Correspondence banks can also act as agents to carry out local transactions for customers when they travel abroad. At the local level, correspondence banks can accept deposits, process documentation and act as money transfer agents. Correspondence banks are a central part of the financial industry, as they allow domestic banks to operate when they cannot open branches elsewhere, especially in a foreign country. For example, a small national bank may work with clients from different countries with a correspondence bank to meet the needs of its clients internationally. It will also allow them to access the foreign financial market. Therefore, the correspondence bank collects a fee for this service, which is usually passed on by the national bank to the customer. A correspondence bank must act as an intermediary when the issuing and receiving banks do not have transfer agreements. Most international transfers are made via the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network. In the absence of an employment relationship, the home bank may search the SWIFT network for a correspondence bank that has agreements with both banks. If a correspondence bank has entered into agreements with both parties to the transfer, the home bank sends the transferred funds to its Nostro account with the correspondent bank. While there are some similarities between correspondence banks and intermediary banks – namely that they act as third parties for other banks – there is a big difference between the two. While correspondence banks normally conduct transactions on multiple currencies, an intermediary bank enters into transactions with a single currency. They are particularly important for national banks, which may be too small to carry out such transactions.
In the example above, the mail-order bank deducts its transfer fee, normally $25 to $75, and transfers the money to the receiving bank in Japan. For transactions like this, the correspondence bank brings added value in two ways. It reduces the need for the national bank to establish a physical presence abroad and avoids working to conclude direct agreements with other financial institutions around the world. The term correspondence bank refers to a financial institution providing services to another company, normally in another country. It acts as an intermediary or agent, facilitates transfers, carries out commercial transactions, accepts deposits and collects documents on behalf of another bank. Correspondence banks are most likely to be used by domestic banks to carry out transactions that are either carried out abroad or concluded. Domestic banks typically use correspondence banks to access foreign financial markets and serve international customers without having to open branches abroad. Accounts between correspondence banks and the banks for which they provide services are called Nostro and Vostro accounts. An account managed by one bank for another is designated by the bank holding the Nostro account name or our account in your books. The same account is called Vostro account by the counterparty bank – your account, but in our books.
As a rule, in a correspondence relationship, the two banks keep accounts for each other in order to track direct debits and credits between the parties. Correspondence banks are third-party banks. They act as intermediaries between different financial institutions. As such, they offer treasury services between issuing banks and beneficiary banks, especially in different countries – such as for example: international transfers often take place between banks that do not have an established financial relationship. . . .