The concept
An international payment appears as a transaction between a sender and a beneficiary. The banking infrastructure is almost always more complex: the sender's bank may hold no account in the required currency, no direct access to the local payment system and no presence in the beneficiary's country. It then places liquidity with another bank and instructs that bank to complete settlement.
That is correspondent banking — a bilateral correspondent-account relationship between banks. One bank keeps the customer relationship; the other supplies its presence in a currency and a payment system. The customer does not normally select the correspondent and may not know of it until a payment is delayed, an amount is reduced by charges or a bank asks for documents.
Safeguarding addresses a related but separate question. A correspondent account determines how a financial institution obtains settlement access; safeguarding determines how a non-bank operator separates customer money from its own. Both appear in an app in the same way, as a balance or an account number, but the customer's rights on a freeze, on withdrawal of a bank's licence or on insolvency differ fundamentally.
The legal regimes here are stated as at 17 August 2026 and cover the EU, the United Kingdom, the United States, Canada, Singapore and Hong Kong.
How a bank obtains access to another institution's infrastructure
A banking licence does not make a bank a participant in every settlement system. Dollar payments require dollar liquidity and access to US infrastructure; sterling payments require access to UK settlement; euro payments require participation in T2 or in the SEPA schemes; renminbi requires a separate network of banks and clearing institutions. International banking is therefore built as a network of bilateral relationships.
The bank serving the end customer is the respondent bank. The bank with which it holds funds and through which it settles is the correspondent bank. The respondent's account at the correspondent is called a nostro account; the same account in the records of the bank that maintains it is called a vostro account. These are not two assets but two views of one obligation. The terminology appears in the ECB survey of 2020, and the model itself in the CPMI definition.
The correspondent relationship supplies the respondent with several capabilities at once:
| Capability | What the correspondent provides | How it appears in the product |
|---|---|---|
| Liquidity | An operating balance in the required currency | A bank or fintech supports USD, EUR, GBP or another currency without a presence in that country |
| Settlement access | Connection to a local or international payment system | ACH, wires, SEPA and CHAPS become available through one interface, with instructions carried over SWIFT |
| Banking perimeter | Compliance, sanctions controls, payment operations and interaction with other banks | A platform serves cross-border business without incorporating a bank in every jurisdiction |
Much of modern fintech is built on this architecture. One interface may combine local account details, international transfers, foreign exchange, cards, contractor payouts and sometimes stablecoins. Different functions are nevertheless performed by different banks, card issuers, custodians and payment institutions. A "global account" is usually a product assembled from several regulated perimeters and several legal entities.
How one international payment moves
A dollar payment from an account held with a fintech appears on screen as a single operation. Up to five roles take part in executing it.
| Step | Participant | What it does | What obligation arises |
|---|---|---|---|
| 1 | The customer's fintech, EMI or bank | Accepts the instruction, checks the customer and reduces the available balance | Owes duties to the customer under an account, e-money or payment-services contract |
| 2 | Respondent bank | Creates the payment instruction and selects the route | Disposes of its own balance in its nostro account |
| 3 | Correspondent bank | Debits the nostro account, runs compliance checks and passes settlement onward | Performs the respondent's instruction within the scope of the correspondent-account agreement |
| 4 | Settlement system | Completes the final movement of money between banks | Creates settlement finality under the rules of Fedwire, CHIPS, T2, CHAPS or another system |
| 5 | Beneficiary bank | Receives the funds and credits the supplier | Owes the credited amount to its customer |
SWIFT carries messages in this chain. The network is not a payment or settlement system. Final settlement takes place across bank accounts — through Fedwire or CHIPS in dollars, T2 in euro and CHAPS in sterling.
Settlement finality arises under the rules of the particular system: in CHIPS a payment once released and settled is final and irrevocable, while T2 settles continuously in central bank money with immediate finality. When the money reaches the end customer's account is determined separately.
Where the sending bank has no direct relationship with the beneficiary bank, an intermediary correspondent joins the chain, sometimes more than one. Each bank sees only part of the transaction, applies its own sanctions and AML filters and may deduct charges. The same sender and beneficiary therefore produce different routes depending on the currency, the time of day, the available intermediary and current risk policy.
The institution that answers to the customer is the customer's own, under its contract and the applicable payment-services law. Adding an intermediary does not by itself transfer the customer's claim to another bank in the chain.
Why a fintech looks like a global bank
A modern platform separates the customer experience from the banking infrastructure. The user sees one dashboard while the product is assembled from several layers.
