How international money transfer works.

How do banks transfer money from one country to another ? It's magical when your friend, Brandon who lives in the U.S receives $100 when you meet your local bank and send ₦38,900. To make sense out of this, let's first take a little history lesson.

How did wire transfer first start out?

A company called Western Union launched the first wire transfer in 1872. Western Union had a telegraph network back then which people used to send messages across the country.

So to make a transfer, you had to walk into a telegraph office, the operator guy (who must have been a very patient soul) would transmit a message and "wire" the money to another office using passwords and code books. The guys at the other office would then allow the money to be released to whoever you were sending it to.

This was a style of transfer called a telegraphic transfer. Telegraphic transfers sent messages (instead of paper or gold) over long distances with the sender using codes that only the receiver knew.

With our history lesson over, let's go back to our friend, Brandon.

Maybe you were thinking before now, "The guys at the bank did a really fast marathon sprint to the U.S and handed Brandon's local bank the money."

To see how your money traveled from Isolo, Nigeria to Denver, Colorado in the U.S (without anybody running), we have to learn about how International Money Transfer works.

Let's take the journey!

When you walked into the bank to make the transfer, the guys at the bank use something called a wire transfer system  (Wire transfer, bank transfer or credit transfer, is a method of electronic fundstransfer from one person or entity to another).

Several wire transfer systems are used in the world and the one used at your local bank could be different. What are some of the qualities they are looking for? Well, your bank may prefer to choose a wire transfer system that's faster than other's while being costlier to use. Another bank, could be more interested in one that can handle many transfers at the same time or even in one that can assure that your money gets sent safely.

Some of the more popular systems include:

• Federal Reserves system (also known as Fedwire) used in the United States
• Clearing House Inter-bank Payment System (also called ICHIPS)

Fedwire can do something called a "real time gross settlement" which simply means a transfer will happen instantly without waiting for a crazy period of time.

ICHIPS on the other hand,  does a "net settlement on a periodic basis" which is fancy talk for a transfer that does not happen immediately but instead shows up after a certain period of time (could be a day or a week).

fig 1- A flow diagram for international money transfer.

Continuing with the transfer to Brandon

On getting to the bank, the operator will choose to make the transfer through a secure system like Fedwire or SWIFT. if swift is going to be  used, you would be asked to provide some information about Brandon. You'd notice that you need to add the SWIFT code (also called Business Identifier Code ) for Brandon's Bank. If Swift is the channel going to be used by the operator.

You might be wondering, "What is a Swift Code or BIC?" . A SWIFT code is kinda like a nickname for banks that is usually eight characters long.

Deutsche Bank  is an international bank with its head office in Frankfurt, Germany with DEUTDEFF as its SWIFT code. To understand how Deutsche Bank coined a SWIFT code, let's look at the parts of Deutsche Bank's SWIFT code:

DEUT  stands for Deutsche Bank. DE  is the country code for Germany. FF is the code for Frankfurt.

If you see a Deutsche Bank SWIFT code, DEUTDEFF500, then the 500 is a branch or area code for a specific office, in this case the Deutsche Bank in the city of Bad Homburg.

So you hand over your money (along with an extra fee for the service) and the  bank guy will chose a wire transfer system to be used to get it over to Brandon. The bank guy may collect cash, check, card, or transfer of funds from your account.

For example, some banks convert the transaction in U.S dollars, regardless of where they operate. Cost factor for transferring to Brandon  are mostly due to the following reasons:

1. Minimum fees
2. Sender or recipient fees
3. Authorization fees
4. Commissions
5. Currency exchange fee.

Originating the transfer.

Since the channel has been chosen and the transfer funded the next step for the operator is the origination of the payment or transfer order, origination is carried out by the bank by sending the money. The operator will initiate the transfer using the bank established procedures.

Sending, Clearing, and Settlement of Transfer Orders.

The way the transfer moves between  you  and Brandon is  determined by the payment instrument and the transfer mechanism. Clearing is a critical part of the money transfer value chain.

Clearing is the process of transmitting, reconciling, and in some cases, confirming transfer transactions before their final settlement.

During clearing, your bank and Brandon's bank exchange information about the payment, and the amount of funds to be settled by during the transfer. The outcome is a fully processed payment transaction between you and Brandon as well as a valid financial claim by Brandon's bank to receive funds from your bank.

Settlement is the process of discharging the claims of the institutions involved in a transfer. The steps include collecting and checking the integrity of the claims to be settled, ensuring the availability of funds for settlement, settling the claims between your bank and Brandon's bank, recording the settlement, and communicating the final settlement.

The arrangement used in clearing payment for international transfer is called is Third-party clearing arrangements where financial institutions employ a common third party (a separate financial institution known as a correspondent) for clearing, with one or more institutions forwarding payment instructions to the correspondent for sorting and processing. For example, your bank in Nigeria has a correspondence bank in the US which handles all international transfers arriving in the US and balance the ledgers.

Receiving a Money Transfer Order

The receiving channel for a money transfer depends on the type of transfer instrument and clearing system involved. These channels can be broadly categorized as physical or electronic.

Physical channels used to transport payment instructions include personal transportation and mail. Money transfer instruments that can be transmitted by physical channels include currency, checks, money orders, traveler’s checks, debit cards, credit cards, and prepaid cards. Electronic channels involve the receipt of electronic files of transfer transactions from clearing facilities, by phone, and by Internet.

Given this risk, the institution must carefully reconcile incoming transactions and the settlement of those transactions.

Paying a Money Transfer Order

Disbursement of funds to Brandon can occur using local currency, foreign currency (if regulations permit)

Customer Service

Customer service is the final stage in the value chain of money transfer activities. Activities include answering client questions, providing information on transfer services and other available financial services, authorizing exceptional events, maintaining accounts, and resolving problems.

Conclusion

I  hope with the above example, you should have gotten a very good (if not  heuristic) sense of how money is transferred. Though the above example  has been simplified almost to an elementary level, this is pretty much  all that happens when money (wealth) value transfer happens from one  bank to another, be it within the country, or across borders.

Resources

https://www.simple.com/blog/international-money-transfers https://www.quora.com/How-does-money-transfer-between-banks-and-different-countries-work https://en.wikipedia.org/wiki/Wire_transfer