International Banking: How it works, types & services

International banking is a complex field comprising letters of credits, investments as well as cross-border transactions. Due to technological progress and new financial service providers, international payment options are diversifying. Just a few years ago, this part of international banking was almost exclusively dominated by the costly and slow SWIFT network.

Nowadays, individuals and companies have cheaper and faster alternatives to send money abroad. In this article, we explain how international banking works and what you can do to optimise your cross-border payments.

What is international banking?

International banking summarises all services offered by banks to facilitate international trade, including investments, lending operations and cross-border transactions. As such, most businesses with an international customer or supply base need to have a thorough understanding of how international banking works and which players are involved in order to minimise costs and streamline payment processes.

While traditional banking arrangements have been dominating international banking for decades, new financial service providers are offering innovative ways to send money abroad, which take just a fraction of the time and costs of the SWIFT network.

International banking arrangements

Before we introduce you to solutions of how to avoid the SWIFT network and profit from local payment schemes, we explain the most common types of international banking arrangements and processes.

Correspondent bank

Correspondent banks establish relationships with other banks abroad to facilitate seamless cross-border transactions. Correspondent banking relationships enable banks to conduct transactions in foreign countries without physical presence. Or in simple terms: The correspondent bank connects domestic with foreign banks and acts as intermediary.

When using SWIFT, a bank transfer between 2 institutions is only possible if there is a direct commercial relationship. If there is no direct relationship between sending and receiving bank, the money flows through a chain of intermediary banks. Every time money is sent through SWIFT, 2 to 5 banks are involved in the process, leading to slow processing times and higher transaction fees.

Representative office

Banks set up representative offices to conduct limited activities abroad. This includes, among others, maintaining relationships with correspondent banks in the host country as well as marketing or promotional activities.

A representative office enables the parent bank to efficiently deal with local regulations and lending requirements. Therefore, the purpose of a representative office is not to capture new markets, but to better serve customers in the home market.

Foreign branches

While representative offices are set up abroad to conduct limited banking activities and to better serve the home market, foreign bank branches are a means to expand into new markets and to target new customers.

Therefore, foreign bank branches enable banks to operate in different countries. The services offered abroad may differ from the local ones depending on the laws and regulations of the host country.

Subsidiary and affiliate banks

Similar to branch offices, subsidiary and affiliate banks can also be used to reach new markets. The main difference of these entities can be found in the ownership structure and the level of independence.

A subsidiary bank is majority-owned (more than 50%) and controlled by a parent bank, which means that the parent bank continues to have strategic and operational control. In contrast, the ownership stake in an affiliate bank is less than 50%, which also reduces the level of control.

Offshore banks

Offshore banks are located in offshore financial centres, commonly referred to as tax havens. One major reason why companies and individuals deposit their money in offshore banks lies in asset protection against lawsuits or political instability in their home country.

The reason is that these jurisdictions offer legal, regulatory and tax environments, which are usually more favourable compared to the parent bank. Offshore banks usually operate as branches or subsidiaries.

Is international banking expensive?

Now that you have a better understanding of how international banking works and which players are involved, you might ask yourself about the costs associated with cross-border payments. As previously mentioned, every SWIFT transaction can involve up to 5 (intermediary) banks before the money reaches the receiving account. This leads to transaction fees of up to 5%. However, there are ways to engage in international banking at local conditions.

While Europeans are used to sending Euros through SEPA, US citizens use ACH. These payment schemes serve the purpose of making money transfers faster and cheaper within a given economic zone. The problem: Usually only companies and individuals within these regions are able to use local payment schemes. This is where amnis comes into play.

How to avoid the expensive SWIFT network?

Companies with a global customer and supply base know the problems associated with the SWIFT network: Next to extraordinarily high fees, the slow, intransparent process makes it difficult to trace the money or to make any changes, once the international payment is initiated. Therefore, companies are looking for alternatives to avoid the SWIFT network altogether.

amnis is a financial service provider where you can open a business account, which enables companies to profit from local payment schemes, no matter whether local business or global corporation. With amnis, there is no need to open separate foreign currency accounts at your local bank, as you are able to collect more than 20 currencies within one interface. Even better: You can open local IBAN accounts in your company’s name in the most relevant markets worldwide – even if you don’t have a local presence.

Your amnis demo account

As a global financial service provider, amnis enables SMEs and corporations to profit from local payment schemes and to avoid the SWIFT network. This helps companies streamline their financial processes and save huge amounts of transaction fees on both, the sender’s and beneficiary’s end, which can be used for more important projects. Sign up for a free demo account and find out how much money you can save from day 1.