A wire transfer is the electronic transfer of funds between people or entities. It allows people in distant locations around the globe to safely transfer money across geographical locations without being in physical contact with each other.
When sending money via wire transfers, information is passed between two banks on the recipient’s identity, their account number, and the amount of money that the person is due to receive.
The person initiating the transaction must usually pay a transaction fee before the bank will wire the funds to the other party. Once the information is passed to the recipient’s bank, the bank deposits its reserve funds to the recipient’s account, and the two institutions settle the payments on the back end after the receiver has received the funds. There is no physical exchange of funds.
How Does a Wire Transfer Work?
The person or entity wishing to make a wire transfer first approaches a banking institution and directs them to transfer a specific amount of money. The sender provides the SWIFT or IBAN and BIC codes of the recipient so that the bank knows where the money is to be sent.
Before the transaction can be initiated, the sender must deposit the money to be sent and a transaction fee that is determined by the sending bank. The sending bank then transmits a message via a secure system like SWIFT or FedWire to clear the funds.
Once the funds are cleared, the recipient’s bank receives the message requesting it to execute the payment according to the instructions provided. The funds may take several hours or days to get to the recipient’s account from the time the sender initiated the transaction. Either of the banks must hold a reciprocal account with each other to settle the payment.
Uses of Wire Transfer
The following are some of the ways that you can use wire transfer:
1. To wire money
The person wiring funds to a recipient must first obtain “wire instructions” from the recipient. The recipient can get the wire instructions from the banking institution where they expect to receive the money.
The sender will then submit the instructions to their bank, alongside the money to be sent and the transaction fee. The bank will then request the sender to fill out the wire transfer form or provide an online form that the sender can access and fill out.
2. To receive money
To receive funds via wire transfer, the recipient will need to provide their bank account information to the sender and the “incoming wire instructions” that are provided by the receiving bank. When the information is sent to the sender, the sender’s bank will initiate the transaction and send the funds.
The funds will typically be transferred within one day, depending on whether the transaction is domestic or international. The recipient’s bank will deduct a transaction fee from the received funds.
Types of Wire Transfers and Associated Costs
There are two types of wire transfers – domestic and international. Each of these wire transfer types varies in cost and delivery times. Domestic wire transfers get processed within the same day. Wire transfers within the United States are charged approximately $25 per transaction, but the fee can go as high as $35, depending on the banking institution.
On the other hand, international wire transfers must be cleared by a United States clearinghouse and at least one foreign country’s processing system, which prolongs the processing time to several days. Individuals and entities use this technique to transfer large volumes of money in a foreign currency.
International wire transfers cost about $43 to send money from the United States to another country. The recipient’s bank deducts about $8 to $10 from the amount of money wired to the recipient. Some banks may impose some hidden costs above the transaction fee that they charge.
How Safe is a Wire Transfer?
There are concerns about the safety of online money transfers due to the rising number of bank fraud cases. Wire transfers are made from one bank to another, before being deposited in the recipient’s account. In the United States, federal regulations require individuals to verify their identity and provide their physical address in order to open an account and use the wire transfer service. It makes it nearly impossible to transfer funds anonymously and prevents cases of wire transfer scams.
The biggest risk comes when scammers take control of another person’s bank account and manage to withdraw cash or re-route the funds to another account. In such scenarios, account holders may be unable to recover their funds unless they report the cases early enough before the scammers execute their plans.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
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