What is a Wire Transfer?

The global wire transfer network is administered by banks and money service businesses (MSBs). They work together to communicate the payment information through a secure system in order to settle, or reconcile balances, without ever transferring physical currency. 

The system commonly used for international wires is SWIFT, the Society for World Interbank Transactions, a large network that allows banks and financial institutions to send and receive wire transfer instructions. US domestic wires run through Fedwire, an electronic funds-transfer service run by the Federal Reserve Board, and CHIPS, Fedwire’s private sector counterpart managed by The Clearing House. Domestic wires are governed by regulations such as the Uniform Commercial Code are in place to ensure domestic wires run through Fedwire settle within one business day.

Wire transfers play a critical role for businesses and individuals alike. They offer higher transaction limits for single payments and are often used when paying large sums of money. This could be a business paying for a large expense or a person making a major financial purchase, such as a home or car. 

How do Wire Transfers work?

There’s no physical transfer of funds with Wire Transfers. So, how does that work?

Let’s say you’re house hunting. You find a house you love and want to send a down payment to your mortgage servicer as soon as possible. You could initiate that transaction multiple ways: by going into a branch, calling them, or going online depending on your bank.

But, to send the down payment, you’d need to provide the recipient’s name, the receiving bank routing number and account number, and the wire amount. Some banks may also require the sender’s bank address, account type, and currencies involved in the payment. If the payment is international, there might be currency conversion to take care of. 

After that information is collected, your bank will relay the payment information and instructions to the recipient’s bank through a secure system, such as SWIFT, CHIPS, or Fedwire. The receiving bank will then deposit money from its reserve funds into the correct account. Later, the two institutions will settle the payment, which means they’ll adjust the account balances to reflect the transfer.

Domestic wire transfers will process the same day as long as they are initiated before the sending and receiving bank’s cut-off times. International wire transfers can take up to two business days.

History of Wire Transfers

Wire transfers date back to the 19th century. Western Union used their telegraph network to send wire transfers as early as the 1870s. Senders would bring money to the telegraph office and the operation would send a message and “wire” the funds to another location. For security, the parties involved would use codes and passwords to ensure the funds were released to the right person.