Intermediary Bank

Intro to Intermediary Bank?

An intermediary bank serves as a critical link in the global financial infrastructure, facilitating international payments between financial institutions that don’t have direct banking relationships. Also known as a correspondent bank or an agent bank, this entity acts as the middle point in cross-border transactions, enabling the smooth flow of funds across different countries, currencies, and banking systems. Understanding the role and function of intermediary banks is essential for HR and finance professionals who manage international payroll, vendor payments, and other cross-border financial operations.

Definition of Intermediary Bank

An intermediary bank is a financial institution that serves as a third-party facilitator between two banks engaged in an international transaction where no direct banking relationship exists. These banks act as conduits for international wire transfers and other cross-border payments, processing transactions on behalf of the originating bank and the beneficiary bank.

When a sender’s bank does not have a direct relationship or account with the recipient’s bank—often because they operate in different countries or financial systems—an intermediary bank with established connections to both institutions bridges this gap. The intermediary receives funds from the sending bank, processes the transaction according to international banking protocols, and forwards the payment to the receiving bank.

Intermediary banks typically maintain a global network of correspondent banking relationships and hold accounts in multiple currencies, enabling them to process transactions across different monetary systems. They utilize international banking identification codes such as SWIFT (Society for Worldwide Interbank Financial Telecommunication) to securely route funds and transaction information between financial institutions.

It’s important to note that while intermediary banks provide essential services for global commerce, their involvement in transactions may incur additional fees and potentially extend processing times compared to domestic transfers.

How an Intermediary Bank Works

The process typically involves three key stages—initiating, transferring, and crediting.

Here’s how it works step by step, using a payroll example:

1. Payment Initiation:
   An employer’s bank (the originating bank) sends funds to an intermediary bank located in the same country as the employer.

2. Fund Transfer:
   The intermediary bank forwards the money to another intermediary or directly to the employee’s local bank (the receiving bank). In some cases, multiple intermediary banks may be involved if no direct transfer route exists.

3. Crediting the Account:
   Finally, the receiving bank credits the employee’s account with the transferred amount.

This chain ensures international payments—like cross-border payroll or vendor payments—reach their final destination, even when banks don’t have direct connections.

Importance of Intermediary Bank in HR

Intermediary banks play a crucial role in several HR functions, particularly those involving international financial operations:

Global Payroll Processing: For organizations with international employees, intermediary banks facilitate salary payments across borders. HR departments rely on these banks to ensure that compensation reaches employees in different countries accurately and on time, which is essential for maintaining workforce satisfaction and compliance with local payment regulations.

Contractor and Vendor Payments: When working with international contractors, consultants, or service providers, HR and procurement teams depend on intermediary banks to process payments efficiently. This is particularly important for companies that leverage global talent through independent contractor arrangements or service agreements with international vendors.

Expatriate Compensation Management: Organizations with expatriate employees often need to split compensation between host and home countries or provide allowances in local currencies. Intermediary banks enable these complex payment arrangements, supporting HR’s ability to implement competitive international assignment packages.

Mergers and Acquisitions: During international corporate transactions, HR departments involved in transition planning and integration rely on intermediary banks to handle cross-border financial aspects of these processes, including severance payments, retention bonuses, and benefit transfers.

Financial Services Integration: For HR teams working with international financial service providers, such as financial technology companies, understanding the role of intermediary banks helps ensure seamless integration of payment systems with HR platforms.

Banking Relationship Management: HR professionals involved in treasury and financial operations benefit from knowledge of banking hierarchies and relationships, including the role of intermediary banks, to optimize international payment strategies and minimize transaction costs for the organization.

Compliance and Documentation: International payments processed through intermediary banks must comply with various regulations, including anti-money laundering laws and sanctions. HR departments need to understand these requirements when documenting and justifying international payments related to employment and services.

Intermediary vs. Correspondent Banks

While both intermediary and correspondent banks help facilitate international payments, they serve slightly different purposes.

Correspondent Banks

• Provide a broad range of financial services to foreign or partner banks.

• Handle currency exchange, securities settlements, and trade transactions.

• Maintain formal agreements with other banks.

• Follow strict compliance and due diligence standards to prevent money laundering and fraud.

