What Are Intermediary Banks? What Do They Do?

When money moves from one bank to another, you may think it travels in one speedy step, but in truth, an intermediary bank may be involved. When funds move between a sender and a receiving account at the same bank, the money typically moves directly. But if the money is moving from one bank to another, the processing may be more involved and an intermediary bank is likely needed.

As the name implies, an intermediary bank is a bank that acts as a go-between, connecting two different banks. Smaller banks require intermediary banks or correspondent banks to facilitate transactions with other banks, while larger banks may have enough connections to serve as their own intermediaries.

Generally, retail bank customers do not have to worry about finding intermediary banks — instead, they work behind the scenes with the banks themselves. Here, learn about:

•   What is the meaning of an intermediary bank and how does it work?

•   When are intermediary banks needed:

•   What is an intermediary vs. correspondent banks?

•   What are intermediary bank fees and who pays them?

What Is an Intermediary Bank?

An intermediary bank is a third-party bank that helps facilitate transfers and transactions between two other banks. Often, intermediary banks are dealing with international transactions such as wire transfers between different countries. If you are sending money to others abroad, your bank may end up using an intermediary bank.

You may not be aware of how the intermediary banks work behind the scenes, but be aware that you may be charged additional fees for the work that intermediary banks are doing.

How Do Intermediary Banks Work

If you are doing a bank account transfer, especially to an account in a different country than the one where your own bank is located, it is likely that an intermediary bank will be involved. During a monetary transfer between accounts at different banks, an intermediary bank works in between the sender’s bank account and the account at the receiving bank.

Here’s how the transaction might work:

•   A person with an account at Bank A wants to send money to another person, a client with an account at Bank B.

•   However, Bank A doesn’t have an account or banking relationship with Bank B.

•   Bank A and Bank B do, however, each have an account with Bank C.

•   Funds can be funneled through Bank C, the intermediary bank, to make the transaction successful.

Intermediary Bank Example

Intermediary banks are like an international travel hub through which transfers flow. They are especially important for fund transfers made via the SWIFT (Society for Worldwide Interbank Telecommunications) network.

Here’s a simple example to show how intermediary banks usually work. Let’s say that John is an importer-exporter based in the United States who banks at the Acme Bank. He needs to make a payment to Angela, a supplier of his based in Germany, who banks with Big Bank. He gives Angela’s bank’s information to his bank to make the transfer.

If Acme Bank does not have an account at or a relationship directly with Big Bank (Angela’s bank), it will use an intermediary bank; let’s call it Central Bank. This intermediary bank will have accounts at both Acme Bank, John’s bank in the United States, as well as Big Bank, Angela’s bank in Germany.

Central Bank can transfer the money between the two banks. It will likely charge a fee for their role in the transaction. The transaction will be completed by the three banks working together.

When Is an Intermediary Bank Required?

Any time that money is being transferred between two banks that do not have an existing relationship, an intermediary bank is usually involved. Whether you have a single account or a joint bank account, when you transfer money to a user at a different bank (especially internationally), an intermediary bank will generally be required.

This is likely to occur as a commercial banking transaction. In other words, the use of an intermediary bank is not something the consumer has to initiate.

The Need for Intermediary Banks

Intermediary banks are important as part of the global financial system. Since banks generally do not have accounts with every single bank around the world, there is a need for intermediary banks to help facilitate monetary transfers.

The good news is that you typically do not have to worry about finding an intermediary bank yourself. Instead, the banks themselves have intermediary banks that they use to transfer money between other banks.

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When Will an Intermediary Bank Be Involved in a Transaction?

An intermediary bank will usually be involved whenever there is a need to transfer money between accounts at two separate banks. If the sending bank does not have its own account with the receiving bank, it will usually use an intermediary bank.

Even if a business thought it could get around the need for intermediary banks (and save money; see more on fees below) by opening multiple bank accounts, its main bank would still probably use an intermediary bank at some point to transfer funds on its behalf.

Difference Between Intermediary and Correspondent Banks

When considering how bank transfers work, you may hear two different terms: intermediary banks and correspondent banks. Depending on which part of the world you’re in, there may or may not be a difference between the terms “intermediary bank” and “correspondent bank.”

•   In some countries, the terms correspondent banks and intermediary banks are used interchangeably.

•   In the U.S. as well as in a few other countries, correspondent banks are often ones that handle multiple types of currencies.

