Cross-Border Payments: Correspondent Banking 101

By Mark Castellani on The Capital

In this article, I first explain how different settlement systems work, and I then walk through two examples of cross-border payments through a correspondent banking network

1. A payment in US Dollar (USD) that must be received in Euro (EUR) through one correspondent bank, and
2. A payment/receipt in USD between two companies outside the United States (a German company and its Japanese supplier) using multiple correspondent banks. You’ll note as I walk through the example that while the sender can ultimately deliver USD or the local currency (in this case EUR or JPY) to the beneficiary’s correspondent bank, finally for the beneficiary bank to take receipt of the funds, they must be converted to the local currency at some point in the process.

Settlement Systems

There are two main types of settlement systems: Real-Time Gross Settlement and Continuous Net settlement.

1. Real-time gross settlement (RTGS) system

is used for high-value urgent payments, and sacrifice liquidity efficiency for lower settlement risk… — A real-time gross settlement (RTGS) system allows money to be moved in real-time and with settlement finality…