Correspondent banking and Nostro/Vostro
Why a USD wire from Lagos to Singapore goes through three banks that each take a slice.
By Solomon Ajayi · Free to read, no signup
Your fintech needs to send $1,000 USD to a supplier in Singapore. Your Nigerian bank doesn't have a direct relationship with the Singaporean recipient bank. They use a CORRESPONDENT, a US bank where both your bank and the recipient bank hold accounts. Your bank debits its Nostro (the account it HOLDS at the US bank), the US bank credits the Singaporean bank's Vostro (the account they HOLD at the US bank). The wire passes through 3 institutional ledgers, each taking 15-50 USD in fees. This lesson walks the Nostro/Vostro pattern from your fintech's perspective so the ₦1,650 'mysterious wire fee' on the user's statement actually makes sense.
There is no single global ledger that moves dollars from Lagos to Singapore. Your Nigerian bank has no account relationship with the recipient's Singaporean bank, so they cannot just transfer between each other. They route through a correspondent, a US bank where both of them hold dollar accounts, and the money walks across three institutional ledgers in sequence. Each hop is a real bank making a real entry, and each one takes a slice on the way through.
Nostro and Vostro are the same account seen from two sides. A Nostro is the account you hold at someone else's bank: your money, sitting on their books. A Vostro is the account someone else holds at your bank: their money, sitting on your books. When the wire fires, your bank debits its Nostro at the US correspondent, and the correspondent credits the recipient bank's Vostro. To send dollars you first have to have dollars positioned in that Nostro, which is why your treasury buys the USD and funds the account before the wire can leave.
The fees are why the supplier receives $990 from a $1,000 wire: the correspondent takes its cut, the recipient bank takes another, and what survives is what lands. From your books the outbound $1,000 leaves the Nostro in one credit, and you split how it was spent, some to Correspondent Bank Fees, the rest to the amount that actually reached the recipient. The Nostro is a foreign-currency asset, so it also gets revalued at period close exactly like Lesson 45.
Worked example, step by step
User initiates: ₦1.65M for $1,000 USD wire
User wants to send exactly $1,000 to a supplier. Spot rate is 1500 NGN/USD = ₦1,500,000 in cost. You charge ₦150,000 in FX spread (10%, typical for retail FX in Nigeria's parallel-market reality). User's wallet drops by ₦1,650,000 total. NGN Treasury goes UP because you're now holding the NGN (you haven't bought the USD yet).
| Account | Debit | Credit |
|---|---|---|
| User Wallet (2000) | ₦1,650,000.00 | |
| NGN Treasury (1310) | ₦1,650,000.00 |
User Wallet DOWN ₦1,650,000 (debit). NGN Treasury UP ₦1,500,000 (the cost basis, debit). FX Spread Revenue UP ₦150,000 (income, credit), wait, this is the SPREAD you keep. NGN Treasury already captures cost; the SPREAD goes to revenue. Re-balance: User Wallet 1650 debit; NGN Treasury 1500 debit; FX Spread (income, but stored as an expense in this model to represent COST TO USER) 150 debit. We use 'FX Conversion Spread' as a tracking account, not classic revenue, so reconciliation against external FX rate stays clean.
Buy USD from sponsor bank's FX desk, fund Nostro
Your treasury team buys $1,000 USD from your Nigerian bank's FX desk at the agreed wholesale rate. The $1,000 lands in your Nostro account (the USD account YOUR bank holds for you at a US correspondent). NGN Treasury drops, USD Nostro rises.
| Account | Debit | Credit |
|---|---|---|
| USD Nostro (at US Bank) (1320) | $1,500,000.00 | |
| NGN Treasury (1310) | ₦1,500,000.00 |
NGN Treasury DOWN ₦1,500,000 (credit). USD Nostro UP $1,000 = ₦1,500,000 at book rate (asset, debit). You're now denominated in USD as far as this $1,000 is concerned. Foreign-currency assets get revalued at period close (Lesson 45 covers that mechanism).
Send the wire: $1,000 leaves Nostro, $35 in correspondent fees
Your bank instructs the US correspondent to debit your Nostro by $1,000 and credit the Singaporean recipient bank's Vostro. The US correspondent takes $25 (intermediary fee). The Singaporean bank takes $10 from THEIR side (your supplier sees $990 land in their account, not $1,000). The $35 in fees is your COST OF SERVICE, you book it as an expense.
| Account | Debit | Credit |
|---|---|---|
| Correspondent Bank Fees (5300) | $52,500.00 | |
| FX Conversion Spread (5310) | ₦1,447,500.00 | |
| USD Nostro (at US Bank) (1320) | $1,500,000.00 |
USD Nostro DOWN $1,000 = ₦1,500,000 (credit). Correspondent Bank Fees UP $35 = ₦52,500 at book rate (expense, debit). Wait, that's unbalanced. The $35 in fees CAME OUT of the SAME $1,000 the user paid. The Nostro account drops by the full ₦1,500,000, but we recognize $35 of it as fee and $965 as money that reached the recipient. Re-shape: NGN Treasury credited the full ₦1,500,000 earlier; the wire posting splits how the OUTBOUND $1,000 is allocated: 965 to the recipient (cleared), 35 to fees.
Takeaway
Cross-border wires through correspondent banking always have three institutional ledgers in motion: yours, your correspondent's, the recipient's. Nostro is the asset YOU hold at someone else's bank (your money, their books); Vostro is the asset SOMEONE ELSE holds at your bank (their money, your books). Every wire eats fees at every hop, which is why your supplier in Singapore receives $990 from a $1,000 wire. This is also why neobanks aggressively build LOCAL accounts in every market, Wise model in lesson 49, to bypass the correspondent chain entirely.
Practice this on a real ledger
Reading is half of it. Open this lesson in the lab to post the entries yourself against a real Postgres-backed double-entry ledger, with the validation on. Free, your sandbox is yours.