Account structures: direct, nested and payable through

Not every bank has a direct correspondent relationship with a bank in every country, and the account structures that fill the gaps are important for an analyst to understand. In a direct relationship, Bank A holds an account with Bank B and uses it to make payments in Bank B's country. This is the simplest structure and the one with the fewest intermediaries, so it is usually the fastest and the cheapest. A large bank that trades heavily with the United States will have a direct dollar account with a large US bank, and a large bank that trades heavily with Europe will have a direct euro account with a large European bank. Direct relationships are preferred wherever the volume justifies them, because each intermediary adds cost, time and risk. In a nested relationship, a smaller bank holds an account with a larger bank in its own country, and uses that larger bank's correspondent accounts to reach other countries. For example, a small bank in Kenya may hold an account with a large Kenyan bank, and the large Kenyan bank holds a dollar account in New York. When the small bank needs to pay USD 50,000 in dollars, it instructs the large Kenyan bank, debiting its account with that bank, and the large Kenyan bank instructs its New York correspondent, debiting its own dollar nostro. The payment passes through an extra bank, which adds a day or a fee, but it gives the small bank access to a currency it could not reach on its own. The nested structure creates a specific compliance risk that the analyst must know about. The large bank in the middle is processing payments for customers it does not know, on behalf of a bank it does know. The correspondent in New York sees the large Kenyan bank as the originator, not the small bank's customer. The Wolfsberg Group calls this nested correspondent banking, and it requires the intermediary bank to understand the business of the nested bank, to apply risk based controls, and to be able to identify the underlying originator when asked. A bank that offers nested services without those controls is taking a risk that regulators have fined heavily for, and several large banks have exited nested relationships for exactly this reason. A payable through account is a third structure, where a bank allows its respondent's customers to issue cheques or payment instructions directly on the correspondent account, as if they were customers of the correspondent. The correspondent cannot easily check the identity of the customers who are using its account, and regulators have pushed banks to reduce or close payable through arrangements. The analyst should know the term, because it still appears in older documentation and in some markets, but should not design a new product around it. The direction of the industry is towards direct and nested relationships with clear identification of the parties, not towards structures that hide the originator behind an intermediary. There is a fourth structure that is becoming more important: access through a payment system rather than through a correspondent account. A bank can join a regional clearing system, or use a fintech network that holds accounts on its behalf, or route through a payment service provider that aggregates volume. In each case the bank does not hold its own nostro, but relies on the intermediary's accounts and liquidity. The cost is usually lower and the setup is faster, but the bank gives up control over the routing, the cut off times and the compliance screening, and it must trust the intermediary's controls. The analyst should evaluate these options corridor by corridor, because the right structure for a high volume corridor is often different from the right structure for a low volume one. Opening a correspondent account is itself a project that takes months. The respondent must submit its Wolfsberg questionnaire, its audited financials, its licences, its ownership structure, and evidence of its anti money laundering and sanctions controls. The correspondent's compliance team reviews the file, asks questions, and may visit the respondent. The legal team negotiates the agreement, covering charges, cut off times, value dating, overdraft terms, liability, and termination. The operations teams test the SWIFT connectivity, exchange test messages, agree the statement format, and run a pilot payment. An analyst who is asked to open a new corridor should plan for three to six months, and should start the compliance file first, because it is almost always the longest part. The analyst's practical takeaway is to map the structures before designing the flow. For each currency and each destination, the analyst should be able to answer: is this direct, nested, or through an intermediary, which banks are in the chain, what does each one charge, what is the cut off at each step, and who screens the payment. That map is the foundation for the routing table, for the customer promise on speed and cost, and for the exception handling when a payment goes wrong. A payment flow designed without that map will fail the first time a corridor is used in production. Worked example with real numbers: a small bank in Dhaka needs to pay in USD, but no large US bank will open an account for it directly, so it uses a nested relationship: it holds a USD account with a bank in Singapore, which holds a USD account with a bank in New York, and the Dhaka payment travels Dhaka to Singapore to New York, with each hop adding a day and a charge of USD 12. A USD 50,000 payment arrives as USD 49,976, after two deductions, in three days, while a bank with a direct relationship would have paid USD 15 and arrived in one day. The nested account is therefore a real service, but it is slower and more expensive, and the BA must document the cost and the time, so the customer is not promised a direct service at a nested price. Failure and recovery: a nested relationship fails when the middle bank closes the account, or when the middle bank holds the payment for compliance review, and the Dhaka bank cannot see why, because it has no relationship with the New York bank, and must ask Singapore, which must ask New York, so the investigation takes days. The recovery is to ask the middle bank for the status, to escalate through the relationship manager, and to consider a second nested route, so the corridor has a fallback. A bank that depends on one nested route has a single point of failure that it cannot even see, because the failure is two hops away, and the BA should require the nested chain to be documented hop by hop, with the status enquiry path for each hop. For a business analyst, product owner or subject matter expert, the account structure requirement must name each structure, direct, nested and payable-through, the cost and time of each, the compliance responsibility at each hop, and the fallback. The ISO 20022 pacs.008 carries the agent chain, and the requirement must map each structure to the agent fields, so that a payment through a nested chain can be traced hop by hop, and the UETR must be carried at every hop, because without it the investigation cannot link the legs. A nested payment without a UETR is a payment that cannot be traced.