How do correspondent banks support cross-border payments?

Correspondent banks play a crucial role in facilitating cross-border payments through their established relationships with local banks in different countries. These relationships enable banks in one country to access and utilize the banking infrastructure of another country. When a bank needs to send money abroad but does not have a direct presence in the receiving country, it can partner with a correspondent bank that has established ties there.

This arrangement allows the originating bank to process international transactions efficiently, as the correspondent bank can handle the local currency and comply with local regulations. This system helps mitigate the challenges associated with international transactions, such as differing currencies, regulatory requirements, and differing banking systems.

While other options touch on different aspects of payments, they do not accurately represent how correspondent banks function in the realm of cross-border transactions. For instance, opening branches in other countries requires significant investment and does not necessarily provide the immediate transaction capabilities that a correspondent relationship does. Similarly, international credit cards and digital wallets are tools for individual consumers and businesses rather than mechanisms for banks to conduct cross-border payments. Hence, developing banking relationships with local banks is the fundamental way correspondent banks support cross-border payments.