What is an intermediary bank?

Intermediary banks act as a third-party financial institution for international payments between the recipient’s bank and the sender’s bank.

Intermediary banks come into play when the recipient’s bank and the sender’s bank do not have a direct relationship. It also may play a role when the recipient’s bank doesn’t have a corresponding relationship with the country where the sender’s bank is.

What do intermediary banks do?

The intermediary bank’s purpose in these international transfers involves making sure the funds are securely transferred between each party. This can include:

• Converting funds into the local currency
• Deducting fees for the transaction
• Conducting identification checks of both sender and recipient
• Bridging the bank sending the wire transfer and the bank that receives it
• Providing smaller banks with access to financial networks for international transfers
• Ensuring compliance with international banking regulations

Today, most banks have direct relationships with financial institutions in other countries, which means the role of intermediary banks has diminished over the years.

As a general rule, banks will prefer using direct bank-to-bank transfers wherever possible because it’s cheaper.

How it works

The use of intermediary banks boils down to three steps, including initiating the payment, transferring the funds, and crediting. For example, the process of an employer playing an employee overseas using an intermediary bank may go something like this:

1. The employer’s bank (known as the originating bank) transfers the funds to an intermediary bank that’s in the same country as the employer.
2. The intermediary bank then transfers these funds to another intermediary bank, located this time in the same country as the employee’s bank (known as the receiving bank). This intermediary bank then transfers the funds to the receiving bank. If possible, the first intermediary bank may transfer the funds to the receiving bank directly.
3. Finally, the receiving bank credits the employee’s account with the funds.

Intermediary vs correspondent banks

Intermediary banks sometimes get lumped in with correspondent banks. But while both kinds are used for international payments, these entities have different roles depending on the transaction. Correspondent banks can have more ongoing services, while intermediary banks focus on the chain of transfers for certain transactions. Here are some other key differences.

Correspondent banks:

Correspondent banks are financial institutions that provide services to foreign banks. Correspondent banking covers a range of services besides transferring funds. They execute business transactions, facilitate wire transfers, manage business accounts and document exchanges for another bank.

A correspondent bank can:

• Settle trades for securities and other transactions
• Exchange currency and settle foreign transactions
• Give smaller banks access to international banking networks
• Adhere to strict regulations and due diligence procedures to reduce the risks of money laundering and fraud
• Established legal agreements with other banks

Intermediary banks

Intermediary banks are used during international wire transactions. Intermediary banking mainly facilitates fund transfers that require multiple banks. Functions include:

• Transferring funds from the sender’s bank to the recipient’s bank
• Managing and deducting fees for international transfers
• Ensuring transfers follow international banking regulations

​​Intermediary banks:

• Don’t always have established legal agreements with each other.
• Act as the in-between for financial transactions between two parties. Other services aren’t usually included.
• Are often seen as higher risk in terms of payment timing because it’s more difficult to track the fund flow and make sure compliance with regulation is happening.

Types of fees associated with intermediary banks

Intermediary banks are notorious for sneaking in fees wherever possible, whether for the transaction itself or action behind the scenes, like currency conversion. Here are some examples of potential fees:

• Handling fees: A flat fee the intermediary bank charges to process the transaction.
• Currency conversion fees: A fee or percentage charged to convert currency conversion.
• Lifting charges: Fees imposed on the sender or receiver by intermediary banks.
• Incoming wire transfer fees: A fee the recipient’s bank charges for receiving the international wire transfer.

Several factors can determine the type and amount of fees charged:

• How many banks are involved: The more intermediaries handling the transaction, the higher the total fees.
• Currency and amount: Fees vary based on the currencies and the amount transferred.
• Location and relationships: The location of the involved banks and their relationships can impact the fees.
• Payment method: Different payment methods have varying fee structures.

Examples of intermediary banks

Examples of intermediary banks include:

• Bank of America: A US bank offering international banking and payment services
• BNP Paribas: A French international banking group
• BNY Mellon: A global investment company offering financial services
• Citibank: A global financial services company providing international trade finance and payments
• Deutsche Bank: A European bank operating in global financial markets
• HSBC: An international bank with a massive correspondent banking network
• JPMorganChase: A global leader in financial services, powering cross-border payments and trade finance for businesses
• Standard Chartered: A British multinational bank specializing in emerging markets and international trade

Risks with intermediary banks

Over the years, intermediary banks have succeeded in building a reputation for themselves as a trusted service for transferring payments overseas.

Still, intermediary banks tend to be viewed with more speculation. This is especially true in global workforce payments, where intermediary banks are often used to transfer salaries to employees.

Here are the biggest risks associated with relying on intermediary banks for global workforce payments:

• Delays: Where there are banks, there are legacy systems. And in this case, intermediary banks’ often outdated infrastructure can result in payment delays – leaving employees dealing with debt and employers dealing with fines.
• Complexity: The more banks that are involved in the transfer process, the greater the likelihood of error, risk, and fraud throughout the process.
• Compliance: Involving intermediary banks in the process makes it harder for companies to comply with international payments regulations, due to all the parties involved in the process. Each one may carry its own set of regulation and compliance hoops that companies need to jump through.
• Lack of transparency: There’s a lot that goes into international payments, yet intermediary banks tend not to offer a lot of transparency into their own activities. For companies this can be a big source of concern since it’s hard to know whether the payments are being processed properly or not.
• Exchange rate fluctuations: Currency fluctuates – there’s no avoiding it. Unfortunately, intermediate banks often don’t have the technology to manage these fluctuations. This means employees can end up with a salary that’s higher or lower than what they were supposed to receive.

Exploring payment distribution platforms as an alternative to intermediary banks

Overall, while intermediary banks have succeeded in building a reputation for themselves in global payments, they also bring a whole lot of challenges for companies, including an influx of fees and a lack of transparency.

Payment distribution platforms can solve a lot of these obstacles, including offering:

• Automated and efficient payment processes that reduce the risk of error and delays
• Compliance monitoring and reporting
• An ability to transfer funds across different countries and in multiple currencies without being hindered by fluctuation