•   Intermediary banks may be smaller banks that only typically handle transactions in one currency.

What Are Some Typical Intermediary Bank Fees?

Because intermediary banks typically do not work directly with consumers, they also do not regularly post a breakdown of the fees they charge. Instead, you can look at your own bank’s fees for financial transactions such as domestic wire transfers or international wire transfers.

The fees that your bank will charge you for these transactions generally include the fees that your bank will have to pay to the intermediary bank it uses. These bank fees can range anywhere from $15 to $50 or more.

Recommended: How Do Banks Make Money?

Who Pays for Intermediary Bank Fees?

Intermediary bank fees are paid in different ways, depending on the specific transaction. Let’s say Person A is sending money to Person B. There are three ways the fees may be handled, depending on what the parties involved agree upon:

•   “OUR” is the code used when the sender will pay all fees. An average fee for an international transfer can be about $70.

•   “SHA” is the code indicating shared costs. Person A will likely pay their bank charges (perhaps $15 to $30 on a typical transaction) and then Person B pays the rest: their bank’s and the intermediary bank’s charges.

•   “BEN” indicates that Person B, the recipient of the funds, will pay all charges.

The Takeaway

If a bank customer wants to send money to someone at a different bank and the two banks involved are not connected, an intermediary bank typically plays a role. Intermediary banks work with other banks to help facilitate monetary transactions such as domestic and especially international wire transfers. You, as a consumer, usually do not have to find or hire your own intermediary bank. However, your bank will likely pass along any intermediary bank fees if you initiate a transaction that requires one.

What about your everyday, basic banking, though? If you’re looking for great interest rates while keeping flexible access to your money, why not open a bank account with SoFi? When you open our Checking and Savings with direct deposit, you can earn 2.00% APY and pay no fees. That means your money can grow faster.

Bank smarter with SoFi.

FAQ

What is an example of an intermediary bank?

An intermediary bank is one that moves funds between other banks. They do not typically work directly with consumers, so you likely neither need to know their names nor contact them. For instance, Bank of America might offer this service, or it might be provided by a foreign bank with which you are not familiar.

Why do you need an intermediary bank?

Intermediary banks are usually used when someone needs to send money to a person with an account at a different bank. An intermediary bank can serve as a middleman and facilitate the transaction. One common example is sending a wire transfer, especially internationally.

How do you find an intermediary bank?

In most cases, you will not need to find your own intermediary bank. The bank you use will have its own intermediary bank that it collaborates with as needed. Depending on what kinds of financial transactions you need, in some cases, you might also want to consider alternatives to traditional banks for international transfers.


Photo credit: iStock/MicroStockHub

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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All You Need to Know About a Foreign Currency Certificate of Deposit

The Basics About ACH Holds

ACH, which stands for Automated Clearing House, is a common form of electronic fund transfer (ETF) that individuals and businesses use to move money from one bank account to another. When you authorize a business or government to perform an ACH debit (electronically removing funds from your bank account), you may see that there is an ACH hold on funds in your account ahead of the official transfer.

This situation can cause account holders to have some questions and wonder if everything is okay with their bank accounts. So read on to learn more about:

•   How ACH works

•   What an ACH hold means

•   Why your bank might put an ACH hold on your account

•   What to do if there is an unauthorized ACH hold on your account.

Understanding Automated Clearing House

ACH stands for Automated Clearing House, a U.S.-based network governed by Nacha (National Automated Clearing House Association). The system enables businesses and individuals to electronically debit (take money from) or credit (put money into) accounts.

ACH credit transfers are quite common today. Examples of a company or government agency putting funds into an individual’s or company’s account include direct deposit payments from an employer to an employee, social security benefits, and tax refunds.

As an individual, you likely utilize ACH debit as well. If you have connected your online bank account to a peer-to-peer or P2P payment app like PayPal, Venmo, or Cash App and you utilize standard transfers, you are likely using ACH debit when you pay friends and family.

You may also use ACH when you enable autopay for bills each month, such as your mortgage, rent, or utilities. When you sign up for this kind of payment, those companies are using ACH debit to withdraw the necessary funds to cover your monthly payment.

But money does not go directly from one account to another. Before your direct deposit paycheck reaches your bank account — or your automatic payment reaches your landlord or the electric company — it goes through the clearing house, which batches payments multiple times a day. That means ACH payments are not immediate, though they can be same-day.

Recommended: How to Balance Your Bank Account

What Is an ACH Hold?

