What Is an Intermediary Bank? Purpose, Functions, and Fees Explained

What is an Intermediary Bank?

An intermediary bank is a financial institution that acts as a middleman in international transactions. When the remitting bank and the beneficiary bank do not have a direct financial relationship, an intermediary bank is used to facilitate the flow of funds.

The intermediary bank serves as a transfer point between the sending bank and the receiving bank, ensuring that the funds are successfully routed to the intended destination and that the transaction complies with international financial regulations.

For example, a trading company in Hong Kong needs to pay a supplier in the United States:

• The Hong Kong company uses Bank A for the transfer, but Bank A has no direct relationship with the US supplier’s bank, Bank B.

• In this case, Bank A will select an intermediary bank, Bank C, which has established financial relationships with both Bank A and Bank B, to complete the transaction.

• The transaction path would then be: Bank A (Hong Kong company’s account) → Intermediary Bank C → Bank B (US supplier’s account).

In this process, the intermediary bank acts as a bridge between those two domestic banks, using its established financial network to transfer funds securely and in compliance with international financial transaction standards.

Intermediary banks are often large, international financial institutions with extensive global networks. Common examples include HSBC, JPMorgan Chase, Citibank, Barclays, and Bank of America. These banks can efficiently facilitate international money transfers due to their connections with multiple financial institutions worldwide.

What Are the Functions of an Intermediary Bank?

An intermediary bank serves as a transfer hub in international wire transfers, facilitating the movement of funds between financial institutions that lack a direct financial relationship. The main functions of an intermediary bank include:

Intermediary banks play a vital role in transferring funds when the remitting bank and the beneficiary bank are located in different countries or operate under different financial systems. They act as a bridge to facilitate the transfer of funds, ensuring that the transaction is executed smoothly and reaches the intended recipient bank.

Currency conversion is another key function of intermediary banks. International financial transactions often involve multiple currencies, and intermediary banks can handle currency exchange before the funds reach the beneficiary bank. However, this service typically incurs currency conversion fees, which can vary depending on the currencies involved.

Network access is crucial for smaller or regional banks that lack direct connections to international financial networks. Intermediary banks provide these banks with access to broader financial networks, enabling them to participate in international transfers and other global financial transactions.

Regulatory compliance is a critical functions for intermediary banks. They are required to conduct Anti-Money Laundering (AML) checks and Know Your Customer (KYC) verifications to ensure that transactions comply with international financial regulations.

During the transaction process, intermediary banks may screen the funds to verify the legitimacy of the source and the destination. If a transaction is flagged as high-risk, the intermediary banks involved may suspend the transfer and request additional documentation to verify the source of funds and the intended recipient.

How Do Intermediary Banks Work?

In the process of international wire transfers, funds often pass through one or more intermediary banks to bridge the gap between financial institutions that do not have a direct financial relationship. The operational flow of intermediary banks can be broken down into three main stages:

1. Initiating the International Transfer

When the sender initiates an international transfer, the remitting bank first debits the specified amount and deposits the funds into the intermediary bank’s pre-funded account. At this stage, the intermediary bank becomes the temporary custodian of the funds, receiving the amount from the remitting bank. Following the instructions provided, the intermediary bank will then transfer the funds to the beneficiary bank or the next intermediary bank in the chain.

2. Currency Exchange and Settlement

If the transaction involves different currencies, the intermediary banks involved will handle the currency conversion. During this process, the bank deducts currency conversion fees based on the current exchange rate. In cases where multiple intermediary banks are involved, the funds may pass through several banks before reaching the final destination. 

For instance, a transfer initiated in Hong Kong may first pass through a Hong Kong-based intermediary bank, then a European intermediary bank, and finally arrive at the recipient’s financial institution. Each intermediary bank may deduct its service fees, impacting the final amount received.

Once the transfer is completed, the intermediary bank enters the reconciliation and settlement stage. The bank verifies transaction details, including the amount, time, and sender’s identity, to ensure accuracy. The reconciliation process involves confirming the balance in the pre-funded account, ensuring that each transaction is accounted for and that all fees deducted by intermediary banks are properly recorded. This ensures that the final amount received aligns with the sender’s original instructions.

3. Compliance Monitoring and Risk Management

A critical function of intermediary banks is ensuring that transactions comply with international regulations. Once the funds are deposited into the intermediary bank’s system, the bank conducts AML checks to verify the legitimacy of the transaction. Additionally, the bank performs  KYC checks to validate the identities of both the sender and the recipient.

Intermediary banks also screen transactions against international sanctions lists to prevent funds from being sent to high-risk countries or entities that are sanctioned. If a transaction is flagged as high risk, the intermediary bank may suspend the transfer and request supporting documents, such as contracts or invoices, to verify the source and purpose of the funds. In such cases, the bank may also notify regulatory authorities to further investigate the transaction.

Benefits of Using Intermediary Banks

While intermediary banks charge fees for their services, they play a vital role in enhancing the security and stability of international financial transactions. Here are the key advantages of using intermediary banks:

• Expanding the global financial network: Intermediary banks maintain extensive networks of partner banks worldwide, connecting financial institutions across different countries. This network facilitates international transfers, ensuring that funds can be routed even when the sending and receiving banks do not have a direct relationship.

