What is an intermediary bank in international payments?

An intermediary bank is a third-party financial institution that facilitates international payments between the sender's bank and the recipient's bank. It comes into play when the two banks do not have a direct relationship or when the recipient's bank lacks a corresponding relationship with the sender's bank.

What is the role of an intermediary bank in international transfers?

The primary purpose of an intermediary bank in international transfers is to ensure the secure transfer of funds. This includes tasks like converting funds into local currency, deducting transaction fees, and conducting identification checks of both the sender and recipient.

How does the process involving an intermediary bank work?

The process typically involves three steps: initiation, transfer, and crediting. For example, when an employer pays an overseas employee using an intermediary bank: The employer's bank (originating bank) transfers funds to an intermediary bank in the same country as the employer. The intermediary bank may transfer funds to another intermediary bank in the same country as the employee's bank or directly to the receiving bank. The receiving bank credits the employee's account with the funds.

What is the difference between an intermediary bank and a correspondent bank?

While both intermediary and correspondent banks are used for international payments, they have key differences: Correspondent banks adhere to strict regulations, have legal agreements with each other, and offer various services. Intermediary banks may lack established legal agreements and mainly act as intermediaries for financial transactions, often seen as higher risk.

What are the risks associated with intermediary banks in global payments?

Risks include additional fees, payment delays due to outdated infrastructure, complexity in the process, compliance challenges, lack of transparency into activities, and exposure to currency exchange rate fluctuations.

How can payment distribution platforms provide an alternative to intermediary banks?

Payment distribution platforms offer automated and efficient payment processes, compliance monitoring, multi-currency transfers, and reduced risk of errors and delays. They can mitigate challenges associated with intermediary banks in global payments.