What exactly happens during a wire transfer and how does money move step by step between banks?

Payments

Asked by Question Bot02/Sep/20131 answer

1 Answer

Faisal Khan

Answered 02/Sep/2013

Wire Transfers between two banks is essentially not too complex. To understand the whole concept of wire transfer, you need to understand the different types of Wire Transfers:

Domestic Inter-bank Transfers (within the country transfer from one bank to another)
Domestic Intra-bank Transfers (within the country and transferring from one bank branch to another)
International Inter-bank Transfers (probably the most common/famous bank transfer, whereby funds are transferred from one bank in one country to another bank in another country)
International Intra-bank Transfers (transferring of money within the same bank, but in a different country)

Domestic Inter-Bank Funds Transfer
This depends on how the setup is in each country. It can be done via RTGS (See Wiki on RTGS: http://en.wikipedia.org/wiki/Rea...) or via a local ACH or even a localized Financial Network or Switch. Essentially, banks are members of a network (secure, closed network) that essentially allows banks to net off or send payments to each other and exchange beneficiary details. Some old-school (read: not technologically advance countries) still do this manually by exchanging physical cheques and then settling them. Whilst, most of the modern and even developing economies have some form of an exchange / network to connect to and settle. The United States, for example uses ACH for this purpose.

Intra-Bank Funds Transfers (Domestic)
For Intra-Bank Transfers the procedure is very simple. Most banks will simply instruct their core banking software to do an FT (Funds Transfer), which essentially means debit one account holder and credit the other account holder.

Intra-Bank Funds Transfers (International)
When the same Intra-Bank transfer is done internationally, banks in both the remitting country and the beneficiary country have to follow laws in their respective countries for reporting the same to the financial services authority / central banks on the money in-flow/out-flow (see more below on the different types of reporting).

Inter-Bank Funds Transfer (International)
On the International transfers, for Inter-bank transfers, banks usually use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Think of SWIFT as the common denominator (or network) to connect any two banks. Sometimes two banks may have a direct arrangement (for example, a transfer from Citibank NYC (US) to Deutsche Bank Karachi (PK) have a direct arrangement, and hence the transfer will be done via the SWIFT network, without the interaction or involvement of an intermediary bank, commonly referred to as a correspondent bank.

In the event a direct relationship is not available, banks have arrangements with each other (via Nostro Accounts).

So for example, if Sunbank out of Orlando Florida (US) needs to send money to Mr. XYZ at Askari Bank in Lahore (Pakistan), the two banks here: Sunbank and Askari Bank certainly do not have a working arrangement.

Via SWIFT Sunbank can easily see that Askari Bank has an arrangement with Deutsche Bank NYC as a direct arrangement. IF Sunbank has a direct arrangement with Deutsche Bank - via a Nostro Account, they will simply send an instruction and the money to Deutsche Bank and and then Deutsche Bank NYC will accept the funds, minus its correspondent banking fees, and forward the money to Deutsche Bank (Karachi).

If Sunbank does not have a direct arrangement, they will ask Deutsche Bank for the bank account used for on-ward funds transfer and simply do a local wire transfer (ACH) which can take up to 2 days to clear.

Because Askari Bank and Deutsche Bank (Pakistan) have an arrangement, the funds come into the nostro account of Askari Bank in Deutsche Bank Pakistan. Askari Bank now has your money from Sunbank Orlando Florida. At the end-of-the-day settlement of Nostro account, the incoming money is transferred into the appropriate central account of Askari Bank and which will then do a FT (Funds Transfer) of the money to your account.

In this case, Deutsche Bank (Pakistan) may deduct correspondent bank fees and your bank may do the same. All in all, it is not unusual for mid-bank deductions to be in the vicinity of US$ 25 to say US$ 75 per transaction.

Reporting - is a very essential element of wire transfer business. Depending on the country (each has its own set of requirements), such reporting includes essentially:

KYC (Know Your Customer) Report
Source of Funds Reporting (if Cash was induced into the source end of the transactions)
AML (Anti-Money Laundering) Report (specifically velocity checks)
SAR/CTR (Suspicious Activity Report / Currency Transaction Report)
OFAC (Office of Foreign Assets Control - predominantly practiced by the US) and in other countries they may have their own check lists to see if the funds are being transferred To/From people on a given checklist.
Threshold Reporting (reporting on amounts that exceed a specific monetary value in a given number of days, usually US$ 10,000 in the last 30-day window)
Workers Remittance Reporting.
Any other reporting as required by law or internal policies in the country the Bank is operating out of.