The Intermediary Problem: Why More Banks Mean More Risk

Every cross-border payment tells the same quiet story: money leaves one country, passes through a chain of financial institutions, and arrives days later, lighter, with a trail of fees behind it. In cross-border payments, the intermediary problem is the extra risk, cost, delay, and blurred accountability that appear when money moves through multiple banks instead of directly from payer to payee. The more banks that sit between a payer and a payee, the more places a transaction can slow down, fail, or expose the parties to risk.

The intermediary problem is not new. It has simply become more visible now that businesses and merchants can compare the friction of traditional correspondent banking with faster digital alternatives. If you send, receive, or reconcile international payments, understanding what intermediaries are, why banks rely on them, where payment chains break down, how this compares with intermediary liability in the digital world, and which newer payment models reduce those handoffs will help you cut hidden fees, reduce failures, and make payment reliability a controllable part of your operation.

Key Point Summary

• What is an intermediary, and why do financial institutions like banks play this role?
• More banks, more risk: the mechanics of the problem
• The parallel debate: intermediary liability in the digital space
• What the market is doing about it
• Practical takeaways for businesses

What is an intermediary, and why do financial institutions like banks play this role?

An intermediary is any party that stands between a principal and the outcome the principal wants. In finance, banks are the classic example because they provide financial services, not just pass funds between parties. A bank takes a deposit from one customer and lends it to another; it accepts cash from merchants and settles card payments; it holds accounts on behalf of customers who rely on it to manage, move, and safeguard their money, even though the bank often knows more about how the process works than the customer does.

This is an important role. Banks provide security, deposit insurance (in the United States, through the FDIC), regulatory oversight, and the practical convenience of not having to carry cash or settle every transaction in person. When the modern banking system was founded, physical branches in every city were the only way to participate in the financial system. You went to a branch, spoke to a clerk, or later picked up a telephone to communicate with your bank. Financial access was tied to geography: a firm incorporated in New York, Connecticut, or Maryland dealt primarily with banks in those states, and interstate, let alone international, payments were slow by design. That structure helped economic development by widening access to trusted banking, but it also increased dependence on intermediaries.

That legacy structure still shapes how money moves today. A payment from a company in Lagos to a supplier in Frankfurt does not travel directly. It hops through correspondent banks, each of which is an intermediary with its own compliance checks, cut-off times, and fees. When those incentives diverge from the business trying to move funds efficiently, they can distort outcomes and push decision-makers toward suboptimal choices. Each hop is a point where something can happen: a compliance flag, a delay, a rejected transaction, a request for documents. Those intermediary relationships can also complicate negotiations and create conflicts over loyalties and incentives across the chain. Each intermediary must respond to its own regulators, conduct its own due diligence, and manage its own risk, and every one of those steps costs the end customer time and money. Communication gaps arise too, because intermediaries often use technical banking jargon customers do not fully understand.

More banks, more risk: the mechanics of the problem

Why does adding banks to a payment chain increase risk rather than reduce it? Three reasons.

First, every intermediary is a potential point of failure. In a chain of four correspondent banks, the transaction is only as reliable as the weakest link. If one institution in the chain de-risks a corridor, as many did across Africa and parts of Latin America over the past decade, the entire route can disappear with little notice. Businesses that rely on a single correspondent path can find themselves unable to pay suppliers in an entire country overnight.

Second, costs compound. Each bank in the chain charges fees, applies its own FX spread, and may deduct charges directly from the principal amount. The sender pays one price; the recipient receives another; nobody in between is required to express the total cost transparently. For a business making thousands of payments a month, this compounding cost is a permanent tax on growth, reducing working capital that could otherwise support investment.

Third, accountability diffuses. When a payment goes missing, who is responsible? The sending bank blames the correspondent; the correspondent blames the receiving institution. The customer, meanwhile, has a legal relation with only one of them. Getting legal support to trace a failed payment across three jurisdictions is expensive, slow, and often not worth the cost of the transaction itself. Liability, in practice, dissolves somewhere in the middle of the chain.