Local account details. A platform can issue dollar, euro or sterling account details without being a participant in Fedwire, SEPA or CHAPS. Partner banks or payment institutions with the necessary infrastructure supply the access.
Named and virtual accounts. The details may be issued in the customer's own name, point to a dedicated sub-account or merely route a payment into an omnibus account. The EBA found in 2024 that there is no common definition of a virtual IBAN and that they are issued in different ways and for different purposes. A named IBAN by itself identifies neither the holder of the underlying account nor the applicable protection.
A unified currency layer. The product may select the bank, the FX market and the payment system automatically while displaying one rate and one payment status. The more fully a platform discloses legal entities, banks and charges, the clearer the real chain becomes.
APIs and automation. Correspondent infrastructure turns cross-border payments into software: bulk payouts, virtual account details, automated reconciliation, limits and routing. The technical layer may be modern while the settlement foundation remains traditional.
What "account" and "balance" mean
The product layers explain where the functionality comes from, but not the question that decides the customer's position: what the balance actually is. The same figure in an app can represent claims of quite different legal character — against a bank, against a payment institution, against a token issuer — and that character governs what happens on insolvency.
| What the customer sees | What may sit underneath | Main consequence |
|---|---|---|
| Bank account | A direct customer deposit on a licensed bank's balance sheet | The customer is a creditor of the bank; a deposit guarantee responds to the failure of that bank itself, up to the scheme's coverage limit |
| EMI or payment-institution account | E-money or a payment claim backed by a segregated pool, or by insurance or a guarantee | The customer does not become a depositor of the bank holding the pool; the insolvency outcome depends on which safeguarding method was used |
| Virtual IBAN or named account | A routing layer to a dedicated or pooled underlying account | The name in the account details does not answer the question of ownership or protection |
| Omnibus / FBO account | One provider-held account for the benefit of many customers | Protection depends on beneficial-owner records, the contractual structure and insolvency law |
| Stablecoin balance | A claim on the token issuer or a digital asset in custodial or self-hosted storage | A separate legal regime applies — see stablecoins |
The decisive question is not which IBAN appears in the interface, but which legal entity owes the customer money and where the asset supporting that obligation is held.
The same distinctions sit behind standard provider claims. Marketing language describes the customer experience rather than the legal structure beneath it, so identical promises can rest on materially different products.
| Claim | What it may mean | What determines the substance |
|---|---|---|
| "Local account" | A direct account, a sub-account or a virtual IBAN | The contracting legal entity, the underlying account, the owner of the funds and access to the local system |
| "Funds protected" | Deposit guarantee, safeguarding, trust, insurance or mere contractual segregation | The law, the type of institution and the event that triggers protection |
| "Instant payment" | Instant internal display or final settlement in a payment system | The payment system, the cut-off time, the banks on both sides and the moment of settlement finality |
| "Global banking product" | One interface over several banks and licensed providers | Who is responsible for each function, and whether replacing one partner can halt the whole product |
| "FDIC protection" | Direct or pass-through protection of a particular bank deposit | The insurance responds to the bank's failure, not the app operator's; pass-through depends on the account being disclosed as an agency or custodial account and on beneficial owners being ascertainable |
The reading rule is the same in each row: the phrase describes the interface, while the conditions in the right-hand column describe the legal structure. They need not coincide.
How a non-bank balance is protected
A bank may deploy deposits in its business and is liable to the depositor to the extent of its whole estate. A payment institution or EMI must not use the customer-money pool to fund its own lending. The law requires those funds to be segregated, or covered by insurance or a guarantee.
In the EU, Article 10 PSD2 — in the version as replaced by Regulation (EU) 2024/886, which Member States were required to apply by 9 April 2025 — establishes two independent methods. The first: keep user funds unmingled with those of anyone other than payment service users; by the end of the business day following receipt, deposit them in a separate account in a credit institution or, at that central bank's discretion, in a central bank, or invest them in secure, liquid low-risk assets; and insulate them, in accordance with national law, from the claims of other creditors on insolvency. The second: cover them by an insurance policy or a comparable guarantee from an insurer or credit institution outside the payment institution's group. The same replacement extended Article 10(1) expressly to electronic money institutions, which the earlier text reached through EMD2. Replacement of both regimes was agreed politically on 27 November 2025 and approved by the European Parliament's lead committee on 5 May 2026, but as at 17 August 2026 the PSD3 and PSR texts had not been formally adopted or published in the Official Journal.
The customer does not become a depositor of the bank holding the safeguarding account. The outcome on failure of the operator depends on the method used: return of the segregated pool, or a payout under the insurance policy or guarantee. Protection on withdrawal of the bank's licence or on the bank's own insolvency depends on national law and on how beneficial owners are recorded.
