A correspondent bank is a bank that provides services on behalf of another financial institution. Correspondent banks are most likely to be used by domestic banks to service transactions that either originate or are completed in foreign countries, acting as a domestic bank's agent abroad.
For example: in case you transfer USD to a bank account in Singapore, the correspondent bank is the bank through which your bank in Singapore receives foreign currencies. Your bank in Singapore will have a correspondent bank in the US through which they receive USD. When you place a withdrawal request for USD, the funds will first be sent from our US bank account to the correspondent bank of your bank in the US and they will then send the funds to your bank in Singapore.
Generally speaking, the reasons domestic banks employ correspondent banks include the limited access to foreign financial markets and the inability to service client accounts without opening branches abroad.
Correspondent banking is an essential component of the global payment system, especially for cross-border transactions. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion.
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