What is a correspondent account?
A correspondent account called also a nostro or vostro account is an account opened by a bank for another bank or financial institution. On this account, the bank can receive deposits from, make payments on behalf of, or handle other financial transactions. Usually, the correspondent accounts are the accounts of banks in a country other than the place of registration in order to get the ability to pay and receive foreign currency. The correspondent accounts can be used to pay for their clients from the account or to receive money for their clients from others into the account. This correspondent account gives the bank the ability to offer additional services to its customers such as currency exchange and foreign currency-denominated loans and deposits. The banks require such a correspondent account for international trading. This international trading requires people and businesses to pay for things in a currency other than their own.
Usually, international wire transfers often occur between banks that do not have an established financial relationship. In such case, banks cannot send transfers directly but they must use correspondent banks ad intermediary. For example, a bank in Germany has received instructions to wire funds to a bank in China. German banks cannot wire funds directly without a working relationship with the receiving bank. German bank knows that it does not have a working relationship with the destination bank, so it can search the SWIFT network for a correspondent bank that has arrangements with both banks. When the German bank finds this correspondent bank having arrangements with both sides of the transfer, the originating bank sends the transferred funds to its account held at the correspondent bank. The correspondent bank deducts its transfer fee and transfers the funds to the receiving bank in China.