How things work: Wire transfers
In today’s fast-paced world, transferring money needs to be fast and secure. Wire transfer is one such method that is commonly associated with modern online banking, but its history is longer than many believe.
A wire transfer is when money is sent digitally from one bank to another, and the concept of this system actually predates the 20th century. The system of wire transfers originated with the creation of the first telegraph company. A few of these companies are still in existence, such as Western Union (WU), a former telegraph company turned financial service company. Its main service, a wire transfer, is used hundreds of thousands of times a day between individuals, businesses, and even the government, according to www.westernunion.com. A hundred or so years ago, an individual would approach a Western Union office and request a sum of money be transferred across the country. That person would pay WU, and a telegraph would be sent to the receiving end, instructing the local WU branch to deliver the money to the receiver. Nowadays, this transaction is handled online.
Online money transferring is relatively simple and quick. The transaction involves taking electronic money from a bank or financial services institution and sending it to a second location, either in the United States or abroad. Usually there is a fee for sending or receiving a wire transfer, depending on which financial services institution one uses. There is also usually a limit to how much money one can transfer — Citibank puts a cap at $50,000 per transaction. The delivery date and processing time window also varies from bank to bank.
To transfer money, one would go to a financial services company such as WU or a bank and request a wire. The sender would provide the receiver’s account information and number. The institution would then assign International Bank Account Numbers (IBAN) and Business Identifier Codes (BIC), which allow the institutions to identify the amount of money sent and where to send it.
The next step is for the sending institution to contact the receiving party using a secure online system, such as Fedwire, a Federal Reserve Bank-operated company, or Clearing House Interbank Payments System (CHIPS). If approved, the money will be relayed from the original bank to the receiving bank.
According to frbservices.org, Fedwire and CHIPS are companies that ensure secure wire transfers of information between the respective financial institutions involved in the transaction are real-time gross settlement systems, which means the payments are instant and irreversible. The only organizations who have access to these services, according to www.fraudaid.com, are Federal Reserve banks, its related institutions, and foreign banks within the United States. The Federal Reserve board website states that in 2009, there were $631.1 trillion moved within the United States using the Fedwire and its subsidiaries. Besides ordinary money transfers, a large bulk of the transactions are the collection of taxes and sales of U.S securities or federal funds. Federal funds are money a bank borrows from a second bank to maintain its reserve requirement.
Besides online wire transfers, banks have also moved a great portion of their business online. For example, one can pay bills, transfer money between linked accounts, manage Individual Retirement Accounts, or even set up credit cards through the Internet. Banking still has the same rules and regulations, however. The Federal Deposit Insurance Corporation (FDIC), run by the government, still insures up to $250,000 per bank account with member bank institutions, and banks, depending on their size, can be required to maintain up to 10 percent of their capital physically within their vaults. The other 90 percent is loaned out to other banks or lenders with varying interest rates.
While the technology of banking has become increasingly electronic, banks still maintain some of their roots from their early history.