How Cross-Border Payments Actually Work: Settlement, Clearing, and the Correspondent Chain

Every day, trillions of dollars move across borders. Businesses pay suppliers in other countries, platforms pay out to global contractors, and treasury teams move funds between subsidiaries. Yet most finance professionals, including many who initiate these payments daily, have only a vague understanding of what actually happens between clicking “send” and the beneficiary receiving funds.

That gap matters. When a payment takes five business days instead of one, the cost isn’t simply the wire fee. It’s the supplier who can’t release goods until they see the funds. It’s the port storage charges accumulating while shipments wait. It’s the working capital locked in transit that can’t be deployed elsewhere.

Understanding how cross-border payments work is a prerequisite for evaluating whether newer approaches offer genuine improvements or just different tradeoffs.

The Three Stages of Every Payment

Every payment, whether it crosses a street or an ocean, moves through three distinct stages. The mechanics change depending on the payment type, but the stages are universal.

Stage 1: Initiation

The sender creates a payment instruction. This could be a wire transfer request submitted through a banking portal, an API call to a payment provider, or even a paper form at a bank branch. At this point, no money has moved. An instruction exists, nothing more. The sender bears the risk: their account has been debited or earmarked, but the beneficiary has received nothing.

Critically, payments at this stage are easily reversible. The sending bank hasn’t committed anything to the broader financial network yet.

Stage 2: Clearing

The payment instruction is transmitted, validated, and reconciled between financial institutions. In the cross-border context, this typically involves messaging networks like SWIFT, which transmit payment instructions between banks.

A common misconception: many people believe that SWIFT moves money. It does not. SWIFT is a messaging network. When your bank sends a SWIFT message, it creates an obligation between institutions - a promise that money will follow. The actual movement of value happens in the next stage.

During clearing, the payment instruction passes through compliance checks, format validations, and routing decisions. Each intermediary bank in the chain performs its own screening. This is one reason cross-border payments take longer than domestic ones: every institution in the chain applies its own compliance and operational processes.

Stage 3: Settlement

Settlement is the final, irrevocable transfer of value. In the United States, most large-value interbank settlement happens through Fedwire, the Federal Reserve’s real-time gross settlement (RTGS) system. When a payment settles on Fedwire, the sending bank’s reserve account at the Federal Reserve is debited and the receiving bank’s reserve account is credited.

The transfer is immediate, final, and backed by the full faith and credit of the central bank.

This distinction—between a message that says money is coming and the actual movement of money on a central bank ledger—is fundamental to understanding why cross-border payments behave the way they do.

Messages and Money: Why Your SWIFT Confirmation Doesn’t Mean You Got Paid

This is worth emphasizing because it surprises many experienced finance professionals.

When a bank sends a SWIFT MT103 (a single customer credit transfer) and receives a SWIFT acknowledgment (ACK), that acknowledgment confirms only that the message was delivered to the next bank in the chain. It does not confirm that funds have arrived, that the payment cleared compliance screening at the receiving bank, or that the beneficiary’s account has been credited.

After a SWIFT ACK, a payment can still fail for several reasons:

• The receiving bank’s compliance screening flags the transaction for review
• Account details don’t match (name mismatch, invalid account number)
• The correspondent bank’s nostro account has insufficient funds to cover the transfer
• The payment arrives after the receiving bank’s processing cut-off time
• A correspondent bank in the chain places a compliance hold

Each of these scenarios results in a payment that looks like it was “sent” but hasn’t actually been completed. For the sender, the funds have left their account. For the beneficiary, nothing has arrived. The payment is somewhere in between - and identifying exactly where it is can require manual investigation across multiple institutions.

The Correspondent Banking Chain

Domestic payments are relatively straightforward because both banks typically have accounts at the same central bank. The central bank acts as a trusted intermediary, debiting one and crediting the other on its own ledger.

Cross-border payments are structurally different. A bank in the United States and a bank in Nigeria don’t share a central bank. They may not have any direct relationship at all. So the payment has to travel through a chain of intermediary banks, called correspondent banks, that do have relationships with each other.

A typical cross-border payment from the U.S. to Nigeria might look like this:

1. The U.S. sending bank receives the payment instruction and debits the sender’s account
2. The sending bank routes the payment to a U.S. correspondent bank (often in New York) with international reach
3. The U.S. correspondent sends a SWIFT message to a correspondent bank with a relationship in Nigeria (possibly via an additional intermediary in London)
4. The Nigerian correspondent credits the beneficiary’s bank based on the SWIFT instruction
5. The beneficiary’s bank credits the recipient’s account

That’s four or more institutions, each with its own compliance processes, operating hours, and processing queues. Each correspondent adds time, fees, and potential points of failure.

