When you process a funds transaction through your domestic or international payment gateway, there will be times when your fees are higher than usual, or when the recipient does not get the full amount of the money you sent. 

Often, the reason for this is that you are dealing with an intermediary bank. But just what is this type of institution, and how does it work?

What are intermediary banks?

In instances when two banks do not have a working relationship with each other, they may need a third-party go-between to facilitate a transaction. These institutions are particularly relevant in certain types of fund transfers.

Especially in international payment processing, when financial entities are geographically distant and do not have a need to interact with each other on a regular basis, intermediary banks come into the picture. 

These institutions are third-party go-betweens that help to facilitate the entire operation. Depending on the networks involved and the locations of the banks, there may be more than one intermediary bank working in concert to ensure a safe and secure funds transfer.

How intermediary banks work.

Intermediary banks harness the power of their connections with domestic and international lenders to facilitate seamless funds transfers. However, their services come at a price.

Let’s use the example of a cross-border transaction to illustrate the role that intermediary banks play. 

In these transactions, the sending bank instructs the receiving bank to credit the merchant’s account, with the settlement of the balances occurring later. For these institutions that already have established relationships with each other, a pre-funded settlement account is set up to aid in efficient and accurate reconciliation.

If, however, the banks do not have a history, they will work through an intermediary bank. This entity is ideal because of its pre-existing relationships with both banks. 

In effect, the intermediary bank bridges the gap between the other two, receiving funds from the customer’s bank and forwarding them to that of the merchant – minus fees.

In many cases, more than one intermediary bank is required to complete the process. The transfer simply continues unabated until the funds are placed in the merchant’s account. With every link in the chain, an additional set of fees is assessed.

When intermediary banks become involved.

Intermediary banks facilitate transactions in certain scenarios. These include during international funds transfers, for domestic banks that have no connections to each other, and in situations in which the financial entities lack the necessary infrastructure to make a transfer without their assistance.

Especially in the international payment processing arena, intermediary banks function as vital links between institutions that have no established working bonds. This generally occurs through the SWIFT network, which can be searched for valid intermediary banks equipped to conduct the wire transfer.

In addition to cross-border transfers, intermediary banks play an important role in certain domestic inter-bank communications. 

Examples of when this occurs include domestic transfers between banks with no relationship, as well as between very small institutions, or those that lack the requisite infrastructure to conduct the transfer on their own.

A word about intermediary bank fees.

Intermediary banks charge fees for each transaction they process. What is unclear is how many intermediaries will be involved, and the exact amounts of the fees.

Unsurprisingly, the services of intermediary banks come at a price that businesses need to figure into their calculations. The problem is that there is a certain amount of vagueness when it comes to these charges.

When a transfer is initiated by an originating bank, there are two main gray areas. First, there is no way to know ahead of time how many intermediary banks will be involved in the process. 

What’s more, precise fee amounts are impossible to predict. On average, however, per-transaction fees range between $15 and $30, which is similar to what individual banks charge. If several go-between institutions are involved, these can add up quickly.

Who covers the cost of intermediary bank fees?

Charge details dictate who pays for international intermediary bank fees. The cost could be covered by the sender, and the beneficiary, or be shared between the two.

The typical international transfer involves two parties: the remitter or sender, and the beneficiary or the receiver. When setting up an international bank transfer, any one of three instructions can be given that dictate who will foot the bill.

One option is that the sender pays for everything, including originating bank charges, beneficiary bank fees, and anything else levied by all other involved financial institutions. Remitters pay a fixed fee for this arrangement of anywhere between $60 to $70, the average cost of an international transaction. This fee is added to the amount of money to be sent.

In the second type, the beneficiary picks up all of the charges. This includes everything listed above. The sender pays no fees at all, meaning that the amount received is greater than the amount sent.

The third arrangement involves the parties sharing the fee costs. The remitting or originating bank pays the costs involved in sending the funds. The beneficiary shells out the money to pay for their own bank charges as well as any imposed by intermediary banks.

Where to find information about intermediary banks.

Take away the guesswork about your transfer by contacting your bank. For international transfers with SWIFT, request an MT103.

Although it is not necessary to learn about the intermediary bank or banks that will be involved in your transfer, you do have a way to obtain helpful information. Contact the institution handling your payments for these details.

For international payment processing via the SWIFT network, it is possible to track its path. To do so, request an MT103. This document contains all relevant details of the transaction, including the nature of the payment instructions as well as proof that the process has been completed. Having it in hand is especially helpful in resolving disputes and for record-keeping purposes.

When you are accepting multiple currencies and otherwise offering international payments to your customers, the impact of intermediary banks may not initially be something that you consider. 

However, understanding their role as well as the extra fees they impose is vital in determining the real costs that you will pay during the course of your business dealings.