Correspondent Banking
Sovereign Assets • Layer 1s • Payment Networks
intermediary bank network for cross-border payments
Correspondent Banking is the traditional system in which two banks in different countries establish reciprocal accounts and agreements to facilitate international payments and settlements. These relationships form the backbone of cross-border payment infrastructure, enabling money to move globally even when the sender and receiver do not bank with the same institution. However, correspondent banking often introduces delays, high costs, and lack of transparency, as funds must pass through several intermediary banks before reaching their final destination.
Use Case: When a business wires money from the U.S. to India, the payment may be routed through multiple correspondent banks in New York, London, and Mumbai before being credited to the recipient’s local bank account.
Key Concepts:
- Cross-Border Payments — The main reason correspondent banking networks exist
- Finality — Each step between banks must reach a final, irreversible state before funds are released
- Currency Conversion — Intermediary banks often handle exchanging between different fiat currencies
- Remittance — Individual or business payments sent internationally often travel via correspondent banks
- SWIFT Rails — Messaging system coordinating correspondent bank transactions
- Liquidity Bridging — Blockchain alternative eliminating correspondent intermediaries
- $XRP — Bridge currency designed to replace correspondent banking corridors
- Bridge Currency — Neutral asset enabling direct settlement without intermediaries
- Stablecoins — Digital dollars bypassing correspondent bank chains
- Permissioned — Correspondent banking operates as closed, permissioned network
- Decentralization — Property absent from correspondent banking by design
- Trustless — Blockchain settlement requiring no intermediary trust
Summary: Correspondent banking is the legacy mechanism for moving money internationally, but is being rapidly challenged by blockchain and digital asset networks that offer faster, cheaper, and more transparent alternatives.
How Correspondent Banking Works
the chain of intermediaries moving your money
1. Sender instructs local bank to wire funds
2. Local bank sends SWIFT message to US correspondent
3. US correspondent debits nostro, sends to UK correspondent
4. UK correspondent routes to India correspondent
5. India correspondent credits local bank’s vostro account
6. Local bank credits recipient’s account
7. Settlement reconciled days later
Each step: Compliance checks, fees extracted, time added
• “Our money at your bank”
• Pre-funded in foreign currency
• Held at correspondent banks
• Capital locked up globally
• Requires constant rebalancing
• Expensive to maintain
• “Your money at our bank”
• Mirror of nostro relationship
• Receives incoming funds
• Reciprocal arrangement
• Enables bilateral settlement
• Same capital inefficiency
The Correspondent Banking Problem
why the system is breaking down
• Banks exiting “risky” corridors
• Emerging markets cut off
• Compliance costs too high
• Small banks losing access
• Financial exclusion growing
• 25% fewer relationships since 2011
• Few mega-banks dominate
• Single points of failure
• Geopolitical weaponization
• Sanctions enforcement tool
• Access = political favor
• Vulnerable corridors
• Originating bank fee: $15-30
• Each intermediary: $10-25
• Receiving bank fee: $10-20
• FX markup: 1-4%
• Total: $40-100+ per transfer
• Plus opportunity cost of delays
• Migrant workers (remittances)
• Small businesses (trade)
• Emerging market citizens
• Time-sensitive payments
• Low-value transactions
• Anyone outside major corridors
Blockchain Disruption of Correspondent Banking
how crypto eliminates the intermediary chain
• Multiple intermediary hops
• Pre-funded nostro accounts
• Multi-day settlement delays
• Opaque fee stacking
• Business hours limitations
• Geographic restrictions
• Direct peer-to-peer settlement
• On-demand liquidity
• Seconds to finality
• Transparent, predictable fees
• 24/7/365 availability
• Permissionless global access
Real-World Corridor Comparison
correspondent banking vs crypto for common routes
Correspondent Banking Checklist
understanding legacy vs blockchain payments
☐ Know correspondent = intermediary chain
☐ Understand cross-border flow
☐ Know settlement finality delays
☐ Understand currency conversion
☐ Know remittance impact
☐ Understand nostro/vostro accounts
☐ Know SWIFT rails role
☐ Understand permissioned access
☐ Know de-risking crisis
☐ Understand concentration risk
☐ Know fee stacking
☐ Recognize capital inefficiency
☐ Know liquidity bridging
☐ Understand $XRP ODL model
☐ Know bridge currency concept
☐ Understand stablecoin corridors
☐ Know decentralization benefits
☐ Understand trustless settlement
☐ What’s the true total cost?
☐ How many intermediaries involved?
☐ What’s actual settlement time?
☐ Is corridor at risk of de-risking?
☐ What blockchain alternatives exist?
☐ What’s the business case for switch?