Correspondent Banking Explained: How Cross-Border Payments Move Between Banks

A small bank in Warsaw has a customer who owes an invoice to a firm in New York. The bank has no branch in the US and no dollar account at the Federal Reserve. What it has is a relationship with a bigger bank that does. Most international payments still run on arrangements like that.

What is correspondent banking?

The correspondent banking definition is short. One bank, the respondent bank, uses a bank in another country, the correspondent bank, to hold its funds and process payments for it. The Polish bank can pay the dollar invoice because a US bank keeps a dollar account in its name.

Nobody covers every currency and every country, so banks connect to a handful of partners and rely on those partners to connect onward.

What are correspondent banking relationships?

They're the agreements and accounts tying two banks together. The partner opens an account, takes deposits, settles payments and sometimes adds services on top. In the books these are nostro and vostro accounts, depending on which side you stand on. We unpack that pair in our guide to the nostro account.

Correspondent banking services

Most of the volume is cross-border wires and foreign exchange. Beyond that, partner banks handle cash management, check clearing, trade finance such as letters of credit, and access to payment systems a small bank can't join directly. That's why a bank with one office can serve customers who trade worldwide.

How a payment moves through the chain

1. The customer asks their bank to pay someone abroad.

2. The bank sends instructions, usually as a message over SWIFT.

3. If it has no direct account with the recipient's bank, the instruction goes to a partner, and sometimes to a second or third one.

4. Every bank in the chain debits one account, credits another and may keep a fee.

5. The recipient's bank credits the final account.

Each hop costs time and money, and each is another place for a typo or a compliance hold to stop the payment. That's why a transfer can take days and arrive lighter than the sender expected.

The correspondent banking network and nested relationships

Thousands of bank pairs make up the web, with a few large banks acting as hubs for the main currencies. Trouble starts with nested correspondent banking. A bank lets other banks use its own account at its partner, so the partner now serves banks it never vetted, and through them customers it has never heard of.

Why is correspondent banking high risk?

The partner processes payments for people it can't see and has to take the other bank's word that they were checked. The FATF, the global standard setter on money laundering, treats the activity as higher risk and covers it in Recommendation 13.

The usual correspondent banking relationship risks are money laundering, terrorist financing, sanctions evasion and weak controls at the smaller bank. Large banks have answered by dropping relationships they can't justify, which the industry calls de-risking. The Financial Stability Board counted roughly a fifth fewer active relationships in 2019 than in 2011, and some countries now struggle to send or receive payments at all.

Correspondent banking AML and due diligence

The Wolfsberg Group, an association of large banks, publishes a standard questionnaire for this job. Correspondent banking due diligence normally asks who owns and runs the smaller bank, how good its anti-money laundering program and its supervision are, whether it serves shell banks, and how it screens customers and payments against sanctions lists.

Sanctions get their own page: what sanctions screening is. On the KYC side, our payments compliance and identity tools cover checks for companies that handle money.

Costs and delays

Fees can accumulate at each intermediary bank. Time does too: banks sit in different time zones, close at different hours, and run compliance checks that can add a day by themselves. The sender rarely sees where the payment is or what the next bank will deduct.

The G20 roadmap, coordinated by the Financial Stability Board, aims at faster, cheaper and more transparent payments by 2027. Banks are working on it with better messaging and tracking, and some are testing stablecoins and tokenized deposits.

Benefits of stablecoins for correspondent banking

The gains come from removing steps. A stablecoin transfer settles on a blockchain in minutes, ignores bank holidays and shows its status in real time. A bank can hold one stablecoin balance instead of pre-funding accounts in many countries, which frees cash that would otherwise sit idle.

What stablecoins don't remove is customer checks, sanctions screening or the need for licensed partners. They replace stretches of the chain, not the rules around it. Banks that want to test the idea can start with our stablecoin-based cross-border infrastructure.

Frequently asked questions

Which bank plays which role?

The bank that needs a service abroad is the one asking. The foreign bank that holds its account and provides the service is the partner. A single bank can be the partner for some banks and the one asking for others.

Why do these payments take so long?

A payment may cross several banks in different time zones, and each has its own cutoff times, checks and fees. Compliance reviews and manual fixes of payment details add more delay, so a transfer can take days.

What makes a relationship nested?

A bank lets other banks use its own account at the partner. The partner may know nothing about those downstream banks or their customers, which raises money laundering and sanctions risk.

How is the activity regulated?

FATF guidance treats it as higher risk and calls for enhanced due diligence. National laws add their own requirements, such as the US Bank Secrecy Act with its rules on customer checks, record keeping and reporting.

Can stablecoins replace the whole chain?

Not entirely. They can take over parts of it by moving value on a blockchain within minutes. Businesses still need regulated partners for on-ramps, off-ramps, customer checks and sanctions screening.

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