A Brief History
The origins of modern day banking can be traced all the way back to Renaissance Italy. Specifically, in Florence and Genoa and the banking dynasty created by the Medici family. From these humble roots, the concepts of banking, lending and credit spread throughout Europe and trickled over into other continents. By the 17th century, Bank notes, originally known as promissory notes, began to be used locally as a form of legal tender.
These notes had inherent value due to being backed by local banks with gold or silver. The use of bank notes and centralized banking helped develop the concept of fractional reserve banking whereby banks made investments, loans, or allowed 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 permitted currency to act in a more fluid manner and for banks to evolve into financial intermediaries between savers and borrowers by giving long-term loans to borrowers and allowing depositors to liquefy instantaneously.
Because of the convenience and the rapid rate at which currency could be transferred, the practice caught on and completely changed the way funds could be exchanged.
One of the most important results of this modernization and centralization of banking was the creation of wire transfers, whereby funds were transferred from one person or entity to another, making the exchange of currency significantly easier and faster. The first wire transfer service was created in 1872 by the Western Union bank across its telegraph network. A telegraph operator in one office could use a codebook and passwords to “wire” money which had been paid to their office by the “sender” to a different telegraph office, which in turn would pay that amount to the “receiver.”
Because of the convenience and the rapid rate at which currency could be transferred, the practice caught on and completely changed the way funds could be exchanged. As international banking networks further developed, this practice became even more commonplace.
International Wire Transfers
As we have moved past the creation of the Internet into the technological revolution, it has become increasingly easier to transfer assets and to do so rapidly. Not only that, but we now also have a variety of options as to how we are able to transfer those assets, be it a wire transfer, money order, bank draft, by check or in cash, each one of those routes has their fair share of trade-offs or pros and cons. That said, there is a marked difference in ease of transferring assets depending on whether you are attempting to do so domestically or internationally.
While you obviously can use more conventional methods to transfer money internationally, they can be either slow or risky, especially if it is a large amount, and in some instances the cash or check might not even work in particular countries. So, if you are traveling abroad, studying in another country, or doing business overseas, and you need to send money, an international wire transfer is the optimal way to do that since you can transfer thousands instantly while also converting it into a chosen foreign currency.
Prior to the creation of contemporary messaging networks, banks used Telex as their messaging system in order to transfer funds internationally. This process was not only slow and insecure, but it had no standardized code system. Using a free-text format, the sender would explain the fund transfer using sentences, which the receiver had to translate and then process. As a result, there could be mistakes made through no real fault of either party, but more so because the specificities 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 70’s and was supported by over 200 banks in fifteen 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 send and receive information in a secure and consistent manner. Once established, rules for liability and fundamental operating procedures were further established and made universal. Today, more than 11,000 banks in 200+ countries rely on the SWIFT Network.
A note should be made 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 send 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 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. That, said, while it was revolutionary in the 70’s allowing money to be transferred securely and quickly, now, it is slower, more inconvenient and more expensive. There are several reasons for this, but before we delve into that, it is important to understand how SWIFT and the correspondent banking network.
A note should be made that SWIFT is only a messaging system that brings security to banks and that there is no actual exchange of money via SWIFT.
While it may seem like this gigantic organization, as mentioned above, SWIFT is simply a secure messaging system with no money actually changes hands. So, in order for financial institutions to perform actual money transactions, each bank needs a prior banking relationship for these funds to transfer. A bank can only work directly with overseas banks with which it holds accounts known as “correspondent accounts.” If banks do not have an existing correspondent relationship, they must seek another bank that does have a prior banking relationship. At each bank, they are obliged to carry out certain checks, specifically on sanctions and anti-money laundering before the payment is cleared.
Because of these requirements SWIFT is anything but its namesake. Verification of details eats time and could take 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. A similar comparison could be how sometimes a plane does not have a direct flight and requires transfers or stops along the way.
As a result, this takes longer and also incurs fees from each bank along the way. Some refer to SWIFT as point and shoot, in that you can give your end destination, but there is no ownership or guarantee that the transfer will go smoothly because as it goes from bank to bank, there are possibilities of it getting lost, since there is no main branch responsible and no ownership end-to-end. Add to these issues the chance or receiving a bad exchange rate and it may seem like more cost than the wire transfer is worth.
Correspondent and Intermediary Banks
Third-party banks that coordinate with beneficiary banks in the facilitation of international wire transfers can be either correspondent or intermediary banks. The distinctions amongst them are not constant and often contingent upon location, so in some cases they may seem identical and in others, not so much. So, depending on where you are from, corresponding banks can either be extremely similar or vastly different.
In countries within the European Union or Australia, banks that perform transfers internationally are known as intermediary banks and there is little to no difference between intermediary and correspondent banks. While in places like the States, correspondent banks deal with transactions where there are two or more currencies; so, if the senders are using dollars and the receivers are using Euros, a correspondent bank deals with every transaction from dollar to Euro. Intermediary banks, however, send cash for foreign transactions, but do not deal with the multiple currencies, more often than not that is due to the sending bank being too tiny to deal with foreign transfer, so they bring in intermediary banks to help them.
