Wire transfer

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Wire transfer, bank transfer or credit transfer is a method of electronic funds transfer from one person or entity to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office.

Electronic funds transfer (EFT) are electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of bank staff.

Contents

Different wire transfer systems and operators provide a variety of options relative to the immediacy and finality of settlement and the cost, value, and volume of transactions. Central bank wire transfer systems, such as the Federal Reserve's FedWire system in the United States, are more likely to be real-time gross settlement (RTGS) systems. RTGS systems provide the quickest availability of funds because they provide immediate "real-time" and final "irrevocable" settlement by posting the gross (complete) entry against electronic accounts of the wire transfer system operator. Other systems such as Clearing House Interbank Payments System (CHIPS) provide net settlement on a periodic basis. More immediate settlement systems tend to process higher monetary value time-critical transactions, have higher transaction costs, and have a smaller volume of payments. A faster settlement process allows less time for currency fluctuations while money is in transit.

Federal Reserve central banking system of the United States

The Federal Reserve System is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

Fedwire is a real-time gross settlement funds transfer system operated by the United States Federal Reserve Banks that allows financial institutions to electronically transfer funds between its more than 9,289 participants. Transfers can only be initiated by the sending bank once they receive the proper wiring instructions from the receiving bank. These instructions include: the receiving bank's routing number, account number, name and dollar amount being transferred. This information is submitted to the Federal Reserve via the Fedwire system. Once the instructions are received and processed, the Fed will debit the funds from the sending bank's reserve account and credit the receiving bank's account. Wire transfers sent via Fedwire are completed in the same day, while some are completed instantly.

Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real time" and on a "gross" basis. Settlement in "real time" means a payment transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed. "Gross settlement" means the transaction is settled on one-to-one basis without bundling or netting with any other transaction. "Settlement" means that once processed, payments are final and irrevocable.

History

The first widely used service for wire transfers was launched by Western Union in 1872 on its existing telegraph network. Once a sender had paid money to one telegraph office, the operator could transmit a message and "wire" the money to another office, using passwords and code books to authorize the release of the funds to a recipient at that location. By 1877 the service was used to transfer almost $2.5 million each year. [1] Because the earliest wire transfers were using telegraph networks, it was termed telegraphic transfer and this name is still used in some countries, although more advanced electronic transfer networks are used.

The Western Union Company is an American worldwide financial services and communications company. Its headquarters is in Meridian, Colorado, although the postal designation of nearby Englewood is used in its mailing address. Up until it discontinued the service in 2006, Western Union was globally the best-known American company in the business of exchanging telegrams.

Telegraphic Transfer or telex transfer, often abbreviated to TT, is a term used to refer to an electronic means of transferring funds. A transfer charge is often charged by the sending bank and in some cases by the receiving bank.

Process

A bank wire transfer is effected as follows:

  1. The entity wishing to do a transfer approaches a bank and gives the bank the order to transfer a certain amount of money. IBAN and BIC codes are given as well so the bank knows where the money needs to be sent.
  2. The sending bank transmits a message, via a secure system (such as SWIFT or Fedwire), to the receiving bank, requesting that it effect payment according to the instructions given.
  3. The message also includes settlement instructions. The actual transfer is not instantaneous: funds may take several hours or even days to move from the sender's account to the receiver's account.
  4. Either the banks involved must hold a reciprocal account with each other, or the payment must be sent to a bank with such an account, a correspondent bank, for further benefit to the ultimate recipient.

Banks collect payment for the service from the sender as well as from the recipient. The sending bank typically collects a fee separate from the funds being transferred, while the receiving bank and intermediary banks through which the transfer travels deduct fees from the money being transferred so that the recipient receives less than what the sender sent.

Regulation and price

Since 2009 the European Union Regulation No 924/2009 [2] [3] controls cross-border payments in the European Union. In the new regulation Article 1 (q.v., Ref.4) states that an IBAN/BIC transfer within Single Euro Payments Area (SEPA) must not cost more than a national transfer, no matter which currency is used. The receiving bank can charge for exchanging to local currency.

