The origins of modern banking reach back to Renaissance Italy with the Medici family’s banking dynasty. From here, the concepts of banking, lending, and credit spread throughout Europe and trickled over into other continents. By the 17th century, bank notes, then called promissory notes, were used locally as a form of legal tender.
The use of bank notes and centralized banking helped develop the concept of fractional reserve banking whereby banks made investments, loans, or took deposits, but were only required to hold reserves at a fraction of the bank’s deposit liabilities. These reserves were kept as bank currency or balances in their central bank’s account. This in turn made currency more fluid and allowed banks to evolve into financial intermediaries between savers and borrowers by giving long-term loans to borrowers and allowing depositors to liquefy instantaneously.
One of the most important results of this modernization and centralization of banking was the creation of wire transfers, a significantly easier and faster way to send funds from one person or entity to another. The first wire transfer service was created in 1872 by the Western Union bank using its telegraph network. A “sender” would give a payment to a telegraph operator in one office, who would then use a codebook and passwords to “wire” money to the telegraph office of the “receiver.”
Because of the convenience and the rapid rate at which currency could be transferred, the practice of wire transfers caught on and completely changed the way money could be exchanged. As international banking networks further developed, wire transfers became even more commonplace.
The Internet and the technological revolution have made transferring assets much easier, and of course, faster. Not only that, but we now also have a variety of options, or routes, through which we are able to transfer those assets, be it a wire transfer, money order, bank draft, check, or cash. Each one of those routes has their fair share of trade-offs. That said, there is a clear difference in ease of transferring assets depending on whether you are attempting to do so domestically or internationally.
While more conventional methods allow you to transfer money internationally, they can be slow or risky, especially for large amounts. Additionally, in some instances cash or checks might not be accepted in particular countries. An international wire transfer allows you to transfer thousands instantly while also converting funds into a chosen foreign currency, making it an optimal choice for users who travel abroad, study in another country, or conduct business overseas.
Before contemporary messaging networks, banks used the messaging system, Telex, to transfer money internationally. This process was slow, insecure, and lacked a standardized code system. Using a free-text format, the sender would explain the wire transfer in sentences which the receiver would translate and then process. However, much of a message could be lost in translation. In order to correct this problem, SWIFT, the Society for Worldwide Interbank Financial Telecommunications, was established in the 70s and was supported by over 200 banks in 15 different countries.
SWIFT created a worldwide communications network that shared and processed financial data and put in place a set of standardized codes that allowed banks to transfer information in a secure and consistent manner. Once established, rules for liability and fundamental operating procedures were further established and made universal.
Note that SWIFT is only a messaging system that brings security to banks and that there is no actual exchange of money via SWIFT. At its essence, SWIFT is a highly secure way of transporting financial messages, but does not perform any manner of settlement or clearing, nor does it hold accounts for members.
What it does is transfer international payment orders to banks. Every bank within the SWIFT network is given a unique code between 8 and 11 characters long. This code is referred to as a bank identifier code (BIC) or SWIFT ID and is commonly denoted to as the BIC/SWIFT code.
The only way a bank can interact with another overseas bank is if they hold accounts known as a “correspondent accounts.” If two banks do not have a correspondent connection, they must find a third bank that does have a correspondent account. When a bank receives a SWIFT message, it performs security and sanctions checks before a wire transfer may be cleared in order to prevent money laundering.
Today, 11,000 financial institutions in over 200 countries use SWIFT on a daily basis to conduct wire transfers. But while it was revolutionary in the 70s, allowing money to be transferred securely and quickly, now, it is slower, less convenient, and more expensive than other transfer options. There are several reasons for this, but before we delve into that, it is important to understand how SWIFT and the correspondent banking network.
As mentioned above, SWIFT is simply a secure messaging system with no money actually changing hands. In order for financial institutions to perform actual money transactions, each bank needs a prior banking relationship. A bank can only work directly with overseas banks with which it holds accounts known as “correspondent accounts.” Without one, they must seek another bank that does have a prior banking relationship. Each bank carries out certain checks, specifically on sanctions and anti-money laundering before a payment is cleared.
Because of these requirements SWIFT is anything but its namesake. Verification eats time taking anywhere from days to weeks. Because not all banks are directly connected, sometimes a SWIFT transfer may have to go through several banks in order to find one with a corresponding relationship, much like how connecting flights work when traveling.
Since there is no main branch responsible and no ownership end-to-end, the SWIFT cannot guarantee that transfers will go smoothly. Add to these issues the chance of receiving a bad exchange rate and it may seem to cost more than the wire transfer is worth.
Third-party banks coordinate with beneficiary banks in the facilitation of international wire transfers. These banks can be either correspondent or intermediary banks. The distinctions among them are not constant and often contingent upon location, so in some cases they may seem identical and in others, not so much.
