Sometimes working overseas requires us to use the funds in our US bank accounts in our host country. We have already covered two ways to do so: paying with credit cards, or withdrawing cash at an ATM. However, there are situations where these methods may not be sufficient. For example, when you need to make a substantial purchase, such as a car or security deposit for an apartment, you aren’t likely to be able to put that on a credit card or meet that demand by withdrawing a few hundred dollars every day. Also, there could also be the unlikely event that you lose both your credit card and ATM card. In times like these, what other ways can you move your money overseas?
Before I dive into the consumer friendly Internet transfer services, I would like to quickly cover the backbone of interbank fund movement. The internet-based companies that provide international fund transfer services generally still function within this framework, but act as the interface so you do not deal directly with your banks.
Traditionally, large institutions and businesses move funds to each other across borders through Wire Transfers. It remains one of the ways that you can transfer funds between your accounts both at home and abroad. Instead of going through global network providers such as VISA and MasterCard, banks transact with each other through currency-specific clearing houses, such as CHIPS for US Dollars and TARGET2 for Euro, with the help of messaging services such as SWIFT. See the illustration below.
For example, if you authorize Bank of America to wire 10,000 USD from your account to your account at Deutsch Bank in Germany, it will ask you for the bank/branch code, account number, and account holder, and then send this message through SWIFT to Deutsch Bank. Bank of America will then order its Frankfurt office to pay 7300 Euros to your account at Deutsch Bank through TARGET2.
Note that your US bank gets to decide the exchange rate since it pays out Euro to your local bank, which means it can charge you at least the retail rate, and maybe add a few basis points for profit. In addition, it charges a fixed fee per transaction, usually around $40-$50 dollars, for a retail customer’s international wire transfer. Hypothetically if you were using a credit card to pay for a $10,000 purchase in Germany, you would have paid a $300 (3%) transaction fee. So $30 does not seem so bad when the one time transaction amount is large enough to dilute the fee. However, you should know that the transaction fee is purely arbitrary, and is likely a leftover norm from handling international business transactions. Since the banks have already devoted infrastructure cost for maintaining and participating in the automated clearinghouse systems, the sizes of transactions do not present different cost levels. Smaller local banks may incur higher costs to send these funds through large banks that participate in the interbank clearing house; nevertheless, they may choose to absorb this cost since very few of their customers live overseas and they never bothered to create a pricing structure for international wire transfers.
The main drawback of interbank wire transfer is that the fund is not available to you immediately like cash withdrawal from ATM or paying with credit card. The outgoing US bank needs to manually process your wire transfer request. While the SWIFT message can arrive at the incoming bank within a few hours, the outgoing bank may not load the payment on to interbank clearing house until the end of business day, (or the next day if your bank is not a direct participant and need to go through an intermediary bank.) On the following day, the clearing house usually net each participating bank’s account balance at the end of business day. The incoming bank, if a direct participant of the clearing house, could credit your foreign account as early as yet the following business day; or it can take a few more days for the payment to transfer through the intermediary bank. That is why the banks usually caution their customers that the wire transfer may take at least 3 business days to arrive at the receiving account.
Lastly, from the earlier discussion it is obvious that you need to have bank accounts in both countries in order to complete wire transfer. Being in a new country, you may not always be able to set up a local bank account immediately. Some internet transfer services bypass this problem and allow you to receive cash at designated participating agents, which we will discuss in the next post.
Then what is the purpose of SWIFT if the funds can’t be settled without the wire transfer processing? Since banks clear each other accounts, why wouldn’t they give the money to the client and then wait for the funds to settle, having received a SWIFT order? SWIFT does operate as a guarantee, doesn’t it?
I would like to learn more about the subject as I aam getting lost in purposes of all the systems
Hi Mark, I’m not an expert in banking system, but I don’t think SWIFT messages are explicit guarantees, because there isn’t a third party to mediate the disputes between the two transacting parties. It’s definitely possible for banks to front you the money, but I can’t see an incentive for them to do so. In aggregate, banks may lose substantial amount in interest if they front every customer’s transfer. I guess it’s possible for banks to charge an “expedite” fee to make up the interest loss and potential mishaps in clearing process if you want to be able to withdraw money immediately after SWIFT message is received, but that seems risky for the banks to do.