So what does ACH hold mean? When a company or institution that you have authorized to make a withdrawal from your account submits an ACH debit, your bank will receive and acknowledge the transaction. At that point, the bank might place an ACH hold on your account.

While there is a hold on your account for the amount of the ACH debit, you will not be able to use those funds for a purchase. During the ACH hold, the bank is verifying that you have the funds in your account to cover the requested debit. Once confirmed, your bank will deduct the money from your account.

In such an instance, the ACH hold simply makes the funds you will owe unavailable before they are actually debited from your account.

On the flip side, you may sometimes notice a pending ACH credit in your account. For example, if you open your mobile banking app a day before payday, you might see the pending direct deposit, but the funds are not yet available. That means your employer has sent the money through ACH, but your bank has simply placed a hold until it can verify the transaction and push the funds through to your account.

It typically flows like this:

1.   The ACH request is sent to your bank.

2.   The bank receives the request and begins work.

3.   The bank put a hold on the funds.

4.   The bank ensures the funds are available.

5.   The transaction is completed.

Recommended: How to Close a Savings Account

Why Do Banks Perform an ACH Hold?

ACH holds allow banks to verify that funds are in place before approving the transaction. For example, say your account has $100 in it, but a bill collector has initiated an ACH debit for $500. It will be in the bank’s best interest to place the hold on your account. Once the bank realizes that your account does not have the funds to complete the transaction, it will reject the ACH transfer.

This protects the bank’s assets, but it means you have an unpaid bill. In this example, you may also have to pay late fees in addition to the funds you owe. What’s more, the bank might charge you an ACH return fee. These fees can certainly add up.

It is a good idea to monitor your account closely and set up low-balance alerts. As a best practice, you might want to keep track of scheduled automatic payments via calendar reminders so your account balance is always high enough to cover charges.

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Unauthorized ACH Holds

ACH holds can benefit you as well as your bank. For example, if you monitor your checking account closely and notice a pending ACH transaction that you weren’t expecting, you can contact your bank to learn more about the transaction.

If a person or entity is attempting to debit your account without your authorization, this could mean that your banking details have been compromised. Your bank will be able to help you with next steps to protect you from fraud.

Another scenario to consider: The Consumer Finance Protection Bureau (CFPB) advises that you can stop electronic debits via ACH by payday lenders. These payday loans are a way to get an advance on your paycheck. To curtail unauthorized account deductions, you must revoke their payment authorization (or ACH authorization) by calling and writing to the loan company and your financial institution or by issuing a stop payment order. Visit the CFPB website for sample letters.

Note: Stopping payment via ACH debit does not cancel your contract with payday lenders. You must still pay off the full balance of your loan, but you can work with the lender to determine an alternate method.

Removing an ACH Hold

If an ACH hold appears on your account and it is for a payment you have authorized, your bank will likely soon remove the hold. Typically, the sequence goes like this:

•   The bank places the funds on hold.

•   The bank determines whether funds are available to process the transaction.

•   If funds are available, the bank eliminates the ACH hold.

•   The payment moves forward and funds are transferred.

You do not need to take any action as long as the funds are available.

Recommended: How to Open a Bank Account

The Takeaway

ACH (or Automated Clearing House) holds protect banks during transfer processing. While delays may seem annoying at times, there are pros and cons to them in this situation. When a company initiates an ACH debit from your account, the hold allows the bank to confirm that funds are available to complete the transaction, which can ensure good flow of finances. Such holds also give you an opportunity to identify any unauthorized ACH debits, which is definitely a plus.

Having a bank that looks out for your best interests is another thing that’s usually a big plus. Which is why SoFi makes sure you can manage all your automatic payments seamlessly so your finances can stay on-track and organized. But that’s not all. When you open an online bank account with direct deposit, you’ll earn a stellar 2.00% APY and pay no account fees.

SoFi: Our Checking and Savings help you bank better.

FAQ

How long can a bank hold an ACH transfer?

When an entity, such as your employer or the government, issues you a direct deposit via ACH transfer, your bank must generally make the funds available for withdrawal by the next business day. However, weekends and bank holidays do not count as business days, so it may take a few days to get your money even after an ACH transfer has gone through.

How long does it take an ACH check to clear?

Financial institutions may be able to choose to have ACH transfers process in one to two business days or on the same day. However, a bank or credit union might hold onto transferred funds once it receives them, generally until the next business day.