The parallel debate: intermediary liability in the digital space

Interestingly, finance is not the only industry wrestling with the intermediary problem. The internet has its own version, and the comparison is instructive.

Search engines like Google, social platforms, and hosting providers are intermediaries between users and content. For decades, the law in most jurisdictions has given these platforms limited liability for what their users publish: a website or platform is generally not treated as the author of the content it hosts. This principle, known as intermediary liability protection, was designed to give the digital space freedom to grow. Without it, no site could afford to let users participate, publish ideas, or engage with communities at scale, because every upload would be a potential lawsuit.

But society is now re-examining that bargain. When illegal content or harmful content spreads through a platform, should the intermediary be responsible? Regulators in the EU, the UK, and several US states argue that platforms which profit from user activity must also conduct meaningful moderation, respond to notice-and-takedown requests, and invest in tools that protect users. The debate is unresolved, but the direction is clear: the more essential an intermediary becomes to how people communicate and trade, the less society is willing to let it disclaim responsibility.

The lesson for finance is the mirror image. Digital platforms started with too little accountability and are being pushed toward more. Banking started with heavy, fragmented accountability spread across too many intermediaries, and the market is now pushing toward fewer, more directly accountable ones.

What the market is doing about it

Three developments are compressing the intermediary chain.

Central bank innovation. Instant payment systems built by central banks, such as SEPA Instant in Europe, FedNow in the US, and PIX in Brazil, let financial institutions settle directly in central bank money, removing correspondent layers for domestic payments. Cross-border linkage projects aim to do the same between countries. A central bank rail replaces a chain of private intermediaries with a single, publicly operated one.

Fintech disintermediation. A new generation of payment firms was founded on the express idea that most hops in the chain add cost without adding value. Instead of routing a payment through five banks, a specialised payments company holds licensed accounts on both sides of a corridor and settles internally. The customer sees one counterparty, one fee, one point of accountability. For merchants and businesses moving money across emerging-market corridors, this model can create dramatic savings, not because the intermediary disappeared, but because five intermediaries became one.

Digital assets as settlement infrastructure. Stablecoins and tokenised cash take the logic further: value moves directly between counterparties on a shared ledger, with settlement finality in minutes rather than days. An OTC desk that sources liquidity and executes the FX leg becomes the only intermediary in the transaction, a single, regulated, accountable counterparty instead of an anonymous chain. This is where much of the real innovation in cross-border payments is happening today, particularly in corridors that traditional correspondent banking has abandoned.

None of this means intermediaries will cease to exist. It means the job of an intermediary is being redefined: from necessary toll booth to single accountable counterparty that earns its fees through speed, transparency, and access.

Practical takeaways for businesses

If your business moves money across borders, the intermediary problem is not an abstraction; it is a line item. A few points of good practice help.

Count the hops. Ask your provider how many institutions actually touch your payment. If they cannot tell you, that is itself the answer.

Price the full chain. Compare the amount sent with the amount received, not just the headline fee. Deducted correspondent charges are where the real cost hides.

Concentrate accountability. Prefer a counterparty with a direct legal relation to you, meaning one company, one contract, one point of recourse, over a chain where liability is limited and diffused.

Diversify corridors, not intermediaries. Redundancy should come from having alternative settlement routes such as bank rails, instant payment systems, and digital assets, not from stacking more banks into one route.

Watch the regulatory lead. As central banks extend instant settlement and regulators tighten rules for digital intermediaries alike, the future clearly favours shorter, more transparent chains. Position your treasury for that future now.

Conclusion

Intermediaries exist because trust does not scale on its own. Banks solved that problem for the analogue age, and they still serve an essential function. But the correspondent model, where every payment passes through a chain of institutions, each adding cost and diluting responsibility, is a legacy of geography, not a law of nature.

The intermediary problem, in the end, is a competition problem. For decades, businesses had no alternative to the chain. Now they do. Fewer, better intermediaries, directly licensed, directly accountable, settling in minutes rather than days, are not just cheaper. They are structurally safer. Because when it comes to moving money, more banks do not mean more security. They mean more places for risk to hide.

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