What correspondent banking is

Correspondent banking is the arrangement that lets a bank in one country make payments in another country where it has no branch, no licence and no account with the central bank. The bank opens an account with a bank in the other country, and that foreign bank acts as its correspondent, making payments and receiving payments on its behalf in the local currency and through the local payment system. A bank in India that wants to pay a supplier in Germany in euros needs a correspondent bank in Europe that holds its euro account, can send a SEPA payment, and can receive euros for it. A bank in Brazil that wants to pay in US dollars needs a correspondent bank in the United States that holds its dollar account and can send a Fedwire or CHIPS payment. The relationship is built on a correspondent banking agreement, on trust, and on compliance. The correspondent agrees to hold the account, to process payments, to provide statements, and to offer services such as foreign exchange, trade finance and intraday liquidity. In return it earns fees, it earns the benefit of holding the balance, and it gains a relationship with a bank in another market. The respondent bank, which is the bank that holds the account with the correspondent, gains access to a currency and a market it could not reach on its own. The agreement sets out the cut off times, the charges, the value dating, the overdraft terms, the service levels, and the compliance obligations on both sides. Every cross border payment that uses correspondent banking is really two things at once: a message and a movement of funds. The message travels over SWIFT, today as an ISO 20022 pacs.008 for a customer payment or a pacs.009 for a bank to bank payment, and before the CBPR+ migration as an MT103 or MT202. The funds move by debiting and crediting nostro accounts. The sending bank debits its customer's account and instructs its correspondent, the correspondent debits the respondent's nostro account, and the funds are passed along the chain until they reach the beneficiary bank. The message and the money must be reconciled at every step, and that reconciliation is what makes the system work. Correspondent banking has become harder and more expensive in recent years, a trend known as de-risking. Large correspondent banks have closed accounts for smaller banks in higher risk countries, because the cost of checking every payment for money laundering and sanctions, and the risk of a large fine if a bad payment slips through, has made some relationships unprofitable. The result is that some countries and some banks have fewer correspondent relationships than they used to, and payments to those countries can be slower and more expensive. The number of active correspondent relationships globally has fallen by roughly a third over the last decade, and the remaining relationships are concentrated in a smaller number of large global banks. The alternatives are real but they do not yet replace correspondent banking. Payment system linkages connect two domestic instant payment systems directly, central bank digital currency projects such as mBridge settle between central banks, and fintech networks use their own accounts and liquidity pools to move money. Each of these reduces the dependence on correspondent accounts for specific corridors, but none of them covers every currency, every country and every payment type. For now correspondent banking remains the backbone of cross border payments, and the analyst must design for the world as it is, not the world as it might become. A business analyst working on cross border payments must know, for each currency the bank supports, which correspondent holds the nostro account, what the cut off times are, what the charges are, what the value dating rules are, and what the service level is. The analyst must also know the nostro balance at any moment, the intraday liquidity available, and the funding process, because a payment product that cannot fund its nostro account cannot send payments at all. The correspondent banking agreement, the nostro account master data, and the routing table are the three documents that define the product, and the analyst should be able to read all three. Finally, the analyst should understand that correspondent banking is a network business. A payment from a small bank in Kenya to a small bank in Vietnam may pass through three or four correspondent banks, each adding a charge, a delay and a compliance check. The longer the chain, the more expensive and slower the payment, and the harder it is to trace. That is why large banks invest in direct relationships on the corridors that matter most, and why the routing decision, which correspondent to use for which payment, is one of the most valuable decisions in the payment engine. Worked example with real numbers: a bank in Mumbai must pay a supplier in Nairobi KES 4,200,000, and it holds no account in Kenya, so it needs a correspondent. Its standing settlement instruction for Kenya names Bank of Nairobi as its correspondent, with the account number and the charges arrangement, so the Mumbai bank sends the payment through Nairobi without asking anyone, and the supplier is credited in two days. If the instruction had named a bank the Mumbai bank no longer uses, the payment would have gone to the wrong bank, been held, and returned after four days, less a USD 25 handling charge, and the supplier would have waited a week. The SSI is therefore not paperwork, it is the routing decision, made in advance, and a stale SSI is a payment sent to the wrong bank. Failure and recovery: an SSI goes stale when a correspondent relationship changes and nobody updates the instruction, and the failure is silent, because the payment is sent, not rejected, and the error is discovered only when the beneficiary complains. The recovery is to recall the payment, correct the SSI, and resend it, but the recovery takes days, and the bank must also check whether other payments used the same SSI, because a stale SSI affects every payment on that corridor, not just one. A bank that finds one stale SSI must audit the whole SSI file, which is why SSI maintenance is a control, with an owner, a review date and a sign-off, not a file that is updated when someone remembers. For a business analyst, product owner or subject matter expert, the SSI requirement must name the instruction fields, the owner, the review cycle, the approval for a change, and the validation that the SSI correspondent is still active before a payment is sent. The ISO 20022 pacs.008 carries the correspondent in its agent fields, and the camt.053 statement proves the settlement, so the requirement must map the SSI to the message fields, and must state what happens when the SSI is missing: the payment must be held for manual routing, not sent to a default that may be wrong. A payment sent on a missing SSI is a payment sent on a guess.