What is Intermediary Bank?

An ‘intermediary bank’, also known as a correspondent bank, is a financial institution that acts as a middleman or intermediary in international financial transactions, particularly in the process of transferring funds between two different banks or financial institutions in different countries.

Here’s how it typically works:

Originating Bank: The bank where the sender or remitter holds an account initiates a cross-border funds transfer. This could be an individual sending money abroad or a company making an international payment.

Intermediary Bank: In many international transactions, especially those involving different currencies and financial systems, an intermediary bank is used as an intermediary step. The originating bank sends the funds to the intermediary bank in the sender’s country.

Correspondent Banking: The intermediary bank typically has a correspondent banking relationship with the receiving bank in the recipient’s country. This means they maintain accounts with each other to facilitate transactions. The intermediary bank sends the funds to the correspondent account it holds with the receiving bank.

Receiving Bank: The receiving bank, also known as the beneficiary’s bank, receives the funds from the correspondent account and then credits the recipient’s account with the transferred amount.

The use of intermediary banks is common in international wire transfers, and it serves several purposes:

Currency Conversion: Intermediary banks can facilitate currency conversion if the originating and receiving banks use different currencies. They convert the funds at the prevailing exchange rate.

Routing and Connectivity: They provide a bridge between banks in different countries, ensuring that the funds are routed accurately and securely.

Risk Management: Intermediary banks play a role in mitigating risks associated with cross-border transactions, such as compliance with international regulations and anti-money laundering (AML) procedures.

Efficiency and Speed: They could expedite the transaction process by handling the intricacies of international payments, reducing delays that might occur if banks tried to send funds directly to each other.

It’s important to note that while intermediary banks facilitate international transactions, they may charge fees for their services, and these fees can vary widely depending on the banks involved and the complexity of the transaction. Customers making international transfers should be aware of potential fees at each step of the process and consider them when sending funds abroad. Additionally, the use of intermediary banks can introduce an additional layer of complexity and may sometimes lead to delays or errors in international payments.