European Union Economic and political union of European states

The European Union (EU) is a political and economic union of 28 member states that are located primarily in Europe. It has an area of 4,475,757 km2 (1,728,099 sq mi) and an estimated population of about 513 million. The EU has developed an internal single market through a standardised system of laws that apply in all member states in those matters, and only those matters, where members have agreed to act as one. EU policies aim to ensure the free movement of people, goods, services and capital within the internal market, enact legislation in justice and home affairs and maintain common policies on trade, agriculture, fisheries and regional development. For travel within the Schengen Area, passport controls have been abolished. A monetary union was established in 1999 and came into full force in 2002 and is composed of 19 EU member states which use the euro currency.

Single Euro Payments Area the Single European Payments Area (SEPA) initiative

The Single Euro Payments Area (SEPA) is a payment-integration initiative of the European Union for simplification of bank transfers denominated in euro. As of 2018, there were 36 members in SEPA consists of the 28 member states of the European Union, the four member states of the European Free Trade Association, and Andorra, Monaco, San Marino, and Vatican City.

Prior to this, in 2002 the European Union relegated the regulation of fees a bank may charge for payments in euro between EU member states down to the domestic level, [4] resulting in very low or no fees for electronic transfers within the Eurozone. In 2005, Iceland, Liechtenstein, and Norway joined the EU regulation on electronic transfers. However, this regulation was superseded by the Single Euro Payments Area (SEPA), consisting of 32 European countries.

Eurozone Area in which the euro is the official currency

The eurozone, officially called the euro area, is a monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro (€) as their common currency and sole legal tender. The monetary authority of the eurozone is the Eurosystem. The other nine members of the European Union continue to use their own national currencies, although most of them are obliged to adopt the euro in the future.

Iceland Island republic in Northern Europe

Iceland is a Nordic island country in the North Atlantic, with a population of 360,390 and an area of 103,000 km2 (40,000 sq mi), making it the most sparsely populated country in Europe. The capital and largest city is Reykjavík, with Reykjavík and the surrounding areas in the southwest of the country being home to over two-thirds of the population. Iceland is volcanically and geologically active. The interior consists of a plateau characterised by sand and lava fields, mountains, and glaciers, and many glacial rivers flow to the sea through the lowlands. Iceland is warmed by the Gulf Stream and has a temperate climate, despite a high latitude just outside the Arctic Circle. Its high latitude and marine influence keep summers chilly, with most of the archipelago having a tundra climate.

Liechtenstein Principality in western-central Europe

Liechtenstein, officially the Principality of Liechtenstein, is a doubly landlocked German-speaking microstate in Alpine Central Europe. The principality is a constitutional monarchy headed by the Prince of Liechtenstein.

In the United States, domestic wire transfers are governed by Federal Regulation J [5] and by Article 4A of the Uniform Commercial Code. [6] US wire transfers can be costly. In 2016, among the 15 largest retail banks, the average fee for an outgoing domestic wire was $25. Incoming domestic wire fees were about evenly split between $0 (free) and $15. [7]

United States Federal republic in North America

The United States of America (USA), commonly known as the United States or America, is a country comprising 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million sq mi (9.8 million km2), the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe's 3.93 million sq mi (10.2 million km2). With a population of more than 327 million people, the U.S. is the third most populous country. Most of the country is located contiguously in North America between Canada and Mexico.

In Australia, money transfers are primarily regulated by ASIC, there is sometimes further regulation by AUSTRAC in industries where money laundering or terrorism financing are a risk; such as money remittance services. Domestic transfers in Australia are generally free to consumers. International transfers can be costly, and banks will often charge a fee between $0 (free) and $20, and an FX margin (the difference between the interbank rate, and the rate that you are charged). Cheaper alternatives to the banks are available from foreign exchange brokers, who usually charge a lower fee and/or margin.