What is the ACH hold check order fee?

In your banking life, you might encounter the phrase “ACH hold check order fee.” It typically just means that your financial institution charges a fee for ordering checks, which may be automatically deducted from your account.


Photo credit: iStock/max-kegfire

Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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Guide to Market-Linked Certificates of Deposit (CDs)

Guide to Market-Linked Certificates of Deposit (CDs)

The primary difference between a market-linked CD (MLCD) and a traditional CD is that a regular CD pays a fixed rate of interest, while the market-linked CD tracks a basket of underlying securities or an index like the S&P 500. These accounts are sometimes called equity-linked CDs or stock CDs.

Otherwise, an MLCD is similar to a traditional certificate of deposit, in that it’s a time-deposit account with a fixed term during which the investor’s funds are unavailable. The principal (though not the gains) is federally insured up to $250,000. But market-linked CDs come with some risks — including the possibility of zero gains at maturity. To decide whether a market-linked CD is right for you, keep reading.

Recommended: What is a Certificate of Deposit?

What Is a Market-Linked CD?

Investing in CDs offers some familiar advantages, chiefly that the CD investor can deposit their funds for the specified term (typically a few months to a few years), and count on a steady rate of return until the CD reaches maturity.

The CD’s total return is unlikely to be high, especially when comparing deposit accounts, because it’s based on current interest rates, but there is little to no market risk. Traditional CDs are federally insured, whether by a bank or a credit union, for up to $250,000. For this reason, traditional CDs are considered a fairly low-return, low-risk investment.

Market-linked CDs share some of these features — e.g. the investor deposits funds for a set period of time, and the funds are unavailable until the CD matures. But the returns of an MLCD are, as the name suggests, linked to the stock market, which adds in a layer of potential reward, but also potential risk.

Unlike traditional CDs, which are considered cash equivalents, market-linked CDs are more like securities.

How Do Market-Linked CDs Work?

Unlike traditional CDs, market-linked CDs do not offer fixed interest payments. Rather the return is based on the underlying investments or market index the CD tracks. Some of these market benchmarks include equity, commodity indexes, or a basket of commodities or currencies. But investors don’t see precisely the same gains and losses as the market.

Typically, the upside of MLCDs is capped in one of two ways. For example, the return on a market-linked CD will be determined by its participation rate, i.e. the percentage of the upside you will see. For example, an 80% participation rate means you only receive 80% of the gains from the underlying market. An interest cap refers to an MLCD where there is simply an upper limit for any gains.

Fortunately, the principal amount deposited in the CD is protected. At maturity, investors will get their full deposit back. But if the market underperforms, the CD may not have any gains. In other words, at maturity there is no guarantee your return will be more than your deposit amount.

Recommended: How Do CD Loans Work?

How to Calculate the Return of a Market-Linked CD

The reason for creating market-linked CDs goes back to the days when banks couldn’t sell securities, and these products offered investors a workaround. Consider that the average stock market return is about 9.0% over time, and it’s easy to see why investors might want this feature.

To calculate the return of a market-linked CD, financial institutions average out the close price of the underlying index over a certain period of time. For this method, you can take the average of the index’s different values in two different periods.

Another method you can use is the point-to-point method which involves identifying two values. The first is the value of the index when the market-linked CD was issued, and the other is the value of the index before the CD’s maturity date, which is referred to as the ending point. The difference between these two values will yield the expected return on your market-linked CD.

The final return also assumes that the funds are left in the CD until maturity. Withdrawing funds earlier than the maturity date — whether that’s two months or 20 years — will trigger early withdrawal penalties.

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Pros of Market-Linked CDs

Market-linked CDs have several favorable characteristics that may be appealing for investors who are looking for alternatives to conventional CDs, or directly investing in the stock market without having too much risk exposure.

•   Protection: Market-linked CDs protect your principal and when held to maturity, the principal is backed by the bank that issues it. In the scenario where the underlying market declines during the period where you hold the CD, investors are protected from losses.

•   Insurance: Market-linked CDs are also FDIC- or NCUA-insured for up to $250,000 on the principal investment, not investment earnings.

•   Potentially higher returns: Market-linked CDs have the ability to provide investors with higher returns than traditional CDs. Because the underlying is based on a collection of stocks, commodities, or indexes, there is a chance market-linked CDs can outperform traditional CDs.