Know Your Customer Compliance
In light of growing corruption, bribery and money laundering passing through international banks by criminal elements, Know Your Customer (KYC) regulations were instituted by financial institutions in order to prevent banks from being used, whether intentionally or not, by said criminals. Know Your Customer policies integrate four main aspects to help a bank better know its user: Customer identification procedures, monitoring of transactions, customer acceptance policy and risk management. While helpful for curbing crime and protecting customers, the cost or regulatory compliance has made it so that banks are less likely to use correspondent relationships, especially because banks are uncertain whether regulations will grow even stricter.
These exorbitant compliance requirements combined with possible damage to a financial institutions reputation have led banks to cut down heavily on correspondent banking.
These exorbitant compliance requirements combined with possible damage to a financial institutions reputation have led banks to cut down heavily on correspondent banking. These regulations have hit SWIFT, a main component of the correspondent banking market harder than the rest. In reaction they have recently announced a global payments initiative, “To dramatically improve the customer experience in correspondent banking by increasing the speed, transparency and predictability of cross-border payments.” While these initiatives may help, SWIFT and traditional wire transfers are likely dying out because of increased competition with third party infrastructure players who are more optimally positioned to seize on these new opportunities.
How to Make a Traditional Wire Transfer
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: your bank account number, the recipient’s bank, International Bank Account number, bank address, type of bank account and their BIC/SWIFT code. Once you have input all this information, along with the desired amount and the desired currency, you will have to pay fees for processing and exchange rates. Further fees may be added due to SWIFT passing through multiple banks.
Today: Alternative Ways to Make Wire Transfers
Besides traditional banking methods, standalone transfer services have become far more popular. Services like Veem allow you to keep the same security while simultaneously cutting down fees and transfer times because of the wonders and immediacy of the internet. According to the Deutsche Bank, “Competition in the correspondent banking market is heating up… there is also the possibility of large nonbank organizations deciding to offer cross-border payment services to companies, in competition with global and regional banks. 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.”
Besides traditional banking methods, standalone transfer services have become far more popular. Services like Veem allow you to keep the same security while simultaneously cutting down fees and transfer times because of the wonders and immediacy of the internet.
Because of this competition in the market place, the cost to transfer money via wire transfers has decreased across the board, which is a great thing. One of the negative offshoots of this increase in businesses competing in the wire transfer market is having a seemingly overwhelming amount of options to choose from. Consumers are faced with a form of the paradox of choice. As you might imagine, some methods take longer, others necessitate more of your time and energy or cost you more in the long run. The following are some of the better services you can utilize in order to avoid SWIFT wire transfers.
Veem is a great emerging option for sending international payments. Founded by a team of financial institution veterans that were frustrated with their available options for wire transfer, Veem’s aim is to alter and simplify the payment system, expediting the process, adding ownership to all stages and removing many of the hidden fees and allowing the sender or receiver to track a payment’s progress.
Their team rebuilt the global payments network by merging the best of traditional systems with the intuition and intelligence of newer, better tech. Considered a multi-rail platform, Veem utilizes blockchain for their correspondence and deliveries, which, combined with these preexisting networks, allots their company higher accessibility, better security, faster speeds, and competitive rates.
Created in 1998, PayPal is the most used online transaction market place in the world and now includes transfer services if you want to create an international wire transfer. In regards to fees, 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 as well as a 2.9% of the 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. This effect can be made even worse due to PayPal giving you a bad exchange rate and pocketing the difference. PayPal international payments generally take two business days and are not optimal if sending large amounts of money (due to the percentage they take and volume limits).
Personal versus Business
In terms of a differential between sending an international wire personally or through a business, the only divide is speed. Due to KYC regulations, vetting and screening a company is usually a more complex process. This eats time when sending a wire and can double the timeframe in which the funds are set to arrive. Validating a single person through KYC regulations is generally a faster process as there’s less documentation involved. This increases the speed of the wire transfer itself.
Generally, it is the origin, destination, amount, currency exchange rate, timeframe desired, and method in which you send funds that dictate the amount of fees that will accrue.
In terms of cost, big banks and transfer operators are often the most expensive. While their “fixed fees” are easy to understand, it’s their exchange rates that suck the well dry. They can promise to deliver a sum of money for nothing but a $50 outgoing foreign wire charge, yet their 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 funds transferred. These are typically half the price of traditional methods.
International Wire Transfers
Making an international wire transfer should be a simple, affordable, and standardized process. Today, with various methods of carrying out an international wire transfer, 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 the traditional methods begin to diminish, or they rebuild their infrastructure to improve their process.
If you are currently considering an international payment, make sure you use the establishment which best fits your needs, you’re not fooled by awful exchange rates but pretty fees, and you do your due diligence before making your decision.