In the United Kingdom, CASS 15 has applied since 7 May 2026 and supplements the requirements of the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 without replacing them. It is an interim regime: the FCA did not proceed with a statutory trust over customer funds and has announced no date for moving to a permanent regime. On the failure of the operator itself the FSCS pays nothing, and user claims are met from the asset pool in priority to other creditors, net of the costs of distributing the pool.
Failure of the bank holding the safeguarding account is a separate case with a different outcome. The PRA depositor-protection rules, in force since 12 March 2023, require the FSCS — where the funds sit as a deposit with a UK establishment of a PRA-authorised bank — to look through such an account and calculate compensation by reference to each underlying customer, each up to the scheme limit, rather than to the institution that opened it, the institution itself being excluded as a depositor. Beneficiaries are paid directly only where an insolvency event has also occurred in relation to the institution and they have been identified and verified; otherwise the compensation is paid into a replacement safeguarding account. The UK regime is set out separately.
In the United States there is no federal safeguarding regime for money transmitters. CSBS reports that 31 states had adopted the Money Transmission Modernization Act in whole or in part as at 26 February 2026. The protection itself comes from the enacted state statute: Massachusetts law, for example, requires permissible investments — even where commingled with the licensee's other assets — to be held in trust for the benefit of holders of outstanding money transmission obligations on the licensee's insolvency or bankruptcy. FDIC insurance responds to the failure of the insured bank and does not protect against the bankruptcy of a non-bank entity; the custodial-account recordkeeping rule proposed after the April 2024 Synapse bankruptcy remained a proposed rule as at 17 August 2026.
In Canada, the RPAA permits a trust account, a separate account supported by insurance or a guarantee, or a prescribed account or prescribed manner; no right of set-off may be asserted against such an account.
In Singapore, a major payment institution's duty under section 23 of the Payment Services Act extends beyond e-money issuance to domestic and cross-border money transfer and merchant acquisition. Funds are safeguarded by an undertaking or guarantee from a safeguarding institution, by a trust account with one, or in another prescribed manner: from the time of receipt for e-money, and no later than the next business day for the other services in scope. E-money is not a bank deposit and is not protected by deposit insurance.
In Hong Kong, the MSO licence regulates AML, money changing and remittance activity and creates no obligation to segregate customer funds or hold them on trust. Segregation arises only under the separate SVF licence regime, where the HKMA expects an effective trust arrangement securing users' priority on the licensee's insolvency and, where the licensee provides justifications, allows a bank guarantee or insurance as an alternative or supplementary arrangement. Money held in a stored value facility is not covered by the Hong Kong Deposit Protection Scheme.
One feature is common to all of these regimes: priority operates against the pool as it stands and does not guarantee recovery in full.
How protection differs across regimes
| Regime | Core structure | What should not be assumed |
|---|---|---|
| Bank | Deposit on the bank's balance sheet | A deposit guarantee responds to the failure of the bank itself, up to the scheme limit; an institution holding the account for its clients is not itself covered as depositor, although some schemes look through such an account to the underlying customers |
| EU PI / EMI | Segregated pool, or insurance or a guarantee from outside the group, under Article 10 PSD2 and EMD2 | Safeguarding is not a deposit guarantee; the outcome depends on the method used and on national law |
| UK payment/e-money firm | Asset pool and user priority, net of the costs of distributing the pool; CASS 15 adds operational requirements | The FSCS pays nothing on the operator's own failure; on failure of the PRA-authorised bank holding the pool, compensation is calculated per underlying customer up to the scheme limit; there is no statutory trust over the funds today |
| US money transmitter | State law: permissible investments held in trust for holders of money transmission obligations | There is no federal safeguarding regime; FDIC insurance does not respond to a non-bank operator's bankruptcy |
| Canada PSP | Trust account, a separate account with insurance or a guarantee, or a prescribed manner | PSP registration does not make the operator a bank; a trust and a guarantee produce different outcomes |
| Singapore MPI | Undertaking, guarantee, trust account with a safeguarding institution, or a prescribed manner | The duty is wider than e-money issuance; e-money is not insured as a deposit; the method chosen changes the outcome |
| Hong Kong MSO | AML, fit-and-proper, records and reporting | The MSO licence does not protect a customer-money pool; segregation comes only with an SVF licence, where a trust, guarantee or insurance is permitted |
What determines the quality of a product's banking infrastructure
The number of partner banks says little by itself. A resilient structure combines several qualities.