•   Return on original deposit: At time of maturity, you will get the full amount of your original deposit regardless of the performance of the underlying market index or securities. If you choose to sell your market-linked CD prior to maturity on the secondary market, there is no guarantee that you will get the full amount of your principal back.

Cons of Market-Linked CDs

Investors must also consider the risks associated with holding market-linked CDs.

•   Liquidity risk: Investors must be aware that when opening a market-linked CD, they are locking up their money for a period of time, and they must be willing to hold on to the CD through its maturity to achieve the full benefits, even though they are not obligated to do so. If you need access to the capital in the CD and want to withdraw money, you may incur withdrawal fees.

•   Market risk: Market-linked CDs that are linked to the equity markets are subject to volatility, which can impact the market-linked CD returns. Other factors can influence market-linked CDs such as changes in interest rates.

•   Taxes: MLCD earnings are taxed as interest income, not as capital gains, and thus investors will pay a higher rate for their earnings. Also, interest must be reported annually, even though it’s not paid until maturity.

•   Little or no profit: The worst scenario is holding a market-linked CD to maturity — but not making a profit. Even though your original principal will be protected, there is no guarantee that you will make more than your deposit amount.

   You may have the possibility of greater gains if you invest your money in an exchange-traded fund (ETF) or index fund directly, which provides similar diversification benefits. However, you are still exposed to market risk, and your original principal is at risk.

How to Open a Market-Linked CD

•   At the financial institution of your choosing, you can open a market-linked certificate of deposit by choosing the interest rate and maturity date.

•   Next, deposit the amount of money you are able to lock up for a period of time.

•   Some market-linked CDs have a minimum investment requirement and a maximum deposit limit per account which must be considered.

Alternatives to a Market-Linked CD

Alternatives to market-linked CDs could include dividend-paying stocks. There are some publicly traded companies that pay out a portion of their profits to shareholders in the form of dividends. This can be consistent and reliable income, and can provide higher yield compared to that of a market-linked CD.

Another option could be investing in a bond fund. Similar to a CD, bond funds have different maturity dates, either short term or long term, and can offer competitive yields. Depending on the creditworthiness of the bonds, the yield can vary. Bonds with a high credit rating which are lower risk may have a lower yield than bonds with a lower credit rating, but the latter may come with higher risk. The choice of bond fund depends on the investor’s risk tolerance.

Investors may also consider a high-yield savings account, which is lower risk but yields less than a market-linked CD. These types of accounts are more for emergency funds but if you are looking for the lower risk options to store your cash, high yield savings accounts can be another alternative to a market-linked CD.

When to Consider Investing in Market-Linked CDs

Investors may be interested in a market-linked CD if they are looking for an alternative for a traditional CD and for the potential for higher returns. Market-linked CDs may also offer some diversification, and protection of principal investment.

If you are looking for exposure to the broader stock market with managed risk, a marked-linked CD may be a suitable option because it’s viewed as an alternative to directly investing in the stock market. That said, market-linked CDs are insured products and are not considered securities.

The Takeaway

Market-linked CDs are, as the name implies, a sort of hybrid savings/investment option. They offer some of the features of traditional CDs: You invest your money for a fixed period of time; if you withdraw funds before the maturity date you face an early withdrawal penalty; and your funds are federally insured for up to $250,000.

Because MLCDs are market-linked, though, a CD’s performance is tied to underlying securities or a market index. Thus investors don’t receive a fixed interest rate, and returns can fluctuate. Typically these CDs are also capped in terms of the gains they can provide. And while an investor’s initial principal deposit is protected from a market drop, you can still lose money if you withdraw funds early or try to sell this type of CD on the secondary market. Finally, like any other investment in the markets, there’s no guarantee that a market-linked CD will see a profit by the time it matures.

If you’re interested in getting a top rate for your savings, consider opening a new bank account with SoFi and setting up an all-in-one Checking and Savings. You can earn 2.00% APY when you qualify and set up direct deposit (which is a smart way to increase savings anyway). Get started on your savings plan today!

FAQ

What is a market-linked CD?

Market-linked CDs are certificates of deposits that can be linked to stocks, commodities, an index — or a mix of these — depending on the type of return the investor is seeking, and their risk tolerance.

Is a market-linked CD a security?

No. A market-linked CD is federally insured in the event of bank failure or fraud, so your principal is protected up to $250,000. Insured products are not considered securities.

What is a stock market CD?

