What Is an Intermediary Bank? How It Works & Fees Explained

Have you ever sent an international transfer and noticed that the recipient received less than the amount you sent or noticed that your bank transfer fees are higher than usual?

If that is the case, it may be because your transaction involves an intermediary bank. These intermediary banks are sometimes cited as the reason for discrepancies in the amount you send versus what is received, additional fees, or even delays in your transfer. 

So, what exactly is an intermediary bank? What does it do, and how much does it charge? We'll answer these questions.

An intermediary bank is a bank that connects two different banks to help transfer funds, acting as a "go-between," "third party," or "middleman." They are essential when transferring money between banks that do not have a working relationship, such as between a domestic bank and a foreign bank.

An intermediary bank can handle both domestic and international transactions, but they are more common in international transfers. Depending on the locations and banking networks involved, multiple intermediary banks may be used in a single transaction. 

Retail bank customers usually don’t interact with intermediary banks, as these banks operate behind the scenes. However, customers may notice the influence of intermediary banks through added fees or delays in their transactions.

Read on as we go into details about how it works and when it's used.

In a cross-border transaction, money does not move directly between accounts. 

Instead, the sending bank instructs the receiving bank to credit the recipient’s account and later settle the balances owed. Banks maintain pre-funded settlement accounts with other banks with which they have an established financial relationship to ensure end-of-day balance reconciliation. 

Suppose the sending "Bank A" maintains an account with the receiving "Bank B." In this case, Bank B can promptly credit the recipient’s account and deduct the amount from Bank A’s account. This setup allows for quick and straightforward transfers. However, not all banks have direct relationships with each other. This lack of direct connections is where intermediary banks come into play.

Imagine you want to send money from your “Bank A” account to a recipient’s “Bank C” account abroad, but the two banks don't have a working relationship. However, Bank B has a connection with both Bank A and Bank C, effectively bridging the gap between them. Bank B can act as an intermediary bank, receiving from Bank A and then forwarding to the recipient Bank C. 

To illustrate this, consider the following example: Alex in the US wants to send USD 1,000 to Jamie, who lives abroad. Alex banks with local Bank A, while Jamie uses local Bank C. Bank B, which operates in both countries, acts as an intermediary. 

• Bank A first deducts USD 1,000 from Alex's account and then sends the transfer instructions to Bank B. 
• Bank B deducts a USD 20 fee and forwards an instruction to credit USD 980 to Bank C. 
• Bank C credits Jamie’s account with USD 980. 

At the end of the day, Bank B reconciles the transactions to ensure all accounts are accurately updated. In this example, if Alex wants Jamie to receive exactly USD 1,000, he must select to cover the intermediary fee beforehand. We'll discuss who pays the fee in a later topic.

In practice, there may be more than one intermediary bank involved in the process. Each intermediary bank serves as a link in the chain until the instruction or the fund reaches the recipient's account. As the instruction or funds pass through each intermediary bank, they deduct any applicable fees before forwarding the remaining to the next bank in the chain.   

Intermediary banks are generally involved when making international transfers between two banks that do not have a working relationship.

Most international wire transfers go through the SWIFT network. When there's no direct connection between the sending and receiving banks, the sending bank can search for intermediary banks within the SWIFT network to assist in processing the transaction.

Less frequently, intermediary banks might be involved in domestic transactions if the domestic banks involved don’t have any connection, are particularly small, or lack the infrastructure for certain types of transfers. 

Smaller banks are more likely to need intermediary banks. Conversely, larger banks have extensive networks, including their own branches in different countries or partnerships with local banks, that can reduce their reliance on intermediary banks. 

Both "intermediary banks" and "correspondent banks" facilitate international financial transactions and are often used interchangeably, but there are subtle differences.

In the US, correspondent banks are usually larger institutions that proceed with several currencies and handle a broader range of services beyond financial transactions, such as cash management or trade finance. In contrast, intermediary banks are smaller and manage transactions in a single currency.

Below is the breakdown of the main differences 

Intermediary banks tend to be among the world's largest banks. This is because, as intermediaries, they need connections to a vast number of accounts across many different countries in order to facilitate payments being routed between the initiating and receiving banks.

Examples include:

The main downside of using an intermediary bank is the fees. When users initiate a transfer, they do not know how many intermediary banks will be involved or the exact fees each intermediary bank will impose.

On average, fees may range from USD 15 to USD 30, which is similar to the charges individual banks make for a transaction. 

This means you have fees on top of the sending and receiving bank fees. Considering that several intermediary banks can be involved in a singular transaction, banking fees can end up quite significant. 

In a typical transaction, there are two parties, the remitter or the sender and the beneficiary or the receiver.

Between these two, who pays for the intermediary bank fees?

There are three instructions that can be given upon instructing an international transfer, called “details of charges:” that will determine who pays the fees. 

If this option is selected, the remitter (sender) pays for originating bank charges, beneficiary bank fees, and fees from any other financial institutions, such as all the intermediaries, that might be needed to facilitate the transaction.

Because it is unknown by the banks before the payment is made which intermediary banks and how many intermediary banks will be involved, a fixed fee is provided to remitters.

This fee is usually calculated based on the average cost of an international transaction and is around USD 60-70 for most banks.

In this case, the charges are added to the sum of money to be sent.

For example, if you wanted to send USD 1,000 to a friend in a different country, your account would be deducted USD 1,070.

Your friend would then receive USD 1,000 without any deductions.

By choosing this option, the amount sent and the amount received will be the same - a very useful factor to consider when paying suppliers.

If this option is chosen, the remitter will have to cover the cost of sending the funds, or in other words, pay for their own bank charges - which are typically around USD 15-30.

The beneficiary will then have to pay for their own bank charges as well as any intermediary bank charges. The fee may also be deducted from the initial fund, so the amount received will be less than the amount sent.

In this case, the beneficiary pays for all the charges, including the charges of intermediary and beneficiary banks.

The sender will not have to pay any fees.

This means that the amount sent will be less than the amount received.

By choosing this option, the difference between the amount sent and the amount received will be the greatest. 

To find the intermediary bank information for your transfer, you can contact your bank or the financial institution handling your payments through your relationship manager or their customer support channels. 

However, note that as a sender, you do not need the intermediary bank information to send money. Intermediary banks are part of a system that banks use to route payments efficiently. To send money, you mainly need the beneficiary bank's information. 

If you've made a transaction through SWIFT and want to track its path, request the document called MT103.

Fees for international transfers through banks can be unpredictable as they vary depending on locations and intermediary banks involved, often resulting in higher transaction fees than expected. 

Transaction costs can also affect business-level transfers, especially when receiving funds from a foreign bank or making payments to overseas suppliers.

If your company is registered in Hong Kong, Singapore, or the BVI, consider opening an account with Statrys. Statrys is not a bank but a licensed money services provider offering multi-currency accounts in 11 major currencies and local payments in 12 currencies. 

Using Statrys' local payment network, you can transfer funds in 12 currencies more cost-effectively, ensuring that your recipient receives the full amount without any extra fees from correspondent or intermediary banks.

Here’s the summary of Statrys’ services