How Money Transfers Work
Once the near-exclusive domain of retail banks and wire offices, money transfers are now available through a growing network of money transfer services. Internet-based financial technology (“fintech”) has dramatically transformed the nature of modern money transfers, which now take place almost entirely online.
Let’s take a look at how money transfers work, considering both domestic and international transfers.
Basics and Definitions
The term “money transfer” is used in varying ways, so first, let’s be clear about what exactly we mean. A money transfer involves the exchange of funds from a sender to a recipient. The sender could be a person or a business entity, and so can the recipient. Thus, they cover person-to-person transactions, business-to-person (and person-to-business) transactions, and business-to-business transfers.
The important point is that we are not talking about money transfers that take place across an individual’s own linked financial accounts. For instance, if you go into your online banking and make a payment from your checking account to your credit card, you may see that transaction referred to as a money transfer. These types of transactions involve similar processes and technologies, but we’re specifically exploring transfers that move money from one person or business to another.
The concept of “electronic funds transfer” (EFT) is key to understanding how modern money transfers work. EFT transactions involve the exchange of data over banking networks. With EFT technologies, no physical exchange of money ever takes place. Instead, financial institutions exchange data that represents money, using that data to settle the transaction and ensure that “money in” equals “money out.”
Online money transfers use EFT technologies, but they also involve several additional steps. These steps vary, depending on whether you’re sending the money to a domestic recipient (in the same country or jurisdiction) or internationally.
Domestic Money Transfers
When you arrange a money transfer to a recipient in the same country through a bank, wire service, or specialized provider, your funds are sent using a set of standard protocols. Money transfer providers usually support online bank payments, credit cards, and debit cards. Customers use these financial accounts and instruments to supply the initial funding needed to launch the transaction.
Those funds travel into an interlinked network of banking protocols known as an automated clearing house (ACH). ACHs use electronic and digital technology to administer and settle transactions among financial institutions.
In most cases, senders must provide the recipient’s bank account details. This enables the ACH to route your funds to the appropriate financial institution and account. After the ACH confirms, processes, and clears your funds, it will release them to your recipient’s bank, which will then deposit the funds in your recipient’s account. The entire process uses EFT networks, with the ACH acting as an intermediary that verifies the accuracy of the transaction details.
Some providers allow senders to pay in cash, and for recipients to retrieve their money in cash through designated agencies or pickup points. In these cases, the process remains very much the same, except that the EFT and ACH aspects of the transaction will occur on the service provider’s end instead of through your bank.
In other words: you pay cash, and the service provider orders the transfer electronically. Those funds then go through the necessary administrative steps before being deposited into the recipient’s account, or into the account of the agency that operates the cash pickup point. In the latter case, the recipient-end agency will clear your recipient to obtain their cash after the transaction has been settled in their account.
International Money Transfers
When you send money across borders, your transaction will follow the same basic process, but a few additional steps are involved. The first involves currency exchanges, which will be handled by the institution or company through which you are arranging the transfer.
In routing your transaction into the EFT/ACH networks that govern international transactions, your money transfer provider needs to supply funds denominated in the recipient’s local currency. Thus, you will need to have your funds exchanged for that currency on the international markets, which involves additional steps and costs.
The exchange rates you see quoted on currency sites and in the news represent what is known as the mid-market interbank rate. This means the quoted rate evenly splits the difference between the prevailing “buy” and “sell” prices among financial institutions for a given currency pair. The mid-market rate is a theoretical rate, as it is impossible for retail consumers to receive it when exchanging money.
This is because the financial institutions that actually carry out those exchanges apply margins to currency conversions. The margin represents a markup on the price the financial institution paid to obtain the currency you ordered. In addition to marked-up margins, banks and service providers may apply additional transaction fees to your money transfer, depending on their internal policies and which two currencies you are trading in.
Another administrative step comes in the form of regulatory requirements in the recipient’s destination jurisdiction. All countries and territories require incoming financial transactions to clear regulatory scrutiny before being released. This prevents people from using the international banking system to engage in illegal transactions and criminal activity.
Regulatory administration does not put your money at risk. Government authorities will not simply seize your money and refuse to clear it for release to your recipient, since their participation in international banking treaties will not allow it. However, regulatory administration can delay the resolution of your transfer by a business day or two, depending on local laws and transaction clearance requirements.
Are Online Money Transfers Safe?
The short answer to this question is yes. Online money transfers are perfectly safe and secure, as long as you conduct them through accredited service providers that are fully licensed and comply with all regulatory requirements applicable to the jurisdictions in which they operate. Some providers have better reputations than others, so it’s wise to compare top money transfer services before selecting which to use.