Vostro accounts are special types of international accounts that allow one bank to keep another bank’s money on deposit. Money in a vostro account is held in the home currency of the bank where the account is located.
“Vostro” is from the Latin, meaning “yours,” and the term is used to denote the account being held on behalf of the other bank. Vostro accounts can offer greater convenience for domestic banks operating in foreign countries.
What Is a Vostro Account?
What is a vostro account in banking? In simple terms, it’s another bank’s account with a reporting bank in another country. This arrangement can be used in situations where one bank needs a cross-border intermediary to complete international financial transactions. For example, businesses based in the U.S. may use vostro accounts at European banks, to manage global banking activity there, where they have customers or conduct transactions.
A vostro account describes a relationship between two banking institutions; it does not refer to personal accounts.
How a Vostro Account Works
Correspondent banking means formal arrangements or relationships that exist between domestic and foreign banks to facilitate cross-border transactions. The correspondent bank is the financial institution that provides services to another bank.
When vostro accounts are used in global banking operations, one bank acts as the account holder while a second bank is the account manager. The account manager is responsible for managing the account of the correspondent bank as a vostro account.
Vostro accounts work much the same as other bank accounts, in terms of how they’re used and the types of transactions that are completed. For example, vostro accounts enable you to make deposits and withdrawals as well as transfer money from one bank to another. They can also be used to complete foreign exchange transactions.
Why Are Vostro Accounts Used?
Vostro accounts are primarily used to make the settlement of international financial transactions easier. A vostro account handled by a correspondent bank acts as a bridge between domestic and foreign banking markets.
Entities that operate in one country can expand their financial footprint to other countries without having to base operations in those countries. They may pay fees to the correspondent bank in exchange for the banking services rendered. But those fees may be more cost-effective than establishing branches in a foreign market.
Vostro Account vs Nostro Account
It’s important to understand that vostro and nostro both describe the same bank account, but from each bank’s perspective. The correspondent bank looks at the money in a vostro account as belonging to the domestic bank. In other words, they see this money as “yours,” hence the use of the vostro label. Again, this money is held in the foreign bank’s home currency.
The domestic bank, meanwhile, views the money as “ours.” In Latin, nostro translates to “ours.” 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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Vostro Account Example
Here’s an example of how vostro accounts work. Say that a small domestic bank located in Portugal has a number of customers who are living and working in the U.K. temporarily. The Portuguese bank might establish a vostro account with a bank in the U.K. to offer services to those customers.
The U.K. bank would be the correspondent bank in this arrangement. As such, the U.K. bank could accept deposits on behalf of the domestic Portuguese bank into its vostro account. Those deposits would be denominated in British pounds sterling.
Funds, such as deposits, in the vostro account could then be forwarded to the domestic bank in Portugal 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 Portuguese bank could then convert the deposits to euros, and credit customers’ accounts with the corresponding amount of money, minus any fees charged.
Vostro Account in an Agency Relationship
An agency relationship is a situation in which one entity has legal authority to act on behalf of another. Vostro accounts can be used when an agency relationship exists between a correspondent bank and a domestic bank. In this scenario, the correspondent bank is authorized to act on behalf of the domestic bank.
The correspondent bank has a fiduciary duty to the domestic bank, meaning it is obligated to act in the bank’s best interest. This is similar to how a fiduciary financial advisor must act when managing assets and making investment decisions on behalf of clients.
Vostro Account in an Intermediary Relationship
An intermediary is an individual or entity that acts as a go-between for other entities. In intermediary banking, one financial institution can receive funds from another bank on behalf of a third party at another bank.
In situations where a domestic bank does not have an established account with a foreign bank, a correspondent bank can step in to help complete transactions via a vostro account. For example, if Bank A needs to wire money to Bank B, they can send the funds to the vostro account. The correspondent bank can then forward the funds to Bank B, less any fees it may charge for doing so.
Advantages of a Vostro Account
Whether it makes sense for a bank to open a vostro account can depend on its individual needs. Here are the main advantages of vostro accounts:
• Establishing a vostro account could make sense for domestic banks that want to be able to complete global banking transactions in other countries, without having to open branches in those locations.
• Vostro accounts can be used to meet a variety of banking needs, including managing deposits, withdrawals, wire transfers, and foreign exchange transactions.
• Setting up a vostro account can be a good way to establish positive relationships with international banks.
Disadvantages of a Vostro Account
While nostro accounts can serve a specific purpose for domestic banks, there are some downsides to consider. Here are the main disadvantages of a nostro account:
• The fees associated with nostro accounts may be steep, meaning domestic banks pay a premium for the convenience they offer.
• Nostro accounts may not earn interest and if they do, the rate may be well below what more traditional bank accounts offer.
• Domestic banks may need to meet stringent requirements in order to establish a nostro account.
The Takeaway
A vostro account is held at one bank on behalf of another bank to facilitate international banking transactions. A vostro account handled by a correspondent bank acts as a bridge between domestic and foreign banking markets. This is one way that banks can offer services in other countries, without needing to establish operations abroad.
Vostro is Latin for “yours,” which is why the correspondent bank that holds the funds on behalf of the other institution uses that term. The originating bank calls the account a “nostro” account, meaning “ours,” because they are keeping a record of the transactions conducted via the foreign bank. Vostro and nostro refer to the same account, but different record keeping.
Fortunately, most people don’t have to consider vostro or nostro systems when opening up a personal account. When you open a high yield bank account with SoFi, you’ll just enjoy the convenience of banking easily and securely from your phone or computer — and earning a competitive interest rate. Also, SoFi members can access complimentary financial advice from professionals as needed.
FAQ
Who can open a vostro account?
Domestic banks can set up vostro accounts with correspondent banks abroad to facilitate international transactions.
What are vostro payments?
Vostro payments are transactions that occur within a vostro account. Correspondent banks can execute a number of transactions on behalf of domestic banks, including accepting deposits, completing withdrawals, and carrying out foreign exchange transactions.
What is the difference between a nostro and vostro account?
A nostro account and a vostro account are the same account. The correspondent bank views the account as a vostro account while the domestic bank views it as a nostro account. Using the two terms helps to distinguish between the recordkeeping for each.
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