Wire transfer

Wire transfer or credit transfer is a method of Electronic funds transfer from one person or institution (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. Wire transfer systems are intended to provide more individualized transactions than bulk payment systems such as ACH and Check21.

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 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 a smaller volume of payments. Currency transaction risk (because of market fluctuations) may be reduced (in part) by immediacy of settlement.

Process

Bank wire transfers are often the most expedient method for transferring funds between bank accounts. 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 intermediate 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

As an example of the cost, Bank Of America as of February 2010 charged $25 to send a wire and $12 to receive one within the US. For international transfer, it charged $35–$45 outgoing, $16 incoming. However, fees may vary from bank to bank.

In the United States, domestic wire transfers are governed by Federal Regulation J and by Article 4A of the Uniform Commercial Code.

In Europe, bank transfer is the most common payment method, with several million transactions processed each day. Debit cards are used extensively to pay in stores, while monthly bills are usually paid with a direct transfer (by cellular phone or Internet, or at the bank or an ATM). In 2002, the European Commission relegated the regulation of the fees that a bank may charge for payments in euros between European Union member countries down to the domestic level, resulting in very low or no fees for electronic transfers within the Eurozone. Wire transfers between the Eurozone and external areas can be expensive.

In 2005, Iceland, Liechtenstein, and Norway joined the EU regulation on electronic transfers. However, this regulation is intended to be superseded by the Single Euro Payments Area (SEPA), consisting of 32 European countries.

In 2009 EC published a new regulation (EC) No 924/2009 on cross-border payments in the Community and repealing Regulation (EC) No 2560/2001 (the text of which is no longer available). The new regulation (EC) No 924/2009 Article 1 (q.v., Ref.4) states that an IBAN/BIC transfer within SEPA must not cost more than a national transfer, no matter which currency is used. But receiving bank can charge for exchanging to local currency. However, according to Article 7 any current arrangements (made between payment services before November 1, 2009) can be honored up to November 1, 2012.

Security

Bank-to-bank wire transfer is considered the safest international payment method. Each account holder must have a proven identity. Chargeback is unlikely, although wires can be recalled. Information contained in wires is 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 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, simply disappear. This scam has been used often, especially in the so-called 419 scam.

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 to ascertain whether money is being transferred to terrorist organizations 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.

IBAN wire transfers are not completely free of vulnerabilities. Every intermediate bank that handles a wire transaction can take a fee directly out of the wire payload (the assets being transferred) without the account holders knowledge or consent. 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 bank 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, the amount transferred is guaranteed in full, and fees (if there are any) can be charged only at endpoint banks.,

European privacy law may be breached by some USA operators such as SWIFT, so EU users are sometimes required by their service provider to make an explicit declaration that seeks to circumvent EU privacy regulations.

Methods

Currency transaction risk

When a corporation or person engages in a transfer of currency that will occur in the future, they are at risk of market fluctuations. Each currency pair can fluctuate from 1 - 3 pennies daily. For every $100,000 USD contract, each penny represents $1000 of risk on average. Therefore a $100,000 purchase of goods overseas could cause the contract to fluctuate $1000 – $3000 per day due to the fluctuation of the market. Importers and exporters hire or outsource a currency planner to evaluate the risk of the future transaction and to suggest currency hedge options that best suit the cash flow position of the company.

Planning currency transfers

When establishing a currency plan, it is important to understand the average fluctuation of the currency pair transferring to and from within the time frame of the contract. If the transfer is to occur in 3 months from now, it is good to understand what the average monthly fluctuation is. After which, it is advised to begin taking steps to hedge the transfer to prevent loss. A good currency hedge is designed to reduce risk and still maximize upside potential of the currency fluctuation.

Import / export / manufacturing and foreign currency transfers

Importing goods or products from another country sometimes require the purchase of the goods to be in the currency of the country importing from. Corporations may also pay in their currency and allow the exporter to convert the currency. Negotiations can be made between importers and exporters on which currency will be used. When negotiating paying in another currency, discounts can be negotiated for the party who has to convert the currency. These discounts can reach up to 5% of the contract price for taking on the risk associated with a future contract and the work associated with performing the physical transaction. A currency planner is often hired to assess risk of the contract and to suggest a forex hedge.

Manufacturers who sell direct to buyers in other countries are also subject to the same negotiations and discounts if they are savvy about how the market works. Larger corporations typically hire a currency planner, while smaller corporations outsource individual contracts to companies who specialize in planning currency transactions.

Common terms relating to currency hedging

Spot - A spot transaction is an immediate transfer. It will sometimes take up to a day or two using a conventional banking system. Modern technology and a good discount broker allows us to make spot contracts that are effective immediately. This type of trade represents a "direct exchange" between currencies, has the shortest time frame, involves cash rather than contract, and interest is not included in the agreed-upon transaction.

Forward - A forward transaction is where money changes hands at an agreed upon date. A buyer and seller agree upon an exchange rate for any date in the future. The transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, one week, one month or even one year or more. Usually the rate is decided by both parties, and a forward contract is a negotiated agreement between the two parties.

Future - A future contract is an exchange traded forward contract with standard contract sizes and maturity dates. Futures are standardized and are usually traded on an exchange created specifically for this purpose. Futures contracts are usually inclusive of any interest amount and are typically 3 months in length.

Swap - A swap is the most common type of a forward contract. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at an agreed upon date. Swaps are not traded on exchanges and are not standardized contracts.

Option - A foreign exchange option (also known as an FxOption) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at an agreed upon rate on a specified date. FxOptions are the deepest most liquid market for options of any kind in the world. FxOptions are also looked at as insurance, where if the purchaser of the option does not like the exchange rate at the time before the option comes due, they can essentially forfeit their initial investment into the option.

Currency plan

After an individual or corporation has a thorough assessment of risk, they will typically choose a hedge method that fits their cash flow position and risk parameters. There are many types of currency plans that are paired with typical hedge methods to reduce the exposure to market fluctuations. The ultimate goal of a good currency plan is to reduce risk and exposure, not to increase it.

FX global transfer

The key to low cost is the exchange rate offered. When one transfers funds, one is selling one currency and buying another. Currency dealers mark up the exchange rate by adding a spread: this is the difference between the price at which one can sell one's primary currency and what ones has to pay to buy the delivery currency.

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. 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.

Another option for consumers and businesses transferring money internationally is to use specialised brokerage houses for their international money transfer needs. Many of these specialised brokerage houses can transfer money at better exchange rates compared to banks, thus saving up to 4%. These providers can offer a range of currency exchange products like Spot Contracts, Forward Contracts and Regular payments.

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 funds transfer between financial institutions. SWIFT's headquarters are in La Hulpe, on the outskirts of Brussels, Belgium. The society 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 provided an ISO 9362 code, also called a Bank Identifier Code (BIC) or SWIFT Code. These codes generally are eight characters long. For example: Deutsche Bank is an international bank, with its head office in Frankfurt, Germany, the SWIFT Code for which is DEUTDEFF:

• DEUT identifies Deutsche Bank.
• DE is the country code for Germany.
• FF is the code for Frankfurt.

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.

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

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 routing transit number, which uniquely identify each bank.

Can anyone add a section on why Credit Unions don't have SWIFT codes?

Other electronic transfers

There are forms of electronic transfer that are distinct from wire transfer. Electronic Funds Transfer System (EFTS) is one such system. This is the system one uses when one gives one's bank account number and routing information to someone one owes 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.

See also

• Wire fraud

External links

• IBAN