Introduction
Wire transfers are the most expensive payment type. Banks and wire transfer services charge between $25 and $50 per transaction for individuals; businesses typically get charged a base fee for a certain number of wires, which may be discounted based on volume, amount, or banking relationship. The fee also depends on whether the money is being sent or received, and whether its destination is domestic or international. Why are these fees so costly? And with other payment methods available, why do businesses continue to use wire transfers despite this cost?
What are Wire Transfers?
A wire transfer is an electronic payment made through a global network administered by banks and money service agencies. Senders fund the transaction from their bank account, and provide the recipient’s name, the receiving bank routing number and account number, and the wire
amount. [1] Domestic routing numbers required are often the same ABA routing numbers used for ACH, but sometimes they have different routing numbers used for wires.
The sending bank relays the payment information and instructions to the receiving bank through a secure system, such as SWIFT, CHIPS, or
FedWire. [2] Once the receiving bank deposits money from its reserve funds into the correct account, the two institutions will settle the payment, which means they’ll adjust the account balances to reflect the transfer.
Timing of Wire Transfers
As long as domestic wire transfers requests are completed before the sending or receiving bank’s cut-off time, they will be processed the same day. Requests made after the cut-off will be processed the next business day. Regulations such as the Uniform Commercial Code are in place to ensure domestic wires run through FedWire settle within one business day. [3]
International wires can take up to two business days to process, as they are also subject to cut-off times, and have to be settled at both domestic and foreign banks, often running through intermediary correspondent banks. International wires are monitored closely by the Office of Foreign Assets Control, a branch of the US Treasury, for anti-money laundering compliance.
Cut-Off Times for Business Wire Transfers
Each bank dictates its own cut-off time for receiving and processing wire transfers. [4]
Are Wire Transfers Safe?
Wire transfers are generally safe, and most services will verify the identity of both sender and recipient to ensure legitimate transactions. Both US and international wires are monitored for fraud protection. However, due to its speed and irreversible nature, wires can be used to commit fraud. It’s important to never send money to anyone you don’t know, protect your personal account information, and monitor your bank statements closely to avoid scams.
Why Do Wires Cost So Much?
Transfer fee amounts vary depending on whether the money is being sent or received, and whether the transaction is international or domestic.
There are few reasons for why wire transfer fees can be steep:
- Immediate Availability: The number one reason for the higher cost of wires is the immediate availability of funds. Unlike ACH payments, which are processed in batches, wires are processed individually at the time of initiation, with immediate, irrevocable settlement. Because there is no physical transfer of funds [5], the recipient does not have to wait a few days for the payment to clear before claiming the money. This also means that it is difficult to recall the money once it’s been sent, even if there is an error. Banks charge fees because they take on risk to make money accessible quickly by releasing money from their reserve funds.
- Higher limits: Another advantage of wire transfers is they have higher transaction limits for single payments. In cases where the wire amount is large enough, the transaction fee is insignificant, and often worth making the funds available quickly. One example of this is large B2B payments, such as commercial real estate or acquisition transactions, where the amount of money transferred can be in the millions or more. Wires are also used in personal finance for major purchases such as homes or cars.
- Global Network: When large amounts of foreign currencies are traded, banks charge other banks a midmarket, or interbank, exchange rate. If the foreign bank has to convert the money on the receiving end, they will usually charge a higher markup. If the sending bank does not have a direct relationship with a receiving bank, there usually will be an intermediary bank, who may deduct a fee as well. However, the benefit is that you can safely transfer money around the world, in any currency. And your SWIFT code provides a unique identifier to make sure the transfer reaches the correct recipient.
Despite their cost, wire transfers are a useful payment method, as they allow businesses to move large amounts of money quickly. If you’re interested in using Modern Treasury to manage wires and other payments, or to help automate your payment operations, sign up or get in touch today.
Some banks may also require bank address, account type, currencies involved (such as US dollars to be received in Japanese Yen), and the reason for transfer.
SWIFT is the Society for World Interbank Transactions, a large network that allows banks and financial institutions to send and receive wire transfer instructions. Most international wire transfers use SWIFT. FedWire is an electronic funds-transfer service run by the Federal Reserve Board; CHIPS is FedWire’s private-sector counterpart. US wires typically use one of these systems.
While banks can dictate cut-off times for receipt and processing of wire transfers, the Uniform Commercial Code (UCC) has rules for the bank’s responsibility to make transferred funds available. Regulation J requires banks to process a wire transfer on the same business day it was received by the Federal Reserve. According to Regulation CC, wire transfers are considered received upon the delivery of information about the account and credit amount.
Wire transfers are all completed electronically, so no physical money is moving from bank to bank. The money that becomes readily available for the recipient comes from the receiving bank’s reserve funds. The receiving bank and sending bank will settle, or reconcile their balances, after the wire is complete.
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