Log InJoin 

What Is A Wire Transfer?

What Is A Wire Transfer?

A wire transfer is the movement of funds between two financial accounts. Depending on the service used, it can be a near instantaneous or take a few days to process a wire transaction. There are a number of different organizations which are public, private and governmental which facilitate and process wire transfers for individual consumers, businesses and governments around the world. Wire transfers used to be limited to high wealth individuals or businesses but technology in recent years has made it available to everyone.

Instead of using a predefined physical form to represent currency which is then exchanged between parties, such as a personal check or cash, a wire transfer is electronic and paper less. A couple of common situations for wire transfers are initially funding a PayPal account. When the account is established you can add your bank and then transfer funds from your bank account to your PayPal account. Another more common consumer wire transfer, which as been around for years, is Western Union for sending money between friends and family.

Governments aren't likely to use Western Union or PayPal to send billions of dollars between countries. For high-volume wire transactions, the Federal Reserve Banks use the central banking system to move large funds between depository institutions and the Fed and between each other. "The Fedwire Services are the premier electronic payments and securities transfer services that banks, businesses and government agencies rely on for mission-critical, same-day transactions. When it absolutely matters, trust the Fedwire Services to deliver transactions with certainty and finality," as stated on the Fedwire Services web site. Wire transfers are only one of the transactions which are processed using the system. Loans, adjustments to the currency supply and checks all operate on the central banking system.

A private system exists called the Clearing House Interbank Payment System is owned and operated by banks and can also process wire transfers. According to the CHIPS web site, "CHIPS is the largest private-sector U.S.-dollar funds-transfer system in the world. CHIPS operates on a global business day and utilizes a sophisticated liquidity savings mechanism to provide fast, final payments while maximizing liquidity efficiency for participating banks. CHIPS sets the industry standard for resiliency, reliability, and innovation in funds transfers. Leading banks worldwide, as well as their correspondents and customers, find CHIPS a trusted partner in the U.S.-dollar clearing and settlement services."

Wire transfer technology has advanced significantly over the decades. Previously, to initiate a wire transfer a consumer would send a message by telegraph to the recipient's financial institution authorizing the release of a certain amount of money. The Internet and computers has made tying accounts together, regardless of their type or location, a quick and painless process. Even when a telephone is used, the request is processed on the back end by computers. Whether you need to transfer money between two personal checking accounts or move million dollars as payment to a foreign company, the process is automated and efficient like it has never been before.

Financial security is the primary benefit of wire transfers and continues to be a key reason for its continued use. PayPal and personal checking accounts are considered verified meaning the individual or institution name which appears on the account has been proven to actually exists as a legally recognized entity. This is an important characteristic because once a wire transfer has been completed, the record will show legal entity A sent money to legal entity B and it was received at a specific date and time for a specific amount. Unlike credit cards, once funds have been transferred the transaction is complete and there is no concern for charge backs, disputes or cancellation. Of course this doesn't prevent human error when inputting an account number or amount but as far as wire transfers are concerned, it is about as safe as it can get when moving money.

As you can probably tell from the description, the benefits of a wire transfer come at an additional cost. Security, reliability and speed all have a cost which is not experienced when handing someone cash or writing a check. Certain wire transfers can be prohibitively expensive especially when there is an international component. Transfers between countries are less common for individual consumers and are often relegated to businesses and governments specifically due to costs. Regardless of the situation or the expense, wire transfers and are an invaluable financial tool providing a secure way to move large amounts of money safely between accounts.

Image by: Eric Driggers