Correspondent Banking: How International Payments Work

When you make an international wire transfer, the money rarely travels directly from your bank to the recipient's bank. Unless both institutions maintain a direct account relationship with each other — which the vast majority of global bank pairs do not — the payment moves through one or more intermediary institutions. These intermediaries are known as correspondent banks, and the network of relationships they form is the infrastructure through which most international payments travel.

Understanding how correspondent banking works helps explain why international transfers take time, why costs vary unpredictably, and why access to the global financial system is uneven across different parts of the world.

What Is a Correspondent Bank?

A correspondent bank is a financial institution that provides services to another financial institution — typically a smaller or less internationally connected bank — in a jurisdiction where the second bank has no direct presence. The correspondent holds accounts on behalf of the respondent (the bank receiving the service) and performs transactions in that currency or jurisdiction on its behalf.

The fundamental mechanism is straightforward: Bank A in Country X needs to make a payment to Bank B in Country Y. Bank A does not have an account at Bank B, nor does Bank B have an account at Bank A. However, both banks maintain accounts at Bank C — a major international institution with a network spanning both countries. Bank A instructs Bank C to debit its account and credit Bank B's account, with a corresponding instruction to credit the ultimate recipient. Bank C is acting as the correspondent bank.

In practice, many international payments involve more than one correspondent. A payment from a small regional bank in Vietnam to a small regional bank in Brazil might travel through correspondent chains totalling three or four institutions before arriving, with each step involving a separate interbank settlement.

Nostro and Vostro Accounts

Correspondent banking relationships are maintained through interbank accounts:

Nostro account — "our money, held by you" (from the Latin for "ours"). A nostro account is an account that Bank A holds at Bank C in Bank C's domestic currency. Bank A uses this account to settle transactions that Bank C processes on its behalf. From Bank A's perspective, the account at Bank C is their nostro account.

Vostro account — "your money, held by us" (from the Latin for "yours"). The same account is a vostro account from Bank C's perspective — it is the money belonging to Bank A that Bank C holds. The two terms describe the same account from opposite viewpoints. (A separate guide covers nostro and vostro accounts in more depth.)

Major correspondent banks — institutions like JPMorgan Chase, Citibank, Deutsche Bank, HSBC, and BNY Mellon — maintain extensive nostro account networks across dozens of currencies, enabling them to process payments for thousands of respondent banks globally.

How a Correspondent Payment Works Step by Step

1. Instruction initiation. The sending client instructs their bank (Bank A) to send USD 50,000 to a recipient at Bank B.

2. SWIFT message. Bank A sends a SWIFT MT103 (or equivalent ISO 20022 pacs.008 message) to Bank C, the correspondent, instructing it to credit Bank B's account with USD 50,000.

3. Correspondent processing. Bank C debits Bank A's nostro account and credits Bank B's vostro account (or sends an onward instruction to another correspondent if Bank B is not a direct respondent).

4. Recipient bank credit. Bank B receives the instruction and credits the recipient client's account.

The SWIFT network transmits the instruction; the actual movement of value occurs through the correspondent account debiting and crediting.

Correspondent Banking Fees

Because each correspondent bank in a payment chain deducts a fee for processing, the recipient can receive less than the amount sent — unless the sender has selected the OUR fee instruction, meaning they bear all fees.

Fee instruction codes:

• OUR — all transaction fees charged to the sender. The recipient receives the full amount instructed.
• SHA (shared) — the sender pays their own bank's charges; the recipient bears any correspondent or receiving bank fees.
• BEN (beneficiary) — the recipient bears all fees, including the sender's bank charges.

For personal transfers, SHA is the most common instruction, which means that in payment chains involving multiple correspondents, fees can be deducted at multiple points. This is why recipients sometimes receive USD 49,800 when USD 50,000 was sent. SWIFT GPI (Global Payments Innovation) has improved fee transparency significantly for participating institutions, but not all payment chains are fully GPI-enabled.

