How international money transfers work

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We might think of PayPal, Western Union, and the like as front-ends for international payments. They’re the companies with which we as consumers are familiar, but they in turn rely on other services to facilitate funds transfers.

Just as ACH and Fedwire operate as transfer networks in the US, other networks facilitate international payments. SWIFT, the Society for Worldwide Interbank Financial Telecommunication, is a key player in the global payments game. SWIFT does not actually move money; their network transmits messages between banks that allow the banks to make transfers. Rather than giving someone your bank account number, then, you use a SWIFT account number and SWIFT does the rest. They’re also not a corporation, but a cooperative owned by the banks who use the network. Based in Belgium, with a chairman from Pakistan and a CEO from Spain, SWIFT is about as international as a financial entity gets.

For large international (and domestic) transactions, there’s CHIPS. Their site boasts, “CHIPS is responsible for over 95% of USD cross-border and nearly half of all domestic wire transactions totaling $1.5 trillion daily.” Their membersinclude the largest banks in the world, and they’re behind the scenes of most of the money transfers that fuel the global economy. Member banks combine a large number of transactions into one big transfer to another bank, and CHIPS settles the score and moves the money.

Exchange rates are always a factor in international money transfers, whether you’re sending $50 to a relative overseas or a company is paying millions to buy property in another country. Some networks will use the rate at the moment a payer initializes a transaction; others will process the payment based on the rate at the moment the payee’s bank receives the funds. And if either country involved has regulations that specify which exchange rate should be applied, the game changes again.

 

   

International laws and other complications

What is clear is that these payment networks are absolutely vital to the global economy, and the actions and reactions of a major player like SWIFT can have serious implications. The recent legislation regarding Iran and the ways in which different countries have addressed payment processors like PayPal demonstrate how much international politics can influence the financial landscape.

As with anything else in the wide world of finance, there’s a price to pay for simplicity and security. You can store your life savings in a shoebox and never set foot in a bank, but for most of us, the risks and inconvenience involved in sidestepping the global financial system don’t come with much—if any—benefit. So it’s a good thing we’ve got options.

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