In countries within the European Union or Australia, banks that perform transfers internationally are known as intermediary banks, with correspondent banks showing little difference. Separately, correspondent banks in the United States deal with transactions involving two or more currencies, such as, if the senders are using US dollars and the receivers are using Euros. Intermediary banks, however, transfer money for foreign transactions, but do not deal with multiple currencies, and are usually brought in to assist smaller banks that don’t handle foreign currencies.
Know Your Customer (KYC) regulations were instituted by financial institutions in order to prevent banks from being used in criminal activity. KYC policies integrate four main aspects to help banks better know their users: customer identification procedures, transaction monitoring, customer acceptance policy, and risk management.
While helpful for curbing crime and protecting customers, these exorbitant compliance requirements, combined with possible damage to the reputations of financial institutions, have led banks to less correspondent banking.
As a main component of the correspondent banking market, these requirements have hit SWIFT hard. They have recently announced a global payments initiative to help with speed, transparency, and predictability of cross-border payments. While this initiative may help, SWIFT and traditional wire transfers face increased competition with third party infrastructure players who are more optimally positioned to seize new opportunities.
You can either make a SWIFT transfer at your bank or through its online portal. Before you do you will need to know several things:
After inputting this information, along with the desired amount and currency, you will have to pay fees for processing and exchange rates. Further fees may be added due to SWIFT passing through multiple banks.
Besides traditional banking methods, standalone transfer services have become very popular. Services like Veem provide the same level of security while simultaneously cutting down fees and transfer times.
According to the Deutsche Bank, “Competition in the correspondent banking market is heating up… The likes of PayPal, Apple, Amazon, and Google have already entered the retail payments market. The corporate payments market could be next. Banks must be mindful of such emerging competition.”
Competition in the market has helped to decrease the costs of wires and money transfers across the board. But on the other hand, the increased competition in the wire transfer market means an overwhelming number of options to choose from. As you might imagine, some methods take longer, others require more of your attention or cost you more in the long run.
Veem is a great emerging option for international payments. Founded by a team of frustrated financial institution veterans who wanted more from available wire transfer options, Veem offers solutions to common pain points in business payments.
Veem alters and simplifies the payment system. With Veem, the payments process is expedited, ownership is added to all stages, hidden fees are nonexistent, and payment tracking is available to senders and receivers.
Their team rebuilt the global payments network by merging the best of traditional systems with the intuition and intelligence of newer, better tech. As a multi-rail platform, Veem utilizes blockchain for their correspondence and deliveries, which, combined with these preexisting networks, allows higher accessibility, better security, faster speeds, and competitive rates.
Created in 1998, PayPal is the most used online transaction marketplace in the world and now includes international wire transfer services.
PayPal account holders that are linked to a bank have no transfer fees to Canada or the US. However, those that are linked to a credit card or debit card pay a fixed fee plus a 2.9% transaction fee. In order to wire money out of country, PayPal charges a variable fee that takes a percentage of the transaction as well as a fixed fee. Costs can climb if PayPal gives you a bad exchange rate and pockets the difference. PayPal international payments generally take two business days and are not optimal if sending large amounts of money due to volume limits and transaction percentage fees.
The only divide between sending an international wire personally or through a business is the speed of the wire transfer. Sending a wire through a business account and can double the timeframe in which the money is set to arrive. This is due to KYC regulations, as the process of vetting and screening a company is usually more complex. Validating a single person through KYC regulations is generally a faster process as there’s less documentation involved.
Wire fees vary based on a number of factors. These include:
In terms of cost, big banks and transfer operators are often the most expensive. While their “fixed fees” are easy to understand, their exchange rates suck the well dry. A $50 outgoing foreign wire charge seems reasonable, yet an exchange rate will take 5-10% of your transfer.
Today, the cheapest way to send a wire is through the digital services we touched on. Some offer zero fees upfront and instead fix percentages based off the amount of money transferred. These are typically half the price of traditional methods.
Making an international wire transfer should be a simple, affordable, and standardized process. Today, with various international wire transfer methods, that is not always the case. Fortunately, companies are racing to the forefront to become the service to beat. Multi-rail technology is making the process more intuitive, cost-efficient, and simple. It is only a matter of time before traditional methods begin to diminish, or else rebuild their infrastructure to improve their process.
If you are going to send money internationally, keep up-to-date on payment options in order to find an establishment that best fits your needs. Don’t be fooled by companies offering seemingly low fees with awful exchange rates. And lastly, do your due diligence before making a decision.
Well, like our girl, Goldi, small businesses are looking for the perfect fit when choosing a cross-border payments provider: one that is not too old but also not too young; not too big but also not too small; and one that doesn’t charge ridiculous exchange rates. Essentially, in search of a cross-border payments provider just right for (all) the small business owner.
Ditch the wire. No more SWIFT codes. No more wire fees.
Get started
Sign Up Schedule a demo