It is clear who the contracting party is. For every account, card, transfer and wallet it should be clear which legal entity answers to the customer. A group brand or an interface does not supply that information.
A transparent custody and settlement chain. The easier it is to establish the underlying account, the bank, the jurisdiction and how beneficial owners are recorded, the less uncertainty arises on return of funds, in a dispute or on insolvency. This matters most for omnibus structures and virtual IBANs.
Sufficient depth in the currency route. A direct correspondent usually delivers more predictable timing and pricing, although a single bank creates concentration. Multiple routes improve resilience and complicate control and reconciliation.
Genuine local access. Local account details are useful where they actually reach the local payment infrastructure, reduce the number of intermediaries and are accepted by counterparties. A country code in an IBAN without a clear contractual model remains an interface feature.
Data management. A correspondent product carries structured information about the payer, beneficiary, banks and payment purpose alongside the funds. Defective data will stop a transfer as surely as insufficient liquidity.
Two services making the same "international account" promise can therefore differ substantially. One opens a direct bank account for the customer and uses a short settlement route. The other displays virtual account details over a pooled account and several intermediaries. Both can be lawful and useful, but their cost, speed, resilience and protection are not the same.
Who checks what in a correspondent relationship
The resilience of the structure rests not only on the choice of partners but on how the duty to check is divided between the two banks. The Basel Committee states the governing principle: the respondent remains responsible for due diligence on its own customers, while the correspondent conducts due diligence on the respondent as its direct customer. The practical consequence is that a correspondent cannot substitute the respondent's compliance for its own assessment of the respondent, and the respondent cannot rely on the correspondent's checks in place of its own.
FATF Recommendation 13 turns the principle into a set of duties: gather information on the respondent, assess its anti-money-laundering and counter-terrorist-financing controls, obtain senior management approval before establishing a new relationship, and record what each party does. The UK's regulation 34 of the Money Laundering Regulations 2017 imposes a comparable set for relationships with a third-country respondent.
The check is not one-off. In the United States, 31 CFR 1010.630 operates as a safe harbour: an institution is deemed compliant if it obtains a certification or recertification from the foreign bank at least once every three years, and where it cannot obtain one the account is closed within a commercially reasonable time.
Industry questionnaires are widely used, but they do not replace the institution's own assessment: the FCA treats exclusive reliance on the Wolfsberg Group questionnaire as poor practice.
What happens when a correspondent exits
A correspondent relationship is usually ended by the correspondent's commercial decision, but termination is sometimes compelled by law: 31 USC 5318(k) requires a correspondent relationship to be terminated within 10 business days of written notice of non-compliance, and FinCEN's special measure regarding Huione Group prohibits US financial institutions from maintaining a correspondent account for it altogether.
The CPMI recorded in 2016 that relationships are terminated where, among other things, the respondent does not generate volumes sufficient to recover compliance costs, its jurisdiction is perceived as too risky, or the information needed for an adequate risk assessment of its customers is unavailable. Some respondent banks may as a result be cut off from international payment networks, and the range of available options for those transactions could narrow.
The FATF states that the wholesale cutting loose of entire countries and classes of customer, without taking their money laundering and terrorist financing risk seriously and comprehensively into account, is not in line with the FATF standards. That is a standards-compliance position; it imposes no outright prohibition on ending a relationship.
Comparable statistics on the number of relationships are no longer published: the CPMI and SWIFT ended the annual quantitative review with the 2022 data. The official access indicator still maintained gives a different picture: on FSB data for the first quarter of 2025, 7.6% of countries and territories had fewer than three institutions sending or receiving a cross-border payment via SWIFT — and those are territories of larger countries — while wholesale access remained strong across the 2023 to 2025 monitoring period.
The practical conclusion here is operational: resilience of currency access depends on whether a second route already works and how quickly it can be brought into service. What a correspondent demands of the respondent itself is set out in banking for a licensed operator.
Why payments are delayed or arrive short
An international payment passes through several independent filters. The customer's bank checks the source, the purpose and the sanctions profile. The correspondent assesses both the individual transfer and the respondent bank itself: its licence, ownership, customer base, AML framework and nested correspondent relationships. The FATF separately states that the Recommendations do not require a correspondent to conduct due diligence on the customers of its customer.
In practice, delay is caused by incomplete or unstructured account details, a mismatch between the message and supporting documents, sanctions exposure, insufficient liquidity in the nostro account, a local cut-off time or a manual bank query.
