Correspondent Banking
Legacy Payments, International Settlement
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 recipientÔÇÖs local bank account.
Key Concepts:
- Cross-Border Payments ÔÇö The main reason correspondent banking networks exist.
- Settlement Finality ÔÇö Each step between banks must reach a final, irreversible state before funds are released.
- Currency Conversion ÔÇö Intermediary banks often handle exchanging between different fiat currencies.
- Remittance ÔÇö Individual or business payments sent internationally often travel via correspondent banks.
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.
| Aspect | Correspondent Banking | Blockchain/Crypto |
|---|---|---|
| Speed | 2ÔÇô5 business days | Seconds to minutes |
| Transparency | Opaque, hard to track progress | Fully transparent, on-chain |
| Fees | High (multiple intermediaries) | Low (direct transfer) |
| Reliance | Multiple banks and checkpoints | Peer-to-peer or direct settlement |
| Examples | SWIFT, Fedwire, legacy wire transfers | XRP Ledger, Stellar, USDC on-chain |