An intermediary bank acts as a mediator between originating and receiving banks during international financial transactions when direct transfers aren’t possible. Often, these banks have established relationships or agreements with banks around the world, which they use to facilitate the movement of funds across borders. This is particularly useful when the sending and receiving banks do not have a direct relationship or when different currencies are involved.

Global cross-border payments exceeded $190 trillion USD in 2023 and are expected to reach $290 trillion USD by 2030, highlighting the increasing demand for intermediary banks’ services. Below, we’ll explain what intermediary banks do, what types of businesses and financial transactions use intermediary banks, and the types of fees associated with intermediary banks.

What’s in this article?

• What do intermediary banks do?
  
• What types of businesses use intermediary banks?
  
• What kinds of financial transactions use an intermediary bank?
  
• Intermediary vs. correspondent banks
  
• Types of fees associated with intermediary banks
  
• Examples of intermediary banks
  

What do intermediary banks do?

Here’s how intermediary banks participate in financial transactions.

• Transfer facilitation: Intermediary banks act as a bridge between the bank that sends the wire transfer and the bank that receives it. This is common in international transactions where banks operate in different countries with different financial regulations and systems.

• Currency exchange: If a transfer needs to be converted from one currency to another, intermediary banks can handle this conversion before the funds reach the final destination.

• Network access: Intermediary banks provide access to financial networks to which smaller banks might not have direct access, allowing them to engage in international transactions.

• Fee collection: Intermediary banks typically charge fees for their services, which can be deducted from the transferred amount. These fees vary depending on the bank, the complexity of the transaction, and the countries involved.

• Regulatory compliance: Intermediary banks ensure compliance with international banking regulations, including Anti-Money Laundering (AML) laws and other regulatory requirements.

What types of businesses use intermediary banks?

Any business involved in international transactions – buying or selling goods, offering services, or receiving donations – will likely use an intermediary bank at some point. While multinational corporations and large importers and exporters are frequent users, smaller businesses and individuals engaging in cross-border payments also rely on intermediary banks. If the transfer involves different countries, currencies, or banks without a direct relationship, an intermediary bank is required to facilitate the transfer.

What kinds of financial transactions use an intermediary bank?

Intermediary banks are used in the following situations:

• When the sender’s bank (originating bank) and the recipient’s bank (beneficiary bank) don’t have a direct financial relationship or account with each other

• When transactions involve multiple currencies, multiple countries, or complex payment routes

• When smaller banks don’t have the resources or infrastructure to handle international transactions directly

• When transactions involve countries or entities under sanctions or embargoes, intermediary banks can ensure compliance with legal restrictions

• When transactions involve large amounts of funds, intermediary banks can manage risk and securely transfer funds

• When it’s a specialised payment type such as documentary collections or letters of credit

Intermediary vs. correspondent banks

The terms “intermediary banks” and “correspondent banks” are often used interchangeably in the context of international banking, but these entities can represent slightly different roles depending on the specifics of the transaction. Both types of banks facilitate international banking transactions, but correspondent banks often have a broader scope of ongoing services, while intermediary banks are specifically involved in the chain of transfers for particular transactions. In practice, a bank might act as both a correspondent and an intermediary, depending on the transaction and the primary banking institutions’ needs.

Here’s how these types of banks compare.

Correspondent banks

Correspondent banks are financial institutions that provide services to another bank, usually in a different country. Correspondent banking relationships are often established through formal agreements that cover a range of services beyond just transferring funds. They act on behalf of the other bank to conduct business transactions, facilitate wire transfers, handle business accounts, or manage document exchanges under reciprocal agreements. The main functions of correspondent banks include:

• Settling trades for securities and other types of transactions

• Exchanging currency and executing foreign transaction settlements

• Providing smaller banks with access to international markets and banking networks

Intermediary banks

Intermediary banks are banks specifically involved in the process of international wire transactions. They act when multiple banks are needed to connect the sender and receiver, often because the primary financial institutions do not have a direct exchange path or relationship. Intermediary banking is typically transaction-specific, focusing mainly on facilitating fund transfers that require multiple banks. The main functions of intermediary banks include:

• Helping to move funds from the sender’s bank to the recipient’s bank

• Managing and deducting fees associated with international transfers

• Ensuring that transfers comply with international banking regulations

Types of fees associated with intermediary banks

It’s important to research and consider the fees associated with intermediary banks when preparing to conduct international transactions. These fees are not standardised and vary depending on several factors. Here are the types of fees you can expect.

• Handling fees: A flat fee charged by the intermediary bank for processing the transaction.

• Currency conversion fees: A fee or percentage charged for currency conversion. This can include hidden markups on the exchange rate.

• Lifting charges: Additional fees imposed by other intermediary banks involved in the payment chain. These can be passed on to the sender or receiver.

• Incoming wire transfer fees: A fee charged by the recipient’s bank for receiving the international wire transfer.

The following factors can impact the type and amount of fees you face.

• Number of banks involved: The more intermediaries involved in the transaction, the higher the total fees.

• Currency and amount: Fees can vary based on the currencies involved and the amount being transferred.

• Location and relationships: The location of the involved banks and their relationships can influence the fees charged.

• Payment method: Different payment methods, such as wire transfers or online platforms, have varying fee structures.

Examples of intermediary banks

Intermediary banks are large, well-established institutions with a global presence and extensive networks. Some examples include:

• Bank of America: One of the largest banks in the United States, with a range of international banking and payment services

• BNP Paribas: A French international banking group with a large presence in global financial markets

• BNY Mellon: A leading global investment company with various financial services

• Citibank: A global financial services company with a strong presence in international trade finance and payments

• Deutsche Bank: A major European bank involved in various aspects of global financial markets

• HSBC: A leading international bank with a vast correspondent banking network

• JPMorganChase: A global leader in financial services, facilitating cross-border payments and trade finance for businesses

• Standard Chartered: A British multinational bank with a strong focus on emerging markets and international trade