In MT messages, field 71A records how bank charges are allocated; in ISO 20022 the same three codes correspond to ChargeBearer codes.
| MT 71A / ISO 20022 | What the code means |
|---|---|
| OUR / DEBT | The payer is responsible for all charges, including those of intermediaries and of the beneficiary's bank |
| SHA / SHAR | Charges are shared: the payer pays its own bank, the beneficiary pays its own |
| BEN / CRED | The beneficiary pays all charges; every bank in the chain may deduct fees and so reduce the amount received |
The meaning of the codes follows Federal Reserve guidance; ISO 20022 also has the code SLEV for charges processed under a service level agreement between banks. Charges taken by preceding banks are deducted from the payment and reported in field 71F. DEBT allocates responsibility for charges and does not by itself guarantee that the beneficiary receives the full amount.
What ISO 20022 changes
ISO 20022 makes payment data structured. Banks gain more precise sanctions screening, automated reconciliation and fewer ambiguous fields; the customer becomes more dependent on the quality of account details and supporting evidence. Settlement timing continues to depend on liquidity, sanctions controls, the number of banks and the settlement system's rules.
Coexistence of old and new formats for core cross-border payment instructions ended on 22 November 2025. Certain MT messages continue to be converted, with contingency processing and in-flow translation chargeable from 1 January 2026. Statements and reporting are mandatory to receive in ISO 20022 from November 2027, with coexistence for them ending in the 2028 standards release.
How the correspondent layer is shrinking
The correspondent layer can shrink where non-bank institutions obtain direct access to settlement infrastructure. In the EU, from 6 October 2025 payment institutions and EMIs established in the Union or the EEA may request access to TARGET. Admission is at the central bank's discretion, but not at large: a request may be refused only where it fails to meet the applicable requirements. Such an account serves settlement: the Eurosystem is expressly prohibited from providing safeguarding accounts to non-bank PSPs.
In the United Kingdom, CHAPS has more than 35 direct participants, while thousands of financial institutions work through them indirectly — a model the Bank of England expressly describes as agency or correspondent banking. In the United States, a direct Fedwire participant must maintain a master account at a Federal Reserve Bank; others use an institution that has one. That boundary is examined separately under Fed payment accounts.
Tokenised bank money, networks such as Partior and Fnality, and stablecoins can remove particular intermediary steps and extend settlement hours. The same question arises for each of them: every new settlement infrastructure still has an issuer or settlement asset, admission rules, compliance, custody and a procedure on insolvency.
What remains constant
Correspondent banking distributes banking presence among institutions. It allows a bank or fintech to give a customer several currencies, local account details and cross-border payments without creating a full bank in every market.
The quality of the product depends on the clarity of the contractual chain, the quality of the correspondents, access to the required currencies, backup routes, data accuracy and the legal status of the customer balance.
Q/A
The bank holding my provider's customer funds has failed, but the provider is still operating. What happens?
It depends on the jurisdiction and the safeguarding method. In the United Kingdom, where the funds sit as a deposit with a UK establishment of a PRA-authorised bank, the PRA rules calculate compensation for each underlying customer up to the scheme limit, but pay customers directly only where the institution has itself entered an insolvency event; otherwise the money goes into a replacement safeguarding account. In the EU the result turns on national law and on how beneficial owners are recorded.
The beneficiary received less than I sent. Is that an error?
Not necessarily. Where the payment carries BEN / CRED, the beneficiary bears the charges and every bank in the chain may deduct its own. Even under OUR / DEBT the payer is responsible for charges, which by itself does not guarantee that the full amount arrives. Deductions taken by preceding banks are reported in field 71F.
My name appears in the account details. Does that mean the account is in my name?
No. A named IBAN may point to a dedicated sub-account, or it may merely route the payment into the provider's omnibus account. Virtual IBANs have no single legal model, so a name shown against an IBAN determines neither the holder of the underlying account nor the protection that applies.
Does a payment licence mean customer money is segregated?
Not always: the duty follows the particular licence rather than the fact of being regulated. In Hong Kong an MSO licence creates no obligation to segregate customer funds — that arises only under the separate SVF regime. In Singapore the duty attaches to major payment institution status and reaches well beyond e-money.
The app says FDIC protection. Does that cover me if the app operator fails?
No. FDIC insurance responds to the failure of the insured bank, not to the bankruptcy of the app operator, and pass-through cover depends on the account being disclosed as an agency or custodial account with beneficial owners ascertainable. There is no federal safeguarding regime for money transmitters: protection comes from the enacted state statute, and CSBS recorded 31 states with the Money Transmission Modernization Act adopted in whole or in part as at 26 February 2026.