A stock market CD is another name for a market-linked CD, and is linked to a broad stock market index like the S&P 500. This means the CD’s performance will adjust as the index changes.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Photo credit: iStock/MicroStockHub
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What Is a Nostro Account? How Does it Work?

All You Need to Know About Nostro Accounts

When a domestic bank needs to handle foreign transactions, they can establish a nostro account with a foreign or correspondent bank, which holds the funds and makes transactions on behalf of the domestic bank. Nostro comes from the Latin, meaning “ours.”

Having a nostro account enables the bank to process transactions for their customers in other countries without having to set up a base of operations abroad. The correspondent bank in the other country handles deposits and other transactions, which are denominated in the local currency, minus any foreign transaction fees.

Since nostro accounts are bank-to-bank accounts, not personal ones, it’s unlikely you’ll encounter one of these. But it’s useful to know how financial matters work between countries, in case you’re thinking about what to do with leftover foreign currency, or other financial dealings while traveling or doing business.

What Is a Nostro Account?

A nostro account is set up by a bank in one country, let’s call it the domestic bank, and the funds are held and partly managed by a bank in another country (the foreign bank).

The foreign bank holds all the funds needed for the domestic bank’s transactions in that country, denominated in the local currency, within the nostro account.

When customers of the domestic bank have relocated, or are traveling or doing business abroad, they can use the foreign bank to make deposits and withdrawals, and so on. The foreign bank works with the domestic bank to ensure that the currency exchange for all transactions is accurate.

A nostro account is the bank’s bank account in another country. Individuals do not have nostro accounts. This system operates behind the scenes, and isn’t something you need to think about if you’re wondering how to invest in a foreign currency, although nostro and vostro accounts do help with foreign currency trading.

How Does a Nostro Account Work?

When opening a nostro account, you open an account with another bank in a foreign country. The foreign bank is also sometimes called the facilitator bank or correspondent bank.

Financial institutions and large corporations that are involved in international trade will typically set up nostro accounts. This gives the organization the ability to hold funds in a foreign currency (via the facilitator bank), without the need to convert its own currency into a foreign currency.

Interestingly, for accounting purposes, the foreign bank calls this account a vostro account, meaning “yours.” It is the same as the nostro account, but each bank uses a separate term for their accounting purposes.

Recommended: What Are Traveler’s Checks?

Example of a Payment Using a Nostro Account

What is a nostro account and how, exactly, does it work in real life?

Say that a small domestic bank located in Colombia has a number of customers who are traveling, living, and working in the U.S. temporarily. The Colombian bank might establish a nostro account with a bank in the U.S. to offer services to those customers.

The U.S. bank would be the facilitator bank in this arrangement. As such, the U.S. bank could accept deposits on behalf of the domestic Colombian bank into its nostro account. Those deposits would be denominated in U.S. dollars (which is also considered the world’s reserve currency).

Funds, such as deposits to the U.S. bank, could then be forwarded to the domestic bank in Colombia through the SWIFT system. SWIFT is the Society for Worldwide Interbank Financial Telecommunications, a cooperative that offers safe and secure financial communications to facilitate cross-border transactions.

The Colombian bank could then convert the deposits to its local currency, and credit customers’ accounts with the corresponding amount of money, minus any fees charged.

Recommended: What Is Forex Trading?

Nostro Account vs. Vostro Account

The terns nostro and vostro both describe the same bank account, but from each bank’s perspective. That’s because the domestic bank looks at the funds in the other bank as “ours” — nostro.

Meanwhile, the bank in the other country that holds the account considers it a “vostro” account (vostro means “yours). The money in the account is held in a foreign currency (i.e., the currency of the correspondent bank), then converted to local currency once the funds are transferred to the domestic bank.

Essentially, the terms vostro and nostro simply help to distinguish between the two sets of records that must be kept and reconciled by the two banks.

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Advantages of a Nostro Account

•   There are several advantages to having a nostro account.

•   Ease of transactions in conducting international currency exchanges.

•   Nostro accounts allow you to pay money in your currency without having to incur foreign exchange risk.

•   Nostro accounts allow holders to keep funds in a foreign currency.

Disadvantages of a Nostro Account

•   There are also some disadvantages that come along with maintaining a nostro account.

•   There may be some added expenses associated with money transfers using nostro accounts.

•   Since you are working with financial institutions outside of the U.S., there are rules and regulations you have to comply with.

