International banking transactions don’t always work exactly the same as domestic banking. For example, banks can use nostro accounts to hold funds in foreign currencies. You may hear the terms ‘nostro account’ and ‘vostro account’ used in discussions of foreign trade and currency exchange. Both terms actually refer to the same account but mean different things.
If you’re interested in offshore banking, your financial advisor can walk you through the rules and regulations that apply when setting up these accounts.
What Is a Nostro Account?
A nostro account is an account that one bank holds in the bank of another country in a foreign currency. The term ‘nostro’ comes from Latin and means “ours.” When you’re discussing nostro accounts, you’re really talking about ownership of the funds in that account.
Banks can use nostro accounts to facilitate the movement of international trade and currencies. So, for example, a bank in the United Kingdom that does business in Japan might open a nostro account and deposit money into it. But instead of holding those funds in pounds sterling, the money is held in the local currency, i.e., Japanese yen, instead.
Corporations can also set up nostro accounts in countries where they do business and have a high volume of foreign exchange transactions. Nostro accounts can offer convenience, since holding funds in the local currency can save the entity that established the account the trouble of having to convert foreign currencies.
How a Nostro Account Works
Nostro accounts work by allowing one party to hold money in a bank in a foreign country in that country’s currency. When transactions are conducted through a nostro account, the bank that holds the account aids in completing transactions involving different currencies.
Here’s an example of how a nostro account might be used. Say that a U.S.-based company is interested in doing business in France. Their current bank doesn’t offer banking services in Europe, but they’re able to find a facilitator bank that offers nostro accounts.
The company establishes a nostro account through the second bank and deposits money into the account. Funds in the account are held in euros, not U.S. dollars. The bank that holds the account will then facilitate transactions on behalf of the company, with those transactions taking place in euros.
Banks that offer nostro accounts act as intermediaries for an entity that wants to do business in a particular country but lacks a physical presence or banking access there. Money can move in and out of a nostro account, smoothing the completion of deposit and withdrawal transactions. Nostro accounts make it easier to document the movement of funds since they require strict recordkeeping.
Nostro Account vs. Vostro Account
As mentioned, nostro accounts and vostro accounts are essentially two sides of the same coin. While ‘nostro’ means ours, ‘vostro’ means yours. A nostro account and a vostro account are the same accounts but you use different terminology to describe who owns the money that’s held in it.
Here’s an example of how nostro and vostro accounts work together. Let’s assume you own a business that’s based in Canada, and you want to be able to complete financial transactions in the U.S. You open a nostro account with a U.S.-based bank which allows you to hold money in U.S. dollars.
The bank that’s holding the money on your behalf describes it as a vostro account. In the bank’s eyes, that money is yours, hence the vostro label. Payments or other deposits you receive into the account belong to you. The intermediary bank then helps to facilitate the movement of that money to your home bank, where it can be converted into the local currency.
Pros and Cons of Nostro Accounts
Nostro accounts are something you may never need if you don’t engage in international banking or trade. But they can be an important part of a business’s financial strategy.
Here are some of the benefits of using a nostro account to manage money:
- Nostro accounts make it easier for money to move between banks in different countries
- Using a nostro account can help to reduce exchange rate risk
- Being able to hold funds in a foreign currency without having a physical presence in a foreign country adds convenience to business operations
- Nostro accounts can make it easier to keep track of the movement of funds, since the holding bank is required to keep accurate ledgers of transactions
On the other hand, nostro accounts can have some drawbacks.
- Nostro accounts are subject to numerous regulatory requirements, which can sometimes make them difficult to open
- Cybercrime and fraud are always potential risk factors, which could be detrimental for businesses that have a higher volume of foreign transactions
- A nostro account may not earn any interest and you might pay higher fees to maintain this type of account
- Nostro accounts may not be an option in countries that lack fully convertible currencies
Again, you may not need to consider a nostro account if you don’t own a business. But if you do run a company that does business internationally, it’s important to evaluate how a nostro account might help to meet certain financial needs.
You may also use a nostro account to invest internationally. If you own an investment property in another country but don’t live in that country full-time, for instance, you may use a nostro account to hold funds for the maintenance of the property or to receive income payments from the property.
How to Open a Nostro Account
If you need to open a nostro account, the first step is finding banks that offer them. You can start with your current bank to see if nostro accounts are offered. If not, you can search online for banks that allow you to establish nostro accounts in other countries. Big banks may be a better place to look compared to smaller, local banks.
Once you find a bank, you’ll need to complete an application and submit any required documentation. For example, you may be asked to provide two forms of government ID, such as a driver’s license or passport. You may also need to provide financial statements if you’re establishing a nostro account for business purposes or proof of income if you’re opening one for personal use. The bank may also require a minimum opening deposit.
When comparing nostro accounts, it’s important to check the list of countries and currencies the bank facilitates transactions in. If a country’s currency is not convertible, meaning it cannot be easily bought and sold on the foreign exchange market, then you may not be able to open a nostro account there.
Nostro accounts might be less familiar to you than other types of bank accounts but it’s possible that you may need to use one to complete transactions in foreign currencies as a business owner or investor. Also, keep in mind that nostro accounts play an important part in keeping international trade moving behind the scenes.
- A financial advisor can help you decide whether you might need a nostro account to run a business or engage in international financial transactions. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Offshore bank accounts allow you to hold money outside of your home country for various purposes. You might open an offshore bank account if you’re compensated for work that you do in a foreign currency, hold property or investments in another country or are planning to retire abroad when the time comes. Offshore bank accounts can potentially offer a tax-advantaged way to save money for investors while keeping your money secure.
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