• Enhancing fund security: Intermediary banks conduct AML checks and KYC verifications, reducing the risk of funds being transferred to illegal accounts. Additionally, they provide SWIFT MT103 messages, enabling businesses to track fund flows and identify any intermediary bank fees deducted during the transfer.

• Providing currency exchange services: Intermediary banks can convert local currency into foreign currency or the recipient’s local currency before the funds reach the beneficiary bank. This streamlines cross-border payments and ensures that the recipient receives the correct amount in the appropriate currency.

• Increasing transaction transparency: Detailed transaction records provided by intermediary banks help businesses maintain accurate financial records for reconciliation, tax reporting, and cash flow tracking.

• Reducing payment delays: With established global networks, intermediary banks can expedite fund transfers, minimizing delays and ensuring that funds reach the recipient’s account more quickly.

Intermediary Bank Fees and Charges

Before initiating an international payments, businesses should carefully assess the potential fees associated with intermediary banks. Here are the common types of fees:

• Handling Fees: Intermediary banks typically charge a handling fee for processing each transaction. This fee can be calculated as a percentage of the transaction amount or as a fixed sum. The service fee is usually deducted directly from the transfer amount, affecting the final amount received by the beneficiary bank.

• Currency Conversion Fees: If the remittance currency differs from the recipient’s currency, the intermediary bank will handle the currency conversion. Conversion fees are generally calculated as a percentage of the exchange amount. However, some banks may embed hidden fees in the exchange rate. For instance, if the market rate is 1 USD = 7.8 HKD, the intermediary bank might adjust the rate to 1 USD = 7.7 HKD, taking the difference as a conversion fee.

• Lifting Charges: When a transaction involves multiple intermediary banks, the intermediary banks involved may impose additional fees, known as lifting charges. These fees are not always disclosed upfront by the remitting bank and may be deducted at each stage as the funds pass through different banks.

• Incoming Transfer Fees: The beneficiary bank may also charge a fee for receiving the funds. This fee is typically applied to each incoming transaction.

Payment Methods for Intermediary Bank Fees

In international wire transfers, there are three common fee payment methods:

• OUR: The sender bears all fees, including service fees, conversion fees, and lifting charges, ensuring that the beneficiary receives the full transfer amount.

• SHA: The sender pays the remitting bank’s fees, while the intermediary and beneficiary banks’ fees are deducted from the transfer amount, with the recipient covering part of the costs.

• BEN: The beneficiary bears all fees, including the remitting bank’s fees, intermediary bank fees, and receiving bank fees.

Hidden Fee Risks

In addition to the clearly stated fees, there are potential hidden costs associated with international transfers:

• Inquiry Fees: If the transfer is delayed or encounters discrepancies, the intermediary bank may charge a fee for tracking or investigating the transaction.

• Refund Fees: If the transfer is returned due to incorrect banking details or other issues, the intermediary bank may deduct a refund processing fee.

• Exchange Rate Markups: Some banks adjust the exchange rate during currency conversion to include hidden fees, resulting in a higher cost for the sender or recipient.

What Is the Difference Between Intermediary and Correspondent Banks?

In international financial transactions, intermediary and correspondent banks are often mistaken for each other. However, they differ significantly in terms of transaction structure, financial relationships, and fee structures. Both types of banks facilitate international financial transactions, but they serve different purposes and apply to different scenarios.

Correspondent Banks: Long-Term Partners Providing Comprehensive Financial Services

A correspondent bank is a financial institution that establishes a long-term financial relationship with another bank, primarily to facilitate international transfers and settlements. These banks maintain pre-funded accounts, known as Nostro and Vostro accounts, to manage cross-border transactions efficiently.

Correspondent banks not only handle international transfers but also provide additional financial services, such as currency exchange, securities settlements, and risk management.

Intermediary Banks: Transaction-Specific Fund Transfer Agents

Unlike correspondent banks, intermediary banks focus on individual transactions, particularly when the remitting bank and beneficiary bank do not have a direct financial relationship. Intermediary banks act as financial bridges, ensuring that funds are successfully routed to the receiving bank.

When international transfers involve multiple currencies, intermediary banks also handle currency exchange and deduct applicable fees based on the transaction amount. Additionally, intermediary banks conduct AML checks and KYC verifications to ensure that the transaction complies with international regulations.

Enjoy Low-Cost International Transfers with Aspire

Aspire business accounts offer cost-effective global payment services using market exchange rates, supporting payments in over 30 currencies across more than 130 countries and regions. Whether sending funds to suppliers or receiving payments from overseas clients, users only pay a straightforward, transparent fee. There are no account opening or monthly maintenance fees, ensuring that funds reach the beneficiary bank without hidden charges eating into the transferred amount.

Aspire’s global payments platform allows businesses to initiate transfers directly, quickly moving funds to major international markets. Users can track each transaction in real-time, ensuring that funds are safely delivered to the intended recipient. For businesses that frequently engage in international transfers, Aspire’s streamlined process and transparent fee structure provide a practical solution for optimizing cash flow and minimizing operational costs.