Banking Tips From SoFi

Nostro accounts are an important behind-the-scenes system that banks and large corporations rely on to make international and foreign exchange transactions seamless. This specialized system helps settle international trades and payments without one bank having to physically set up operations in a new country.

Nostro is Latin for “ours,” which is the term used by the domestic or originating bank. Vostro means “yours” and is the term used by the correspondent or facilitating bank that holds the funds on behalf of the other institution. The two terms refer to the exact same account, just from different perspectives for accounting reasons.

Despite the convenience, nostro accounts come with certain fees and expenses, along with regulations that must be adhered to when executing these transactions.

Fortunately, most individuals don’t have to consider vostro or nostro systems when opening up their personal bank accounts. For example, if you open an all-in-one bank account with SoFi, you’ll just enjoy the convenience of banking easily and securely from your phone or computer, no matter what is happening across borders. If you set up direct deposit, you can earn a competitive interest rate of 2.00% APY. Also, SoFi members pay no account or overdraft fees, and can access complimentary financial advice from professionals as needed.

Come see how quickly your money can grow with SoFi.

FAQs

What is a nostro account and why is it used?

A nostro account is a bank account a bank holds at a foreign bank denominated in a foreign currency where the account is held, and facilitates foreign exchange transactions with ease.

How do I open a nostro account?

Individuals don’t open nostro accounts. If you are part of a large bank or corporation, you would establish a nostro account with a bank overseas.

Does a nostro account earn interest?

A nostro account may earn interest, so it’s likely that deposits made with the foreign bank would offer competitive rates to customers relative to that location.


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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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Can a Foreigner Open a Bank Account in the US?

Guide to Opening a Bank Account as a Non-US Citizen

When non-U.S. citizens arrive in America, a key concern can of course be keeping their money safe and getting their financial life up and running — which are two key benefits of opening a bank account. Fortunately, many financial institutions allow those who are not citizens to do just that…which is a big relief for those who are new to residing in the 50 states.

Here, we’ll share:

•   How to open a bank account if you’re a non-citizen

•   What kind of identification is needed

•   How to secure an ITIN for identification

•   Alternatives to a bank account

Read on for the full story.

Is It Possible to Open a US Bank Account as a Non-Resident?

Yes, it is possible to open a U.S. bank account as a non-resident. However, not all banks may allow this. You’ll need to check with an individual financial institution to learn their policies, including what forms of identification will be required.

It can help to be very specific with your questions. For example, you might ask about the process of opening a checking account for a non-U.S. citizen or a savings account. Find out in advance what the requirements are so you know (and can prepare) exactly the sort of credentials and paperwork are needed. The goal is no surprises, right?

Recommended: What is a Savings Account and How Does it Work?

Typical Requirements for Opening a Bank Account

Even if you are a U.S. citizen, you will have a number of documentation requirements when it comes to opening a bank account. According to the USA PATRIOT Act of 2001, financial institutions must verify the identity of someone who wants to open a bank account to the “extent reasonable and practical.”

How this is accomplished can vary by financial institution, but here are typical requirements whether you are opening a bank account online or in person:

•   Contact information (name, address, phone number, email address)

•   Two forms of current government IDs such as a driver’s license and Social Security card

•   If you haven’t used a Social Security card as a form of ID, the financial institution will still ask for your Social Security number.

•   A current bill, such as a water or electric bill, with your current address

•   Minimum opening deposit (this is often $25)

Check with your bank of choice for more details.

Alternatives for Identification

Opening a bank account in a foreign country can mean, however, that you don’t have all the paperwork listed above. When applying for an account, if you can’t satisfy those requirements, you may be able to submit alternative documents. Other options can include the following:

•   If you don’t have a driver’s license, then you may provide a government-issued state ID or a U.S. military ID. All must be current/unexpired.

•   Other forms of secondary governmental IDs (besides a Social Security card) can include your original or certified birth certificate or your passport; a passport can also serve as your primary form of ID.

•   An ITIN if you’re not eligible for a Social Security number.

Next up: More about an ITIN, which can be a vital piece of identification for non-U.S. citizens, allowing them to bank in America.

What is ITIN?

You may wonder, “What is an ITIN?” as you pursue a bank account as an immigrant. It’s an important point to learn more about and can unlock financial services for you. ITIN stands for an “Individual Taxpayer Identification Number” and, according to the IRS, this serves as a tax processing identification number.