Why Cross-Border Payments Take Days Instead of Hours

The delay is structural, created by the interaction of several factors that no single institution controls.

Business hours and time zones

Banks process payments during their local business hours. A payment initiated in New York at 4 PM EST arrives at a London correspondent after their cut-off time, so it queues for the next business day. If that next day is a Friday, and the Nigerian bank is closed for a local holiday on Monday, the payment waits until Tuesday.

Sequential compliance screening

Every bank in the chain runs its own sanctions screening, AML checks, and risk assessments. These are independent processes. The London correspondent doesn’t trust the New York bank’s screening; it runs its own. If anything triggers a review, the payment pauses until a human analyst clears it.

Nostro account pre-funding

Correspondent banks maintain accounts with each other (called nostro and vostro accounts) that must be pre-funded with the relevant currency. If a nostro account doesn’t have sufficient balance, the payment waits until it’s replenished. This is part of why major banks collectively hold billions in pre-funded correspondent accounts around the world—capital that’s effectively locked up to keep the system running.

Batch processing and netting

Some clearing systems, like CHIPS (the Clearing House Interbank Payments System), process payments in batches and net obligations between banks before settling the net amount on Fedwire. This is efficient in aggregate but introduces processing windows and delays for individual payments.

Manual exceptions handling

When payments fail format validation, trigger compliance alerts, or encounter processing errors, they enter manual exception queues. At large correspondent banks, these queues can be substantial, and resolution depends on human analysts communicating across institutions, often by email or phone.

The result: a payment that takes seconds to initiate can take two to five business days to complete, sometimes longer for less common currency corridors. The total cost includes not just explicit fees (typically $25–$50 per intermediary) but also FX spread markups at each conversion point and the opportunity cost of capital in transit.

What’s Changing: Stablecoin Settlement Rails

The structural challenge of cross-border payments: multiple intermediaries, each adding time and cost, has driven interest in alternative settlement rails, including those built on stablecoin infrastructure.

The concept is relatively straightforward. Instead of routing a payment through a chain of correspondent banks, each operating on its own schedule with its own compliance processes, the cross-border leg of the transaction is settled using stablecoins: digital assets designed to maintain a stable value relative to a reference currency like the U.S. dollar.

In this model, fiat currency is converted to a stablecoin at a licensed on-ramp in the sending country, transferred on a blockchain network (which operates 24/7 with settlement typically completing in minutes), and converted back to local fiat currency at a licensed off-ramp in the receiving country. The sender and the beneficiary only ever touch fiat currency. The stablecoin layer sits underneath as infrastructure, invisible to both sides of the transaction.

This approach can compress what was a multi-day, multi-intermediary process into something significantly faster, because the cross-border leg no longer depends on correspondent banking hours, nostro account balances, or sequential compliance queues at each intermediary.

It’s worth noting that this model introduces its own considerations. Stablecoins carry reserve risk (is the backing actually there and liquid?), redemption risk (can you convert back to fiat at scale during stress?), and regulatory risk (how do evolving regulations affect the model?). Any serious evaluation of stablecoin settlement rails needs to weigh these factors alongside the speed and cost benefits. The technology changes the plumbing, but it doesn’t eliminate the need for compliance, risk management, and sound operational practices.

The Takeaway for Business Leaders

Cross-border payments are slow and expensive because the structure is complex. Multiple sovereign jurisdictions, independent compliance regimes, and a chain of intermediary banks each add their own friction.

Understanding this structure is the starting point for evaluating any solution, whether it’s optimizing your existing banking relationships, exploring newer payment rails, or implementing stablecoin-based settlement infrastructure. The question isn’t just “is there a faster way?” It’s “what tradeoffs does each approach introduce, and which tradeoffs are acceptable for my business?”

The payments landscape is evolving. Regulatory frameworks like MiCA in Europe and the GENIUS Act in the United States are creating clearer rules for digital asset-based payments. Institutional adoption of stablecoin settlement is moving from pilot programs to production volume. But the fundamentals haven’t changed: every payment still needs to be initiated, cleared, and settled - and doing so across borders will always involve navigating multiple legal, regulatory, and operational environments.

The businesses that manage cross-border payments most effectively are the ones that understand what’s actually happening underneath.

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