What it means
When a company asks its bank to make a payment, especially across borders, the bank often cannot deliver the money directly to the recipient. It sends instructions through the banking system to other banks that hold the accounts needed.
The bank that gives those instructions is the instructing bank. In a simple domestic payment the instructing bank may pass the order straight to the bank of the payee.
In an international payment it often uses a correspondent bank, which is a bank that holds accounts for other banks and acts as their agent abroad. Each bank in the chain receives an instruction from the one before it and passes one on to the next.
Payment messages follow standard formats, such as those carried over the SWIFT network and the ISO 20022 standard, which name the parties involved. The instructing party in these messages identifies who is giving the order and who will be debited or credited.
This allows the payment to be tracked and any error to be traced back. For businesses, knowing who the instructing bank is helps when a payment goes missing or is delayed.
The customer's own bank is the first instructing bank, and it can give the payment reference needed to ask each later bank in the chain where the funds are. The nuance is that the term describes a role rather than a particular bank.
A bank can be the instructing bank for one payment and the receiving bank for another, depending on which way the message is travelling. Charges can also arise at each step.
The instructing bank may charge a fee for sending the payment, a correspondent may deduct its own fee, and the receiving bank may charge for crediting the account. Companies that need the supplier to receive the full invoice amount can ask for the sender to pay all fees, which is a charge option usually set in the payment instruction.
In practice
Real-world examples.
Example
A Dubai trading company asks its bank to pay a supplier in Germany. Its bank, acting as instructing bank, sends a message to a correspondent, which passes the funds to the supplier's bank.
Example
A US importer's payment is delayed. The treasurer asks the bank for the payment reference and which bank was named as the instructing party, so she can ask the next bank in the chain for a status update.
Example
A payroll provider submits a batch of salary payments. The provider's bank acts as instructing bank, sending the file to the clearing system so that employees' accounts are credited the next morning. The employer pays the bank a fee per file, and the payroll team checks the confirmation report each month. The provider reconciles the confirmation against its records, so that any missing salary can be traced quickly.
Case study
Seen in the real world.
Northgate Exports is an illustrative, fictional company that paid a $75,000 invoice to an overseas supplier. Three days later the supplier said the money had not arrived and threatened to hold back the next shipment.
The finance manager phoned the company's bank, which was the instructing bank, and obtained the payment reference and the name of the correspondent bank it had used. A query to the correspondent showed that the payment had been paused for a routine compliance review because the beneficiary's name on the instruction did not exactly match the account name.
The bank corrected the name and the funds were released the same day. In this illustrative story, the manager updated the company's supplier forms to capture exact account names, which avoided repeat delays. The finance manager also asked the bank to confirm in future that the fees would be charged to the company, so the supplier would receive the full $75,000. The manager also wrote a one-page checklist for the accounts payable team, covering name, account number, bank identifier and payment reference for every overseas supplier.
Watch out
Common mistakes.
- Assuming the instructing bank is the bank that finally pays the recipient, when it is the one that sends the instruction.
- Entering beneficiary details loosely, such as abbreviated names, which can cause compliance holds along the chain.
- Thinking the role is fixed, when a bank can be the instructing bank on one payment and the receiving bank on another.
Questions
People also ask.
Who is the instructing bank when I send an international payment?
It is normally your own bank, which receives your order and instructs the next bank in the chain to carry it out.
What is a correspondent bank?
It is a bank that holds accounts for other banks and handles payments on their behalf in markets where they have no presence.
How can I trace a delayed payment?
Ask your bank for the payment reference and the list of banks involved, then ask each one in turn for the status.
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