10 Things SMBs Didn’t Know About International Wire Transfers

Wire transfers are integral to any small business operating internationally. SMBs have relied on this method of payment for ages yet fail to realize the many issues that come with it. The mentality from the banks of, “it’s not broken so why fix it” has failed to empower SMBs with new technology out there – technology that is better and far more efficient, like the Blockchain. Though there have been advances in global payments in the past 50 years, the initial structure of the movement of money remains the same.

Here are 10 things that SMB’s didn’t know about international wire transfers:

  1. The first commercial use of the term “wire transfer” was in 1872 by Western Union.
  2. The term “Electronic Funds Transfer”, the foundation of today’s payment system, evolved from the first wire transfers.
  3. In cross-border payments, Correspondent Banking, where banks “conduct business transactions, accept deposits and gather documents on behalf of the other financial institution[1]” has difficulty reconciling their ability to communicate where the money is at any given moment to the actual movement of money itself.
  4. Foreign Exchange Rates have multiple terms: Market Rates, Indicative Rates, Spot Rates, Day Rates, Bank Rates, Margin and Spread. This Foreign Exchange Rate is usually added to the wire transfer fees that SMBs pay when sending or receive a payment.
  5. Domestic payment systems are stitched together to make up the world of cross-border payments. However, the domestic banking, economic and regulatory framework is tailor-made for its own country, leading to a fragmented payment system. Though a lot of countries are moving towards modernizing their infrastructure, there are still a lot of things that need to be done in order to make the system more efficient.
  6. Countries that have adopted Real Time Gross Settlement (RTGS) are able to move funds in Real Time (like the UK) or within 10 seconds (such as Mexico). (To see all the countries that have begun to adopt new payment infrastructures click here)
  7. The cost of implementing the infrastructure to make cross-border payments more efficient is around $100 million per country[2].
  8. Banks without a presence abroad rely on correspondent banks, each having their own agreements on fees which are dependent on the size of transactions, currency, country or whether the transaction is for a company or private individual.
  9. Designed in the 1970’s, SWIFT (Society of Worldwide Interbank Financial Telecommunication), is used solely by electronic fund transfers and is how banks communicate payments to each other.
  10. SMBs are most affected by the inefficiencies of the current international banking protocols because these were designed before the age of the internet, before modern globalization and before e-commerce was invented.

 

[1] http://www.investopedia.com/terms/c/correspondent-bank.asp

[2] Source: http://www.mckinsey.com/client_service/financial_services/latest_thinking/payments ]