• Often used by smaller banks to access global financial networks.

Intermediary Banks

• Used specifically for fund transfers between banks that lack a direct connection.

• Primarily focus on routing payments rather than offering full-service banking functions.

• May deduct handling or conversion fees as money moves between accounts.

• Typically don’t maintain long-term agreements with the other banks involved.

• Can sometimes pose tracking challenges, as multiple intermediaries may handle one transaction.

In short, correspondent banks manage ongoing international relationships, while intermediary banks are transaction-specific connectors that ensure funds get where they need to go.

Examples of Intermediary Bank

Here are three practical examples of how intermediary banks function in HR-related scenarios:

Example 1: International Payroll Processing
A US-based technology company employs software developers in Eastern Europe through its local subsidiary. When processing monthly payroll, the company’s US bank doesn’t have a direct relationship with the small regional bank in Ukraine where many employees have their accounts. To complete these salary payments, an intermediary bank—in this case, a large multinational bank with operations in both North America and Eastern Europe—facilitates the transaction.

The process begins when the company’s HR department initiates payroll through their US bank, specifying the intermediary bank’s SWIFT code in the payment instructions. The US bank transfers the funds to the intermediary, which then converts dollars to local currency at the prevailing exchange rate and forwards the payments to the employees’ bank in Ukraine. Throughout this process, the intermediary bank applies its expertise in currency conversion, international banking regulations, and cross-border payment protocols to ensure the employees receive their compensation correctly and on time.

Example 2: Global Contractor Payment
A UK-based marketing agency contracts with a graphic design firm in Singapore for a major project. When the project is completed, the HR and finance team must process a significant payment to the Singaporean contractor. The agency’s British bank doesn’t maintain a direct correspondent relationship with the contractor’s local Singaporean bank.

In this scenario, a major Asian-based international bank serves as the intermediary. The UK agency includes the intermediary bank’s details in the wire transfer instructions along with the ultimate beneficiary information. The funds first move from the UK bank to the intermediary bank, which then completes the final leg of the transaction to the Singaporean bank. The intermediary bank handles currency conversion from British pounds to Singapore dollars and ensures compliance with both countries’ banking regulations and reporting requirements. This arrangement allows the HR department to maintain reliable payment processes with international contractors despite the lack of direct banking relationships.

Example 3: Expatriate Benefits Transfer
A French multinational corporation transfers an executive to its subsidiary in Brazil for a three-year assignment. As part of the expatriate package negotiated by HR, the company needs to split the executive’s compensation—paying base salary in Brazilian reais to a local bank account while depositing allowances and retirement benefits in euros to the executive’s home country account.

The company’s bank in France has no direct relationship with the regional Brazilian bank where the executive has opened a local account. An intermediary bank with strong presence in both Europe and South America facilitates the Brazilian portion of the monthly payments. The HR department works with corporate treasury to establish a recurring payment process, providing the intermediary bank’s information in the payment instructions. Each month, the intermediary bank receives the funds from France, converts the specified amount to Brazilian reais at competitive rates, and completes the transfer to the executive’s local account. This arrangement enables HR to fulfill the terms of the expatriate agreement while navigating the complexities of cross-border banking between France and Brazil.

Why Intermediary Banks Matter for Global Payroll and EOR Transactions

For global employers and Employer of Record (EOR) providers like Asanify, intermediary banks play a vital role in enabling cross-border salary payments. They ensure timely, compliant, and traceable transfers especially when managing employees in countries where local banks don’t directly connect to international networks.

Key benefits in EOR operations include:

• Reliable international fund routing even across complex banking networks.

• Compliance assurance under global payment and anti-money-laundering (AML) regulations.

• Faster payouts through optimized intermediary partnerships.

• Transparency in global payroll costs, as intermediary fees can be pre-calculated.

By partnering with an EOR like Asanify, businesses can simplify global payments—reducing dependency on multiple banks and ensuring employees get paid on time, anywhere in the world.

Common Risks and Challenges of Intermediary Banks

While intermediary banks have earned trust over the years as reliable partners for international payments, they also come with certain risks especially in global workforce and payroll transactions. Employers using intermediary banks to pay remote or overseas employees may encounter several challenges:

1. Payment Delays

Many intermediary banks still rely on legacy systems and manual processes. These outdated infrastructures can cause significant delays, leading to late salary disbursements, employee dissatisfaction, and even compliance penalties for employers.

