Wire Transfers Explained

Every day, billions of dollars are transferred between bank accounts, businesses, and individuals. A worker may send money to his family overseas. A broker may need to buy or sell securities for a client. A student may pay his/her credit card bill online. In each of these situations, companies and individuals securely and efficiently transfer funds all without having to physically handle and transfer either checks or cash.

For many businesses, large sums of money are moved using wire transfers, which are electronic exchanges of money in which funds are moved between accounts in real time.

To conduct a secure wire transfer, your bank must maintain an account through the Federal Reserve Fedwire or The Society for Worldwide Interbank Financial Telecommunication (SWIFT). When you wire transfer money, the actual transfer of funds is through your bank's account with one of these organizations. Because wire transfers are irrevocable, banks often require a set-up process and identification check for customers requesting transfers. This makes a wire transfer one of the most secure ways to move funds and is often used for transactions involving securities, real estate, and loans.

It all started with Western Union

Wire transfers began in 1851 with the founding of The New York and Mississippi Valley Printing Telegraph Company. This company later changed its name to Western Union, and 20 years later, it would use a telegraph to complete the world's first money transfer. Money transfers were not secure, however, until the early 1900s when the United States Reserve Banks developed a way to securely transfer funds. This was the beginning of the wire transfer.

The technology used today in a wire transfer is more complex than in the early 20th century, but the result remains the same: wire transfers move funds easily, quickly and securely from one account to another without any actual exchange of cash.

How is a wire transfer different than ACH?

Automated clearing house transfers, or ACH transfers, are often confused with wire transfers. Both are electronic transfers of funds, but ACH transfers generally have a two-day settlement period, which means money transferred using an ACH transfer may not be made immediately available. Additionally, ACH transfers do not require the same level of security as a wire transfer and are usually less expensive to do.

ACH transfers are often used in direct deposit of payroll as well as with monthly payments and collections, such as credit card bills.

The advantages of a wire transfer over checks and credit cards

Unlike checks, which can take several days to process, a wire transfer moves funds between accounts very quickly, often within a few hours. Additionally, wire transfers may lessen the paper burden on a business when compared to checks. Once a wire transfer process is set-up with a bank, wiring funds can usually be done online or over the phone.

Wire transfers are advantageous over using credit cards for two reasons. First, not all businesses take credit cards. Second, most credit cards have credit limits that prevent cardholders from charging large amounts. As such, credit cards are usually not a practical solution for transactions involving large sums of money.

Not without disadvantages

Wire transfers are not without risks, particularly when you are sending an outbound wire transfer. Once the transfer is processed, the transaction is irrevocable, so it is important that wire transfers only be used for transactions with businesses with which you have a trusting relationship.

It should also be noted that a wire transfer carries a fee, depending on where the funds are being sent. Therefore, a wire transfer may not be the best option for all business payments. For smaller payments, it may be more economical to pay by check, credit card, ACH, or even cash.

A wire transfer is an effective way to transfer money. The process is relatively easy and secure, and allows your company to transfer funds quickly and efficiently. Consult your business banking representative to evaluate your company's needs in deciding if wire transfers are appropriate.