Interbank Monetary Transfers: A Guide To How It Works

Traditional institutions have come a long way, moving from manual and physical cash transfer systems to modern technologies that automate processes and increase speed and efficiency. Today, anyone with a compatible mobile phone can send cash using the internet or a regular radio connection and send money worldwide quickly. Although the delivery time varies across banks and based on the type of transaction, most financial institutions try to maintain a fast money exchange service to satisfy customers and keep business moving.

Modern Money Transfer Technologies

The development of technologies such as digital wallets and tokens opened more opportunities for sending money. Still, interbank transfers remain crucial to the smooth operations of the financial sector, especially for trading forex, international trading and exchange, and the daily transactions that keep the economy going. For example, consumers pay for goods and services using a debit card or initiate a payment via their mobile application or Internet banking service. These constitute the bulk of transactions, especially locally.

Interbank transactions could also involve international transfers between banks, such as from HSBC to Chase. These international payments form the bulk of foreign currency exchange at institutional levels. These activities are now dependent on modern technologies for speed and efficiency.

Types Of Bank Transfers

All transactions are domestic or international, and while the basic principles are the same, the structure and processes are somewhat different. Using the US as an example, there are:

Domestic Transfers

1. ACH

This is the Automated Clearing House (ACH) domestic transfer network run by the National Automated Clearing House Association (NACHA), an independent organization owned by financial institutions such as banks, credit unions, and payment processing service firms. ACH transactions do not go through the Federal Reserve., and have some distinguishing features from other payments. For example, requests may be processed in batches at specific periods instead of instantly.

2.  Wire

These are transactions that go through the payment network run by the Federal Reserve. Wire transfers are processed individually and thus have a faster processing time than ACH transactions. In the US, wire transactions go through the Fedwire funds transfer system and the Clearing House Interbank Payments System (CHIPS) based on the amount and source of funds. Wire transactions have the payment service provider acting as the middleman who receives funds from the sender and contacts the recipient financial institution with the necessary information to deliver the funds.

3. Real-Time Payments (RTP®) Network

The RTP Network was established in 2017 to improve on the shortcomings of the ACH and wire transfers (speed and costs, respectively). The RTP Network only supports push (credit) payments and not pulls (debits).

International Transfer Networks

Although most countries have established payment systems, the need for an international system led to the creation of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) in 1973. SWIFT is used in over 200 countries, with 11,000 banks on the network. SWIFT makes international payments relatively faster and less expensive.

Some of the other international networks include:

• Clearing House Automated Payments System (CHAPS) in the US.
• Bacs Payment Schemes Limited (previously known as Bankers’ Automated Clearing System, BACS) in the UK.
• Single Euro Payments Area (SEPA) in the Eurozone.

Most countries require payment and commercial banks to be part of a central payment settlement system co-owned by the financial institutions and regulated by the country’s apex bank—for instance, the U.S. The Federal Reserve provides payment and settlement services to U.S. banks and regulates independent payment systems.

How Bank Transfers Work

Transfers can be initiated from the sender (debit) and receiver (credit) sides or via a redirection. In the first instance, the sender requests the bank to remove a stipulated amount from their account and deposit it in the receiver’s account. In the second instance, the receiver can request credit from a source account without the sender initiating the transaction. In the third instance, typical with online payments, transactions are redirected to third-party institutions where the consumer can authorize debit actions.

For local transfers:

• The sender initiates the transaction via available channels such as mobile and internet banking.
• The sender completes the transaction by supplying details such as financial institution and account number and the amount for transfer and then authorizes the debit.
• The bank receives the instruction, pulls the stipulated amount from the source account, and then contacts the receiver’s bank to notify them of the transaction.
• The bank then deposits the money into the destination account.

The process is similar to international transfers, except that the sender usually has to provide additional details, such as a bank Identification Code (BIC), or fulfill other AML requirements.

Interbank Transfers: How Long Does It Take?

The speed and costs of transfers are essential considerations for businesses, individuals, traders, and investors globally. Local transactions are typically less expensive than international but are sometimes faster. ACH transfers could take at least one day and up to three days. International wire transfers are often processed within minutes but may reflect after a few hours, but could also take a few days. The typical range is between a few hours to 1–5 working days.

The most essential factors in the speed of bank transfers are:

• The financial institution involved: Payment between a SWIFT and a non-SWIFT bank could take some time because of the extra processes. Some systems, like the RTP Network, require recipients to be its members.
• Network status: Transactions could take longer if the settlement system is down.
• Time and day: Payments initiated during work hours are faster than payments initiated during off hours and holidays. For example, an international wire sent late on Friday may reflect in mid-morning on Monday.
• Regulatory requirements, which may delay large or bulk transactions.

Conclusion

Digital transactions enable smooth international, local, and cross-border trading in financial markets and other industries. Local and international payment systems drive the speed and reliability of sending money and ensure customers can send and receive money globally within a short time.