Banking is carried based on the relations maintained with other banks, domestically the relation is established and authorized by central banks or central authority of the region, in the world of cross border payments where mostly payment is carried with SWIFT network and connection, the relationship is maintained with correspondent relationships maintained with other banks (mostly in other currencies), the relationship now-a-day is not only with correspondent relation but also what type of message and files that can be sent or received.
Example of how money moves with correspondent banking :
Let say we have below relations maintained with the following banks
Virgin Estates company is banking with bank Small Bank USA in USD | in USA , USD |
Small Bank USA uses CITI bank for processing and settlement of transactions | in USA , USD |
CITI bank has USD/GBP relationship with BNP Paribas in UK | in UK , GBP |
Well Fargo bank has a domestic GBP /GBP relationship with Barclays bank | in UK , GBP |
WillGet Estate company in UK banks with Barclays bank | in UK , GBP |
Let say Virgin Estates has made a deal of purchasing a property in London and is having business with WillGet Estate , and Virgin Estate is required to pay 200000 GBP to WillGet Estates , below are the chargea s and charges conditions that utilized between banks.
Small Bank USA charges seperately to customer for sending payments to CITI bank domestic transfer | Not included in transaction or while posting in customer account for the transaction | USD 0 |
CITI, US BANK charges 20 USD to Small Bank US for transaction less than USD 100000 via correspondent banking | included in the transaction or while posting in Sender customer account for the transaction | USD 20 |
Well Fargo, UK bank charges GBP 10 to CITI Bank for each international transactions for managing USD /GBP corresponding with it | included in the transaction or while posting in beneficiary customer account for the transaction | GBP 10 |
Well Fargo forwards the payment to Barclays , Barclays does not charge anything to beneficiary for receiving payment via domestic routes | no fee | GBP 0 |
Below diagram shows the amount deduction at every bank processing and sending the money to the beneficiary. here the exchange charges and type has been set OUR. (zoom the page for more better view).
Narration on the movement and steps:
How much is the amount Small Bank has debited from Virgin Estate bank account and forwarded the amount depends upon the arrangement set by the bank to its customer on the international payments if Small Bank asks some fee the bank will charge for every payment transaction done, it would add this charge on top of the instructed amount of USD 200000.
Along with it Small Bank as it is aware of correspondents with whom these payments will be processed and routed, as the charges as to be borne by the sender of the payment (Virgin Estate) , all the charges for each correspondent in the flow will also be added to the debit. The total debit done on Virgin's account by Small Bank , US as per the charging chart shown above will be USD 200036.7.
Any additional charges due can be claimed by the receiver bank from the sender's bank or sender's bank from the customer as per the agreement established or negotiations, please see additional post on the current processes adopted for charges collection here.
Step 1 - Virigin Estate company creates a payment MT 101 instructing its bank to send the payment to the beneficiary in London, UK. This is possible as Small Bank US has offered the cross-border US- UK payments to customers with banking and exchange charges, the exchange charges are added and thus debited from the customer account while executing the customer payment MT 101.
Step 2 - Small Bank as it doesn't have the complete processing capacity to make the payment send further, it asks CITI US bank with MT 103 (a) to process and settle the payment initiated by Virgin Estate, The CITI US bank cross-checks the payment attributes of MT 103(a) and also bookkeeping statuses done by Small Bank and creates a MT 103 (b) to instruct Well Fargos in London, UK to send a converted amount to the beneficiary account maintained by Barclay's bank in UK. The exchange rate at the time of the deal was set at 1 USD = 0.73 GBP. The CITI US bank is the Small Bank correspondent for the currency USD to GBP payment with the message type MT 103. It deducts USD 200036.7 from its USD account and credits the equivalent GBP amount minus the sender's charge of USD 20, the value comes GBP 146012.19.
Step 3 - Well Fargo, London, UK bank receives the payment MT 103 (b) via SWIFT net and correspondent banking relationship maintained with RMA in SWIFT. It cross-checks the payment and its attributes and debits its GBP account and credits Barclays Bank, London, UK account (Well Fargo is receiver's correspondent for Barclays Bank in USD/GBP). It takes its charge value of GBP 10 and credits amount GBP 146002.19. It sends MT 103 (c) to Barclays London bank that it has credited the payment of GBP 146002.19 and so make payment to the beneficiary WillGet Estate and intimate them of the credit, the intimation can be any form as stated by Small Bank or in-between agent. It sends MT 910 to the beneficiary to a portal which he uses and given by Barclays bank or also receives information in mail or SMS.
The business elements necessary for MT 103 (b) are also been added below :
