What Are the Pros and Cons of a Vostro Account?

A Vostro account is common in international finance for businesses that are multinational in nature and have many operations in technically-advanced countries. It is also a frequently used type of account for currency exchange and trading systems as well as a means of facilitating local payments by wealthy individuals with assets in foreign countries. Since a Vostro account is a banking account held in a local bank on behalf of a foreign bank, however, local regulations that govern its administration may not be the same as those from the originating foreign bank's country. Account management must therefore take into consideration the regulations under which the holding bank operates, and the procedures that it has for the transfer of funds, which can involve unexpected fees and delays.

The term Vostro account is most often used in the US and UK to refer to this type of holding account in a local bank on behalf of a foreign bank, and another name for this type of account is a Loro account. Such accounts are often confused with Nostro accounts, which are based on a similar principle. A Nostro account is a local bank account that is held in the currency of the foreign bank, whereas a Vostro account holding is in the form of the local bank's currency. An example would be a Nostro account for a foreign Indian bank held in the UK in rupees, where a Vostro account for India held in the UK would be held in pounds sterling. The advantage of a Vostro over a Nostro account depends entirely on where the bank assets are meant to be put to use.

Money management across national borders often involves the establishment of Vostro accounts due to the fact that a local nation where business is being conducted may largely only deal with transactions that utilize the national currency there and not accept most foreign currencies. Vostro accounts are also convenient where a local nation has no established network of bank branches, and some means for expedited currency exchange must be available to the company that wants to do business there. In this regard, Vostro accounts expedite business by also being tied into the international banking network and accepting electronic funds transfers.

The fees and procedures associated with opening and maintaining a Vostro account can vary considerably from nation to nation. Some banking procedures such as those of certain international Hong Kong- and Shanghai-based banks maintained in the Philippines require a minimum balance of $500,000 US Dollars (USD) to open a Vostro account, and charges are made even for the issuance of electronic statements whether on a daily or monthly basis. Other banks offer Vostro accounts with much lower minimum balance requirements, and some, such as those that facilitate international trucking business within the confines of the European Union, offer many additional services such as debit transactions and electronic toll card charges that are all reconciled with the main Vostro account on a daily basis.

In general, Vostro accounts are more expensive than traditional bank accounts that don't cross borders, and the fees can be quite high for businesses that deal in the import/export market or with the cross-border transport of goods. Part of the reasoning for these charges from the local bank is due to the fact that it must hold large cash reserves to fund the Vostro transactions that occur on a daily basis. In many cases, this can create strong competition among banks in countries to establish Vostro accounts with foreign entities, as not all banks are capable of handling this level of service, so, to gain such accounts, banks will offer competitive fees to attract foreign investors.