Intermediary Bank Services
An intermediary bank acts as a conduit in international or cross-border transactions when the sending bank and the receiving bank do not have a direct correspondent relationship. For an intermediary bank to operate effectively between the sending and receiving banks, certain relationships and arrangements must be in place:
1. Correspondent Banking Relationships:
- With the Sending Bank: The intermediary bank must have a correspondent banking relationship with the sending bank. This involves mutual agreements to provide services and settle transactions on behalf of each other.
- With the Receiving Bank: Similarly, the intermediary bank must have a correspondent relationship with the receiving bank. This enables the intermediary bank to transfer funds onward to the receiving bank.
- Nostro Account: This is an account that a bank holds with another bank, usually in that bank’s currency (here, with the intermediary bank). The sending bank might have a Nostro account with the intermediary bank to facilitate the transfer.
- Vostro Account: Conversely, the intermediary bank might hold a Vostro account for the sending or receiving bank, allowing it to manage funds on their behalf.
2. SWIFT Network Membership:
The banks involved typically exchange payment instructions over the Swift (Society for Worldwide Interbank Financial Telecommunication) network, either directly as Swift users or through a bank that connects them. Since November 2025, cross-border payment messages use ISO 20022 (pacs.008, pacs.009).
3. Clearing and Settlement Systems:
The intermediary bank must have access to international clearing and settlement systems that enable it to process and settle transactions between different currencies and banking jurisdictions.
4. Regulatory Compliance and KYC/AML Policies:
- Correspondent due diligence: The intermediary bank must carry out due diligence on the banks for which it holds accounts (FATF Recommendation 13), including their ownership, supervision and AML controls.
- Anti-Money Laundering (AML): Compliance with AML regulations is crucial to prevent illicit activities. The intermediary bank must monitor transactions for suspicious activities.
5. Credit and Risk Management Agreements:
The intermediary bank may establish credit lines or risk management agreements with the sending and receiving banks to manage the financial risks associated with the transactions.
6. Fee and Charge Agreements:
There must be clear agreements on the fees and charges associated with using the intermediary bank’s services, including any currency conversion fees, transaction fees, and handling charges.
7. Technological Compatibility:
The banking systems of all parties involved must be technologically compatible to ensure smooth communication and transaction processing. This includes compatible payment processing systems and message formats.
8. Legal and Contractual Agreements:
Formal contracts outline the responsibilities, liabilities, and obligations of each party. These agreements are essential for resolving disputes and ensuring smooth operation.
9. Communication Protocols:
Established protocols for communication ensure that all parties can quickly and effectively address any issues that arise during the transaction process.
By establishing these relationships and agreements, the intermediary bank can effectively facilitate transactions between the sending and receiving banks, even when they do not have a direct relationship. This network of relationships ensures that funds are securely and efficiently transferred across international borders.
