Banks have always engaged in international business. They have dealt in foreign exchange, extended credit in connection with foreign trade, traded and held foreign assets, and provided travellers with letters of credit. All this and some other types of business the banks historically have carried out from their domestic locations. There was no need for a physical presence abroad. Business that could not be carried out by mail or telecommunications was handled by correspondent banks abroad.

Some banks began to establish a physical presence abroad in the late 19th and early 20th century. This move abroad mostly was part of colonialism. Under the umbrella of the home country's colonial government, banks from Britain opened branches in the Indian subcontinent, Africa, Hong Kong, and Singapore; European and North American banks moved into the Caribbean and Latin America. These banks provided modern banking services to economies which previously had no or only a relatively rudimentary financial industry.

Multinational, also sometimes called transnational, banking is of relatively recent origin. Its development coincided and accelerated with the technological improvements and cost-reductions in international travel and communications in the post-war period. This type of banking involves the physical presence of a bank abroad.

The most prevalent and versatile legal form of this presence is a branch, which uses the home-country bank's name and organization. It is usually an independent corporate entity with limited liabilities, whose shares are owned by the parent. Other legal forms used in foreign physical presence are agencies and representative offices, which have limited legal operational authority but also limited liabilities. Subsidiaries are used if ownership is shared with other firms or individuals, mostly residents of the country hosting the foreign bank. These subsidiaries are mostly corporations with limited liability. In addition, of course, banks have maintained networks of correspondent banks for doing business in locations where they have no physical presence.

The theory of multinational banking explains why these banks find it profitable to have a physical presence abroad.