspondent banking network is one of the most extensive globally, especially for USD transactions. Key aspects of HSBC’s management include:

Global Reach: HSBC operates in numerous countries, providing seamless connectivity for international transactions.
Specialized Services: Offering tailored services for different markets, including trade finance and treasury solutions.
Compliance and Security: Ensuring compliance with international regulations and maintaining high-security standards to protect transactions.

What Are the Correspondent Banking Relationships of GTBank, Access Bank, and Zenith Bank?

GTBank: GTBank has established correspondent relationships with major global banks to facilitate international transactions, particularly focusing on USD, GBP and EUR transfers.
Access Bank: Access Bank’s correspondent network includes partnerships with banks in the U.S., Europe, and Asia, enabling efficient cross-border payments and trade finance.
Zenith Bank: Zenith Bank collaborates with several international banks to provide comprehensive correspondent banking services, including currency exchange and international payment processing.

How Does Bank of America Utilize Correspondent Banking for Global Transactions?

Bank of America leverages its extensive global network to facilitate international transactions. Its correspondent banking services include:

Cross-Border Payments: Processing payments across different countries and currencies.
Trade Finance: Supporting international trade through letters of credit and other trade finance products.
Risk Management: Offering solutions to manage foreign exchange risk and ensure compliance with global regulations.

HOW DO CORRESPONDENT BANKS FACILITATE INTERNATIONAL WIRE TRANSFERS?

Correspondent banks play a critical role in processing international wire transfers. When a bank in one country needs to send money to a bank in another country, it often relies on a correspondent bank to facilitate the transaction. Here’s a step-by-step example:

Initiation: A customer of Zenith Bank in Nigeria wants to send $10,000 to a recipient at Bank of Shanghai in China.
Correspondent Bank Role: Zenith Bank does not have a direct relationship with Bank of Shanghai in China but has an account with a correspondent bank, Citibank New York.
Transaction Process: Zenith Bank sends the payment instructions to Citibank New York, which then transfers the $10,000 to Bank of Shanghai on behalf of Zenith Bank.
Completion: Bank of Shanghai receives the funds and credits the recipient’s account.

This process ensures that the funds are transferred securely and efficiently, even if the sending and receiving banks do not have a direct relationship.

What Is a Correspondent Bank Account and How Is It Used?

A correspondent bank account is an account that one bank holds with another bank (the correspondent bank) to facilitate international transactions. This account allows the originating bank to access services provided by the correspondent bank, such as payment processing and currency exchange. For example, GTBank in Nigeria might hold a USD account with a bank in the United States to handle transactions in dollars.

Here’s how it works:

Example: A bank in Brazil, Bank X, wants to offer its customers the ability to send and receive USD. Bank X opens a correspondent bank account with Bank Y in the United States.
Usage: When a customer of Bank X wants to transfer USD, Bank X uses its account at Bank Y to process the transaction. This account allows Bank X to handle USD without needing a physical presence in the U.S.
Benefits: This setup enables Bank X to provide a wide range of services, such as foreign exchange, international payments, and trade finance, leveraging the infrastructure of Bank Y.

How Correspondent Banking Works in the Real-World?

Example 1: Trade Finance

Scenario: A company in Germany imports goods from China. To pay the Chinese supplier, the German company uses its local bank, Deutsche Bank.
Process: Deutsche Bank does not have a direct relationship with the Chinese supplier’s bank but uses HSBC as a correspondent bank.
Outcome: HSBC facilitates the payment by processing the transaction and ensuring the funds reach the Chinese supplier’s bank, enabling smooth international trade.

Example 2: Remittances

Scenario: An individual in India wants to send money to a family member in Canada.
Process: The sender uses their local bank, ICICI Bank, which partners with Bank of America as a correspondent bank.
Outcome: Bank of America processes the transaction, ensuring the funds are transferred to the recipient’s bank in Canada, allowing for efficient and secure remittances.

Example 3: Currency Exchange

Scenario: A business in South Africa needs to pay for services in Japan in JPY.
Process: The South African business’s bank, Standard Bank, partners with MUFG Bank in Japan as a correspondent bank.
Outcome: Standard Bank sends the ZAR to MUFG Bank, which converts it to JPY and transfers it to the Japanese service provider’s bank account.

What Is the Role of Correspondent Banks in International Trade?

Correspondent banks are vital in facilitating international trade by providing various services:

Letters of Credit: They issue and confirm letters of credit, ensuring that sellers receive payment and buyers receive their goods.
Documentary Collections: They handle the exchange of documents between exporters and importers, ensuring compliance with trade agreements.
Trade Financing: They provide financing options to help businesses manage cash flow and mitigate risks associated with international trade.

CORRESPONDENT BANK LISTS

When doing business across borders, it’s important to know about the network of foreign banks that make it possible. Correspondent bank lists can assist you in finding the right local banks with good intermediary banks to ensure that cross-border payments go smoothly and cheaply.

