What Is Correspondent Banking

What is Correspondent Banking and How Does It Work?

Understanding what correspondent banking is becomes easier when looking at how international payments move between institutions. No bank has a direct relationship with every other bank in the world. That would require thousands of bilateral agreements, regulatory licenses in every jurisdiction, and capital reserves maintained in every currency. Instead, banks maintain accounts, called nostro and vostro accounts, with a select group of correspondent partners, typically large global institutions that serve as hubs in the network.

When a payment needs to travel from a regional bank in Mexico to a mid-sized bank in Vietnam, it doesn't go directly. It moves along a chain that might look like this:

• The Mexican bank routes the payment to its US correspondent bank
• The US correspondent routes it to a larger institution with Asian connections
• That institution routes it to a regional correspondent in Southeast Asia
• The regional correspondent delivers it to the Vietnamese bank

Each institution in that chain processes the payment in its own batch cycle, applies its own compliance screening, deducts its own fee, and passes the net amount forward. The sending company has no visibility into which institutions are handling the payment at any given point, and the receiving company has no way to know when it will arrive until it does.

In favourable conditions, no compliance holds, no currency conversion complications, no bank holidays in any of the relevant jurisdictions, this takes two to five business days. In less favourable conditions, it takes longer, and the reasons are difficult to diagnose without contacting each institution individually.

What It Costs in Practice

Correspondent banking fees are not always visible at the point of initiation, which makes them operationally awkward for treasury teams. The costs typically include:

• Lifting fees charged by the originating bank to send the payment into the correspondent network
• Correspondent bank charges are deducted by each intermediary institution as the payment passes through
• FX conversion spreads are applied at whichever point in the chain currency conversion occurs, often at a rate the sender didn't agree to and can't verify until the payment settles
• Receiving bank fees are charged at the destination end before the funds reach the beneficiary's account

The cumulative effect is that the amount received is often less than the amount sent, sometimes meaningfully so on smaller transactions, and the difference is only visible after the fact. For a finance team reconciling international vendor payments, this creates a persistent mismatch between what was authorised and what landed.

At scale, a treasury team running hundreds of cross-border payments monthly, the cost is high. But the operational overhead of investigating discrepancies, chasing delayed payments, and reconciling fee deductions across currencies and institutions is often more expensive than the fees themselves.

Why Compliance Adds Another Layer of Friction

Every correspondent bank in the chain applies its own AML and sanctions screening. That's not a design flaw, it's a regulatory requirement. But it means a single payment can be screened multiple times by multiple institutions with different risk appetites, different watchlist configurations, and different thresholds for requesting additional documentation.

A payment that clears screening at the originating bank can still be held by a correspondent three hops down the chain if something in the transaction, the amount, the counterparty name, or the destination country triggers a review at that institution. When that happens, the originating company often doesn't know until they notice the payment hasn't arrived and start making phone calls.

This is not an edge case. For payments into or out of markets with elevated AML risk ratings, compliance-related delays are a routine operational reality.

How Stablecoin Rails Remove the Intermediaries

Stablecoin payments on blockchain rails don't route through a correspondent banking chain. There are no intermediary institutions, no nostro accounts, no sequential batch processing across multiple time zones. The payment moves directly from sender to recipient, with settlement confirmed on-chain in seconds, and the transaction record is complete and auditable from the moment it executes.

The cost structure changes entirely. There are no lifting fees, no mid-chain deductions, and no FX spreads applied at an intermediary stage. The amount sent is the amount received. And because blockchain operates continuously, there are no cut-off windows, no bank holidays, and no processing queues that cause a Friday payment to sit until Monday.

For enterprise treasury teams, this isn't an incremental improvement on correspondent banking. It's a different architecture that solves the structural problems rather than working around them.

How Merge Handles the Cross-Border Payments

Merge routes cross-border B2B payments via stablecoin rails rather than the correspondent banking network, which means the multi-hop routing, intermediary fees, and compliance holds that characterise SWIFT-based transfers don't apply.