Intermediary banks and correspondent banking

An intermediary bank is a bank that sits between the debtor agent and the creditor agent in a payment chain and helps to move funds when the two agents do not have a direct relationship. In cross border payments, a payment from a small bank in one country to a small bank in another country will often pass through one or more intermediary banks that hold accounts with both sides. Each intermediary receives the payment instruction, debits one account, credits another, deducts any charges it is entitled to, and forwards the payment onward. The chain can be short, with a single intermediary, or long, with three or more banks involved. Correspondent banking is the network of account relationships that makes this possible. A bank holds a nostro account, which is its own account held with another bank in a foreign currency, and it holds vostro accounts, which are accounts it holds on behalf of other banks. When Bank A in London wants to pay in US dollars to Bank B in Singapore, it may use its nostro account with Bank C in New York, which then pays Bank B. Each link in the chain must be documented, screened, and reconciled, and each link adds time, cost, and risk. The longer the chain, the greater the chance of a delay, a deduction, or a compliance hold. The move to ISO 20022 and to initiatives such as the SWIFT gpi tracker and CBPR Plus is partly an attempt to make these chains more transparent, so that the debtor and creditor can see where their payment is and what charges have been deducted. As an analyst, you must be able to draw the chain for any payment you work on, name each intermediary, and explain why it is there. You should also understand the difference between a serial payment, where the instruction and the funds travel together through each bank, and a cover payment, where the customer instruction and the bank to bank settlement travel separately. That distinction is the key to understanding MT103 versus MT202 and pacs zero zero eight versus pacs zero zero nine. Worked example with real numbers: a customer of Bank A in London pays USD 85,000 to a supplier at Bank B in Singapore, and the payment passes through intermediary Bank C in New York by the serial method. Bank A sends a pacs.008 to Bank C for USD 85,000, Bank C debits the Bank A vostro account and credits its nostro at Bank B, and Bank C sends a pacs.008 to Bank B, which credits the supplier USD 85,000. Under OUR the supplier receives the full USD 85,000, and Bank A pays the intermediary charges separately, while under SHA the supplier would receive less, and the shortfall would be a complaint. The chain must be visible to the customer through the SWIFT gpi tracker, with the time the payment arrived at and left each bank. Failure and recovery: an intermediary bank that rejects a pacs.008, because a field is missing, sends a pacs.002 with status RJCT, and the debtor agent must correct the field and resend, or reroute the payment through a different intermediary. An intermediary bank that holds a payment for sanctions review must complete the review within its SLA, or the payment is delayed, and the customer must be told it is held, not that it is in progress. Each failure is a chain failure, and the recovery follows the chain backwards, from the bank that failed to the bank that sent it, with the end to end identifier as the key that links the messages. For a business analyst, product owner or subject matter expert, the test is to draw the correspondent chain for any cross-border payment, naming each bank, its role, its BIC, its charge and its cut-off, and to state the method, serial or cover, and the charge arrangement, OUR, SHA or BEN. The ISO 20022 pacs.008 carries the intermediary agent as a separate party, and the SWIFT gpi tracker shows the payment status at each bank, so the requirement must map the chain to the message and to the tracker. A requirement that says international payment, without naming the chain, the method and the charges, will produce a payment the customer cannot track and a supplier who receives the wrong amount.