Where Can You Find Lists of Correspondent Banks for Different Financial Institutions?

Banks typically provide their correspondent bank lists on their websites or through customer service. These lists detail the correspondent banks they work with for various currencies and regions. Here’s how to locate them:

Bank Websites: Major banks often have a section dedicated to international banking or correspondent banking. Look for downloadable PDF lists or online directories.
Customer Service: Contacting your bank’s customer service can provide access to up-to-date correspondent bank lists.
Bank Branches: Visiting a local branch can sometimes yield printed lists or direct assistance from bank representatives.

How Do Banks Like Barclays and Bank of China Establish Their Correspondent Networks?

Barclays: Barclays has a broad correspondent banking network to support its global operations, especially in Europe and Africa. Here’s how they manage it:

Regional Expertise: Barclays collaborates with banks that have strong regional presences, ensuring smooth transaction processes.
Currency Coverage: Their network includes banks for major currencies like USD, EUR, GBP, and emerging market currencies.
Compliance and Security: Barclays ensures all correspondent relationships adhere to international regulatory standards to mitigate risk.

Bank of China: Bank of China leverages its extensive international reach to build a robust correspondent banking network.

Global Presence: Bank of China partners with major banks worldwide, especially in regions with significant Chinese business interests.
Specialized Services: They focus on providing tailored services such as trade finance and foreign exchange through their correspondent banks.
Technological Integration: Bank of China employs advanced technology to streamline transactions and ensure real-time processing.

Practical Steps for Using Correspondent Bank Lists

Step 1: Identify Your Needs Determine the currency and region for your transaction. This will help narrow down the list of relevant correspondent banks.

Step 2: Access the List Use the methods mentioned above to obtain the correspondent bank list from your bank. Ensure you have the latest version to avoid outdated information.

Step 3: Analyze the List Look for key details such as:

Bank Name: Ensure it’s a reputable and well-established institution.
SWIFT/BIC Codes: These codes are crucial for international transactions.
Currency Support: Verify that the bank supports the required currency.
Fees and Charges: Some banks list associated fees, which can help in cost estimation.

Step 4: Coordinate with Your Bank Share the correspondent bank details with your bank’s representative to confirm the best route for your transaction. They can provide additional insights on processing times and potential costs.

Step 5: Monitor the Transaction After initiating the transaction, track its progress. Correspondent bank lists often include contact details for follow-up if there are delays or issues.

Example: Using Barclays’ Correspondent Bank List

Scenario: A business in the UK needs to transfer EUR to a supplier in Germany.

Obtain the List: Access Barclays’ correspondent bank list from their website.
Identify Correspondent Banks: Find banks in Germany that handle EUR transactions.
Verify Details: Check the SWIFT/BIC codes and ensure the chosen bank is reliable.
Initiate Transfer: Provide the correspondent bank details to Barclays’ representative to process the transaction.

Example: Using Bank of China’s Correspondent Bank List

Scenario: A Chinese company needs to pay a partner in the US in USD.

Obtain the List: Download the correspondent bank list from Bank of China’s website.
Identify Correspondent Banks: Locate US-based banks that handle USD payments.
Verify Details: Ensure the SWIFT/BIC codes and bank details are accurate.
Initiate Transfer: Coordinate with Bank of China to complete the USD transfer.

FAQS ON CORRESPONDENT BANKING

What is the role of SWIFT in Correspondent Banking?

SWIFT (Society for Worldwide Interbank Financial Telecommunication) plays a critical role in correspondent banking by providing a standardized messaging system that facilitates secure and efficient communication between banks globally. SWIFT messages are used to initiate and confirm international payments, ensuring accuracy and reducing the risk of errors.

How do Correspondent Bank Codes Work?

Correspondent bank codes, often referred to as SWIFT codes or BIC (Bank Identifier Codes), uniquely identify banks and financial institutions involved in international transactions. These codes ensure that funds are transferred to the correct bank. A SWIFT code typically consists of 8 to 11 characters, indicating the bank, country, location, and branch.

What are the differences between OUR, BEN, and SHA charges?

OUR Charges: The sender pays all the transaction fees, ensuring the recipient receives the full amount.
BEN Charges: The recipient bears all the transaction fees, resulting in a lower net amount received.
SHA Charges: The transaction fees are shared between the sender and the recipient, with each party paying their respective bank’s fees.

Why do Banks Use Correspondent Banks Instead of Direct Relationships?

Banks use correspondent banks to extend their global reach without the need to establish physical branches in every country. This arrangement allows them to offer comprehensive international banking services, including payment processing and currency exchange, by leveraging the infrastructure and local expertise of correspondent banks.

What is the Difference Between a Correspondent Bank and an Intermediary Bank?

While both terms are often used interchangeably, there is a subtle difference:

Correspondent Bank: Typically has a direct agreement with another bank to handle transactions on its behalf.
Intermediary Bank: Any bank that acts as an intermediary in the transaction process, facilitating the transfer of funds between the sender and the recipient’s banks.