Security

With bank-to-bank wire transfer, each account holder must have a proven identity. Chargebacks are unlikely, although wires can be recalled.[ citation needed ] Information contained in wires are transmitted securely through encrypted communications methods. The price of bank wire transfers varies greatly, depending on the bank and its location; in some countries, the fee associated with the service can be costly.

Wire transfers done through cash offices are essentially anonymous[ citation needed ] and are designed for transfer between persons who trust each other. It is unsafe to send money by wire to an unknown person to collect at a cash office; the receiver of the money may, after collecting it, not provide whatever goods or services they promised in return for the payment, but instead simply disappear. This scam has been used often, [8] especially in the so-called 419 scams which often nominate Western Union for collection.

International transfers involving the United States are subject to monitoring by the Office of Foreign Assets Control (OFAC), which monitors information provided in the text of the wire and then decides whether, according to the US Government's federal regulations [5] [6] and political positions, money is being transferred to terrorist groups, or countries or entities under sanction by the United States government. If a financial institution suspects that funds are being sent from or to one of these entities, it must block the transfer and freeze the funds. [9]

SWIFT or IBAN wire transfers are not completely free of vulnerabilities. Every intermediary bank that handles a wire transaction can take a fee directly out of the wire payload (the assets being transferred) without the account holder's knowledge or consent. In many places, there is no legislation or technical means to protect customers from this practice. If bank S is the sending bank (or brokerage), and bank R is the receiving bank (or brokerage), and banks I1, I2 and I3 are intermediary banks, the client may only have a contract with bank S and/or R, but banks I1, I2 and I3 can (and often do) take money from the wire without any direct arrangement with the client. Clients are sometimes taken by surprise when less money arrives at bank R. Contrast this with cheques, where the amount transferred is guaranteed in full, and fees (if there are any) can be charged only at endpoint banks.

The European Union offers some partial protection from this practice by prohibiting European intermediary banks from taking a fee out of the amount being transferred, even for transatlantic transfers.[ citation needed ] However, it's still common practice for a European brokerage firm to state that they charge no transfer fee, and then contact their bank to take an unpublished fee from the amount transferred as a means to compensate their bank with their clients' assetse.g., CMC Markets implements this policy in partnership with NatWest.[ citation needed ]

Methods

Retail money transfers

One of the largest companies that offer wire transfer is Western Union, which allows individuals to transfer or receive money without an account with Western Union or any financial institution. [10] Concern and controversy about Western Union transfers have increased in recent years, because of the increased monitoring of money-laundering transactions, as well as concern about terrorist groups using the service, particularly in the wake of the September 11, 2001 attacks. Although Western Union keeps information about senders and receivers, some transactions can be done essentially anonymously, for the receiver is not always required to show identification. [11]

There are other companies in this market, like ACE Money Transfer, RIA Financial Services, MoneyGram and VFX Financial PLC and LCC Money Transfer (both based in Europe) as well as Azimo, Dwolla, TransferGo, and TransferWise.

Another option for consumers and businesses transferring money internationally is to use specialised brokerage houses for their international money transfer needs. [12] Many of these specialised brokerage houses can transfer money at better exchange rates compared to banks, thus saving up to 4%. [13] These providers can offer a range of currency exchange products like Spot Contracts, Forward Contracts and Limit Orders. [14] However, not all such providers are regulated by appropriate government bodies. For example, in the UK, even though such companies are regulated by the Financial Conduct Authority, not all of them fall under (FCA) scrutiny. [15] Regulators include the Australian Securities and Investments Commission (ASIC), the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) in Canada, the Hong Kong Customs and Excise Department in China and the Financial Conduct Authority (FCA) in the UK. [16]

International

Most international transfers are executed through SWIFT, a co-operative society founded in 1974 by seven international banks, which operate a global network to facilitate the transfer of financial messages. Using these messages, banks can exchange data for the transfer of funds between financial institutions. SWIFT's headquarters are in La Hulpe, on the outskirts of Brussels, Belgium.

