The agent bank operates as a financial institution performing specific duties on behalf of another party. These roles can include acting for an individual or a company, as well as providing services for one or more financial institutions. There are various agent banking arrangements available.
Definition and Examples of Agent Banks
Agent banks act on behalf of other parties in financial matters and can operate in various capacities to meet the needs of an individual, company, or another bank. They offer a range of services that can assist in conducting business both locally and internationally.
How Does an Agent Bank Work?
How an agent bank operates depends on its specific type. Some agent banks are simply responsible for carrying out account transactions for customers on behalf of the custodian bank, or arranging loans or credit cards. Others have more complex responsibilities, such as handling securities transactions abroad or assisting with the financial aspects of international mergers.
Types of Agent Banks
Various entities can function as agent banks to facilitate the transfer of securities, provide borrowing and investment opportunities, expand potential service offerings, and assist in everyday consumer banking transactions. Some of the main types of agent banks include:
Investment Banks
Investment banks typically act as agent banks for companies that need to borrow for a large project and require funding from more than one lender. For example, your company might want to expand significantly into a foreign country or merge with another company. In this case, the investment bank can help you secure financing from a consortium of banks known for their synergy.
Retail Agent Banks
Commercial banks may use agent banks to help customers manage everyday banking transactions. Commercial banks often prefer this type of arrangement when customers find it inconvenient to visit a traditional branch due to time or distance, making this arrangement beneficial in remote areas. The commercial agent bank can be located at a third-party retailer or post office, or it can be a specific individual appointed as an agent.
Foreign Agent Banks
When there’s a need to trade investments between countries, the depository financial institution may utilize one or more agent banks in the targeted country to facilitate the transaction. These agent banks will act as sub-custodians and guide the depository bank on how to settle securities in that location and the local rules related to trading. The rules relating to the expectations of both parties are defined.
Credit Card Agent Banks
Some agent banks assist other financial banks that wish to offer credit cards using their own branding. In this case, the issuing bank will handle the application process and gather payments from customers. At the same time, the agent bank will benefit from lower risk and liability compared to taking on all duties internally.
While the agent bank will pay commissions, it will financially benefit from fee income associated with the ability to offer these branded credit cards to customers. The issuing bank will also provide customer support and marketing throughout the duration of the relationship.
Source: https://www.thebalancemoney.com/what-is-an-agent-bank-5216800
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