The IRS issues this number to people who need to have an identification number in the United States but are not eligible to get a Social Security number. A person’s immigration status is not relevant when applying for an ITIN because resident and non-resident aliens may each need to have this number. Worth noting: Getting an ITIN does not authorize you to work in America. It is simply a number that is used for tax-reporting purposes.

How to Apply for an ITIN

If you are not a U.S. citizen and want to apply for an ITIN, you have a few options. The IRS lists the steps for a couple of different options:

•   If you’d like to apply by mail, provide your W-7, proof of identity, tax return, and foreign status documents to the following address:

◦   IRS Austin Service Center, ITIN Operation, PO Box 149342, Austin, TX 78714-9342

◦   No return envelope is required for your documents to be returned. However, if you want your documents returned more quickly, you can include a prepaid express mail envelope or courier envelope.

•   If you will need these original documents within the next 14 weeks (which can be how long processing takes), you may decide to apply in person at a Certifying Acceptance Agent (CAA). Or you can submit certified copies rather than the originals.

◦   If you’re waiting for your original documents and 14 weeks have passed, call 800-908-9982 in the United States or 267-941-1000 outside the country for an update on their return.

•   Make an appointment at an official IRS Taxpayer Assistance Center . Multilingual operators are available.

Once you receive your ITIN, you can move ahead with opening a bank account.

Benefits of Opening a Bank Account

Opening a bank account can be a vital step in establishing and maintaining your day-to-day financial life in the U.S. Let’s spell out some of the benefits. The Federal Deposit Insurance Corporation (FDIC ) lists numerous reasons why opening a bank account can be beneficial:

•   Safety: FDIC insurance keeps your money safe even if a bank would fail and even if an unauthorized electronic transaction is made. (With the second, you’ll need to contact your financial institution in a timely way.)

•   Convenience: You can seamlessly have a paycheck directly deposited into your account, eliminating the possibility of a lost or stolen paper check. You can pay bills from your account, and transfer money to friends and family members.

•   Accountability: You can track your balance and the transactions made, and you’ll have a record of all of them. You can set up alerts to stay informed about these transactions and, once you have an account with a bank, you can then benefit from other services that the financial institution offers.

Depending on your situation, you may want to open an individual account solo or you might want to bank with another person, which will provide some joint bank account benefits. In either case, if you are a new owner of a checking account, it’s important to learn how to balance bank accounts and keep on top of your cash flow to avoid overdraft fees and the like.

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Alternative Accounts for Non-US Citizens

What if you are not a citizen, want to open a bank account, but don’t have or can’t get that ITIN? Although an ITIN is one of most common ways for a non-U.S. citizen without a Social Security number to identify themselves to get a bank account, financial institutions may also accept other IDs. For example, you may be able to present a passport number and the name of the country that issued it, an alien ID number, or another type of government-issued ID that identifies residency or nationality. It’s worth doing a bit of research to see if you can open an account with these forms of identification.

If you’d like to open an account with funds other than U.S. dollars, you might also want to consider a foreign currency account, which lets you send and receive funds in a foreign currency.

The Takeaway

Yes, you can open a bank account as a non-U.S. citizen and enjoy the convenience and security of a checking or savings account. However, extra steps are involved when it comes to providing forms of ID. An ITIN can be helpful when opening a bank account as a non-U.S. citizen. This form of identification can be worthwhile in getting your financial life up and running in America.

Are you looking for a better way to bank? If you need a home for your money, SoFi online banking can offer the right combination of hyper-competitive interest (2.00% APY) if you set up direct deposit. We won’t charge you account fees or overdraft fees.

See how much smarter banking can be with SoFi.

FAQ

Can a non-resident open a bank account in the US?

The answer to “Can an immigrant open a bank account?” is yes. Opening a bank account in the U.S. for non-residents comes with added steps: Someone who doesn’t qualify for a Social Security number must identify themself in another way, such as an ITIN, that’s acceptable to the financial institution.

How do I open a non-resident bank account?

You can check with a financial institution of choice to see whether they offer accounts to non-citizens and their specific policies on how a non-resident can open a bank account in the U.S. Ask what forms of ID you’ll need; you will likely be required to have an ITIN or an alternate form.

What identification is needed to open a bank account in the US?

Although specifics may vary by financial institution, in general, a bank will ask for contact information along with a utility bill that confirms your address; two forms of a government-issued ID; your Social Security number; and a minimum opening deposit. If someone isn’t eligible for a Social Security number, an ITIN may be an acceptable alternative.


SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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