SWIFT also acts as a United Nations–sanctioned international standards body for the creation and maintenance of financial-messaging standards. See SWIFT Standards.

Each financial institution is assigned an ISO 9362 code, also called a Bank Identifier Code (BIC) or SWIFT Code. These codes are generally eight characters long. [17] For example: Deutsche Bank is an international bank with its head office in Frankfurt, Germany, the SWIFT Code for which is DEUTDEFF:

Using an extended code of 11 digits (if the receiving bank has assigned extended codes to branches or to processing areas) allows the payment to be directed to a specific office. For example: DEUTDEFF500 would direct the payment to an office of Deutsche Bank in Bad Homburg. SWIFT deviate slightly from the standard though by using position nine for a Logical Terminal ID, making their extended codes 12 digits long. [18]

European banks making transfers within the European Union and within Switzerland also use the International Bank Account Number, or IBAN.

International prepaid cards

International prepaid cards are an alternative way for transferring funds. Companies can provide a debit card for worldwide employees' payments. The recipients don’t need to have a bank account and can use the card in places that a debit card is accepted at point-of-sale or online and may withdraw funds in local currency at an ATM.

United States of America

Banks in the United States use SWIFT to send messages to notify banks in other countries that a payment has been made. Banks use the CHIPS or Fedwire system to actually effect the payment.

Domestic bank-to-bank transfers are conducted through the Fedwire system, which uses the Federal Reserve System and its assignment of ABA routing transit number, which uniquely identify each bank.

Other electronic transfers

Other forms of electronic transfers include, for example, electronic funds transfer system (EFTS). This is the system one uses when one gives one's bank account number and routing information to someone owed money and that party transfers the money from one's account. It is also the system used in some payments made via a bank's online bill payment service. EFTS transfers differ from wire transfers in important legal ways. An EFTS payment is essentially an electronic personal check, whereas a wire transfer is more like an electronic cashier's check.

EFTS transfers are often called "ACH transfers", because they take place through Automated Clearing Houses.

One important way ACH transfers differ from wire transfer is that the recipient can initiate it. There are of course restrictions, but this is the way people often set up automatic bill payment with utility companies, for example.

See also

Related Research Articles

International Bank Account Number alphanumeric code that uniquely identifies a bank account in any participating country

The International Bank Account Number (IBAN) is an internationally agreed system of identifying bank accounts across national borders to facilitate the communication and processing of cross border transactions with a reduced risk of transcription errors. It was originally adopted by the European Committee for Banking Standards (ECBS), and later as an international standard under ISO 13616:1997. The current standard is ISO 13616:2007, which indicates SWIFT as the formal registrar. Initially developed to facilitate payments within the European Union, it has been implemented by most European countries and numerous countries in the other parts of the world, mainly in the Middle East and in the Caribbean. As of February 2016, 69 countries were using the IBAN numbering system.

ISO 9362 defines a standard format of Business Identifier Codes approved by the International Organization for Standardization (ISO). It is a unique identification code for both financial and non-financial institutions. The acronym SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. The ISO has designated SWIFT as the BIC registration authority. When assigned to a non-financial institution, the code may also be known as a Business Entity Identifier or BEI. These codes are used when transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks. The codes can sometimes be found on account statements.

Financial services economic service provided by the finance industry

Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.

Money order payment order for a pre-specified amount of money

A money order is a payment order for a pre-specified amount of money. As it is required that the funds be prepaid for the amount shown on it, it is a more trusted method of payment than a check.

A value transfer system refers to any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form.