2. Process Complexity

Each additional bank in the payment chain increases the risk of errors, fraud, or miscommunication. With multiple intermediaries involved, tracking the exact status of a transaction can become complicated.

3. Compliance Difficulties

International payments must comply with a variety of local and global banking regulations. When several intermediary banks are part of the process, each may have its own compliance requirements, making it harder for employers to maintain consistent regulatory adherence.

4. Lack of Transparency

Intermediary banks often provide limited visibility into transaction progress or fee deductions. This lack of transparency can make it difficult for companies to confirm whether payments are being processed correctly or to identify where funds may be delayed.

5. Exchange Rate Fluctuations

Because currency rates can shift rapidly, intermediary banks without advanced FX management technology may struggle to manage fluctuations effectively. As a result, employees may receive slightly more or less than their intended salary amount.

How HRMS platforms like Asanify support Intermediary Bank

Modern HRMS platforms provide several capabilities that streamline processes involving intermediary banks:

Global Banking Information Management: Advanced HRMS systems maintain secure databases of international banking details, including intermediary bank information for various country combinations. This functionality allows HR and payroll teams to store and access the correct banking codes and routing instructions for different payment corridors, reducing errors in international transactions.

Automated Payment Routing: Sophisticated HRMS platforms can automatically determine when intermediary banks are required based on the originating and destination countries in a transaction. The system can then apply the appropriate routing instructions and include necessary intermediary bank details without manual intervention, improving efficiency and reducing errors.

Payment Instruction Templates: HRMS solutions offer country-specific payment instruction templates that incorporate the proper format for including intermediary bank information according to different national banking standards. These templates ensure that all required fields for international transfers are completed correctly, reducing payment delays and returns.

Banking Relationship Management: Modern HRMS platforms help organizations manage their banking relationships by tracking which banking corridors require intermediary banks and which financial institutions serve as preferred intermediaries for different regions. This visibility helps organizations optimize their international payment strategies.

Fee Transparency: Advanced systems provide visibility into the fee structures associated with different payment routes, including costs added by intermediary banks. This transparency allows HR and finance teams to make informed decisions about the most cost-effective ways to process international payments.

Payment Tracking: Comprehensive HRMS platforms offer tracking capabilities that monitor transactions as they move through intermediary banks, providing visibility into the payment journey and estimated delivery times. This feature allows HR to provide accurate information to employees or vendors about when they can expect to receive their funds.

Compliance Documentation: HRMS systems maintain detailed records of international payment instructions, including intermediary bank details, supporting documentation requirements for anti-money laundering compliance, and audit trails of payment approvals. These records are essential for demonstrating regulatory compliance in cross-border transactions.

Integration with Financial Services: Leading HRMS platforms integrate with international payment providers and financial technology services that specialize in optimizing cross-border transactions, potentially reducing reliance on traditional intermediary banking networks for certain payment corridors.

FAQs about Intermediary Bank

1. Why are intermediary banks necessary for international payments?

Intermediary banks are essential when the sending and receiving banks don’t have a direct relationship. They help route funds safely across borders, manage currency conversions, and ensure compliance with global banking regulations.

2. How do intermediary banks affect the cost and timing of international payments?

They can add extra fees—usually $10–$50 per transaction—and small currency conversion margins. Processing times may increase by 1–3 business days, especially for transfers involving multiple intermediaries or time zone differences.

3. What information is required to include an intermediary bank in payment instructions?

You’ll need the intermediary bank’s name, location, and SWIFT/BIC code. Depending on the region, you may also need local clearing codes (like ABA or SORT) to ensure proper routing and avoid transfer delays.

4. How can organizations minimize fees and delays associated with intermediary banks?

Use global banks with extensive networks or specialized payment providers. Negotiating FX margins, choosing efficient routes, and using payment automation tools can significantly reduce both costs and delays.

5. What are the compliance considerations when working with intermediary banks?

All parties must comply with AML, sanctions, and data privacy laws. Intermediary banks often review transactions for suspicious activity, which can delay payments if additional documentation is required.