International Bank-to-Bank Transfers—The Messy Truth
April 11, 2017
Your commercial bank may sound like it can take care of your international bank-to-bank transfers soup to nuts, but really, it’s just a well-paid front man. The real performers are in the band behind the bank, the countless other networks, institutions and services that work as a chain (when everything goes right) to facilitate the transfer of your global funds.
Whether domestic or international, bank-to-bank transactions not involving cash must rely on a payment network in order to operate. In fact, the payments infrastructure your financial institution uses is pretty much exactly the same as it was when your grandma sent you checks for your birthday each year. It was designed to run by processing millions upon millions of paper checks every day—and it still is. It may seem hard to believe given the relative speed of money transactions today, but all payments we make leave our account and move through a network of other parties before landing in the intended recipient’s account. Remember that all these players somehow need to get paid, so this is why your bank-to-bank transfer fees can really add up when it comes to international payments for business. Here’s a breakdown of how it all works.
ACH (Automated Clearing Houses)
When banks used to have to haul bushels of paper checks from one institution to the next, they quickly realized they would prefer to send all their checks to one place and let that place handle distribution. That place became the Clearing House. With today’s digital technology, we now have the Automated Clearing House, or ACH—a term you might find familiar as an oft-appearing line item on your bank statement. ACH transactions are either handled by the Federal Reserve Bank or by a private company they regulate.
When making an international payment, you’re probably dealing with International Clearing House, CHIPS —“the largest private-sector U.S.-dollar funds transfer system in the world”. CHIPS claims responsibility for over 95% of USD cross-border payments.
SWIFT (Society for Worldwide Interbank Financial Telecommunication)
You might think SWIFT is like an international Clearing House, but it’s not. SWIFT doesn’t actually move money. They transmit messages between banks that allow them to move money.
When currency exchange exactly happens in an international bank-to-bank transfer process can often be unclear. Some banks use the exchange rate on the day you initiate the transaction, some use the exchange rate on the day the recipient receives the transaction. Either way, currency exchange is another link in the process adding both time and expense to your transaction.
Here’s what the international bank-to-bank transfer process looks like end to end:
The process of moving through this network infrastructure takes on average 3-5 days—when it works. When it doesn’t, the disconnect between the parties involved becomes a glaring problem. It’s very hard to track down where the process broke down and which party is responsible. In your mind, your bank—where you initiated the transfer—should be able to figure it all out for you. But remember, your bank is just the lip-syncing front man. He has no idea what the band is doing behind him. And when he starts investigating, the band snubs him. It goes like this:
You call your bank. Your bank contacts SWIFT. SWIFT doesn’t respond. Nothing happens. You call your bank. Your bank contacts SWIFT. SWIFT doesn’t respond. Nothing happens. You call your bank and start yelling. Your bank contacts the receiving bank. The receiving bank contacts SWIFT. SWIFT doesn’t respond. Nothing happens. You call your bank …
The bottom line is that because no one party owns the entire process end to end, no one party will take responsibility for that process end-to-end, figure out where the problem occurred and fix it in a timely fashion. Typically, after spending several precious business days trying to figure out what happened, orders are simply canceled and resubmitted, adding up to another full business week to your ability to deliver on global payments.
When we saw how these inefficiencies were hurting small businesses and stifling their global operations, we launched Veem. It’s a new global payment technology here to help you get on with the business of growth and innovation. We understand that every moment spent on back office processes like unwraveling the knot of a bank-to-bank transfer gone wrong is a moment not spent on driving your business forward. We eliminate the middlemen and, yes, own the process of your global payments from end to end.