An informal value transfer system (IVTS) is any system, mechanism, or network of people that receives money for the purpose of making the funds or an equivalent value payable to a third party in another geographic location, whether or not in the same form. Informal value transfers generally take place outside of the conventional banking system through non-bank financial institution or other business entities whose primary business activity may not be the transmission of money. The IVTS transactions occasionally interconnect with formal banking systems, such as through the use of bank accounts held by the IVTS operator.

A giro, or giro transfer, is a payment transfer from one bank account to another bank account and initiated by the payer, not the payee. The debit card has a similar model. Giros are primarily a European phenomenon; although electronic payment systems such as the Automated Clearing House exist in the United States and Canada, it is not possible to perform third party transfers with them. In the European Union, there is the Single Euro Payments Area (SEPA) which allows electronic giro or debit card payments in Euros to be executed to any Euro bank account in the area.

The Australian financial system consists of the arrangements covering the borrowing and lending of funds and the transfer of ownership of financial claims in Australia, comprising:

Digital currency Internet based non-physical currency

Digital currency is a type of currency available in digital form. It exhibits properties similar to physical currencies, but can allow for instantaneous transactions and borderless transfer-of-ownership. Examples include virtual currencies and cryptocurrencies and central bank issued money accounted for in a computer database. Like traditional money, these currencies may be used to buy physical goods and services, but may also be restricted to certain communities such as for use inside an online game.

Clearing (finance) all activities from the time a commitment is made for a financial transaction until it is settled

In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.

A Bank State Branch is the name used in Australia for a bank code, which is a branch identifier. The BSB is normally used in association with the account number system used by each financial institution. The structure of the BSB + account number does not permit for account numbers to be transferable between financial institutions. While similar in structure, the New Zealand and Australian systems are only used in domestic transactions and are incompatible with each other. For international transfers, a SWIFT code is used in addition to the BSB and account number.

An e-commerce payment system facilitates the acceptance of electronic payment for online transactions. Also known as a subcomponent of Electronic Data Interchange (EDI), e-commerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking.

A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, instruments, people, rules, procedures, standards, and technologies that make it exchange possible. A common type of payment system is called an operational network that links bank accounts and provides for monetary exchange using bank deposits. Some payment systems also include credit mechanisms, which are essentially a different aspect of payment.

Electronic Fund Transfer Act act passed by the U.S. Congress in 1978

The Electronic Fund Transfer Act was passed by the U.S. Congress in 1978 and signed by President Jimmy Carter, to establish the rights and liabilities of consumers as well as the responsibilities of all participants in electronic funds transfer activities.

Alternative payments refers to payment methods that are used as an alternative to credit card payments. Most alternative payment methods address a domestic economy or have been specifically developed for electronic commerce and the payment systems are generally supported and operated by local banks. Each alternative payment method has its own unique application and settlement process, language and currency support, and is subject to domestic rules and regulations.

TransferWise is a UK-based money transfer service launched in January 2011 by Kristo Käärmann and Taavet Hinrikus with headquarters in London and offices in a number of cities including Tallinn, New York, Singapore and Budapest. The company supports more than 750 currency routes across the world including GBP, USD, EUR, AUD and CAD, and provides multi-currency accounts. In 2018 TransferWise's net profit reached $8 million and its customer-base reached 4 million, who collectively transfer around $4 billion per month.

Cross-Border Inter-Bank Payments System

The Cross-Border Interbank Payment System (CIPS) is a payment system which offers clearing and settlement services for its participants in cross-border RMB payments and trade. It is a significant financial market infrastructure in China. As planned, CIPS will be developed in two phases. On 8 October 2015, CIPS went live. The first batch of direct participants includes 19 Chinese and foreign banks which were set up in mainland China and 176 indirect participants which cover 6 continents and 47 countries and regions. On 25 March 2016, CIPS signed an MoU with SWIFT with mutual understanding of deploying SWIFT as a secure, efficient and reliable communication channel for CIPS's connection with SWIFT's members, which would provide a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardised and reliable environment. CIPS is sometimes referred to as the China Interbank Payment System.

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