SWIFT GPI: Modernising Correspondent Banking

SWIFT's Global Payments Innovation initiative was launched to address the opacity, speed, and cost predictability problems of traditional correspondent banking. GPI introduces:

• End-to-end tracking — a Unique End-to-End Transaction Reference (UETR) code enables banks and, increasingly, their clients to track a payment's status through every correspondent in the chain.
• Same-day settlement commitment — GPI banks commit to processing within the business day for GPI-enabled routes.
• Fee transparency — GPI requires disclosure of all fees deducted at each step.
• Data richness — GPI-compatible messages carry more structured data, reducing payment delays caused by missing information.

As of 2026, GPI participation has expanded to cover the majority of high-value international payments, though full chain coverage depends on every institution in a payment chain being GPI-enabled. Progress is ongoing.

De-risking: The Retreat of Correspondent Banking

One of the most significant developments in global banking over the past decade is the practice known as de-risking: the withdrawal of major international banks from correspondent banking relationships with banks in certain jurisdictions, sectors, or client categories.

The drivers of de-risking are primarily compliance costs and regulatory risk. Following a series of high-profile enforcement actions (HSBC, Standard Chartered, BNP Paribas, and others) resulting in multibillion-dollar fines for AML and sanctions failures, major correspondent banks have reassessed the economic returns from correspondent relationships against the compliance cost of managing them. Relationships with banks in high-risk jurisdictions — those with weaker AML frameworks, significant political instability, or high volumes of sanctions exposure — have been terminated at scale.

The consequences have been significant:

Financial exclusion. Countries in sub-Saharan Africa, parts of the Caribbean, Central Asia, and the Pacific have lost a significant proportion of their correspondent banking relationships, making international payments more expensive, slower, and sometimes impossible through formal channels.

Remittance impacts. For families dependent on remittances from diaspora communities, the withdrawal of correspondent banking coverage has pushed flows toward informal channels.

SME and trade finance. Small and medium-sized businesses in affected jurisdictions have found international trade finance — letters of credit, documentary collections — increasingly difficult to access.

What De-risking Means for HNW Clients

For high-net-worth individuals and businesses operating in or with assets in emerging markets, de-risking creates practical challenges:

• Transfers to or from certain jurisdictions may travel through longer correspondent chains, incurring higher costs and delays
• Some receiving banks may not accept payments from certain jurisdictions
• Bank accounts at smaller institutions in less-covered regions may have difficulty receiving international transfers
• Banks may apply additional scrutiny to payments involving de-risked jurisdictions even where the transaction is entirely legitimate

Understanding which jurisdictions present correspondent banking challenges is useful forward planning for internationally mobile individuals. If you regularly transact with specific countries, confirm that your bank has correspondent coverage for those destinations before relying on it for time-critical payments.

Alternatives to Correspondent Banking

Several alternatives to the traditional SWIFT correspondent model have emerged:

Fintech payment platforms. Providers such as Wise, Airwallex, and OFX operate their own local account networks in multiple countries, enabling payments to be settled locally rather than through SWIFT intermediary chains. This is faster and cheaper for many currency corridors and does not depend on correspondent relationships.

Central bank digital currencies (CBDCs). Several major central banks are exploring bilateral CBDC arrangements that could bypass correspondent infrastructure for specific currency pairs. Practical implementations are still limited as of 2026.

Ripple and blockchain solutions. Various distributed ledger payment solutions have been developed to address correspondent banking inefficiencies, with mixed adoption rates among established financial institutions.

For most large international payments, the correspondent banking system remains the primary infrastructure. For smaller retail transfers, fintech alternatives have become the more efficient option in many corridors.

How Global Investments Can Help

Global Investments works with internationally mobile clients who regularly manage payments across multiple jurisdictions. We help clients understand the payment infrastructure relevant to their specific currency corridors, identify the most cost-effective and reliable mechanisms for regular or large-value transfers, and navigate the challenges of payments to or from jurisdictions with limited correspondent banking coverage.

Our experience with international banking across UK, European, Middle Eastern, and Asian markets means we can offer practical guidance grounded in current market realities rather than theory.

Payment systems, correspondent relationships, and compliance standards change continuously. This guide is accurate as of 2026 and should not be treated as definitive financial or legal advice. Seek professional guidance for complex international payment arrangements.