Here is what happens:
- The sender writes down details of the beneficiary. This includes the account number, bank details (including the branch where the account is), any routing numbers (for example, it may include a FEDWIRE/IFSC codes) and other information.
- This information is submitted (along with the amount to be transferred) to the source bank.
- From the sender’s account, the amount being transferred is deducted and put into an internal account at the bank from where the transfer is being initiated.
- The exact amount deducted depends on the nature of the transfer, for example, if its a transfer in a currency other than the account currency, then an exchange rate is applied and the equivalent amount is deducted.
- The bank then does its normal fiduciary duties such as checking the beneficiary bank, doing any number of internal checks and if the checks pass, then the transfer is actually placed.
- All international money transfers happen in so-called “major” currencies, usually USD, Euro, GBP and the Japanese Yen; there may be circumstances where the transfer is done in another currency, but its a very rare situation. Even if a transaction takes place in another currency, the settlement of funds always happens in major currencies.
- To get money from Bank A to Bank B, either Bank A and Bank B have a direct relationship (they have accounts at each other’s institutions); or Bank A and Bank B have a common bank (normally called the correspondence bank) at which they both have accounts. Major banks usually act as correspondence banks for other(s). A bank in the UK may have an account with Bank of America that is funded in USD; so that Bank of America can transfer funds on behalf of the UK bank’s clients that want to transfer money to the US.
- The banks rely on a common network called SWIFT to actually “wire” the money; think of SWIFT as a very old email system that accepts very cryptic messages. These messages are in the form of instructions to other banks. Special instructions placed on this network affect the transfer of funds.
Now for a practical example:
Lets say you want to transfer 50 Euros from the Regional Bank of Omaha to your friend that is living in Germany and has an account at Regional Bank of Berlin.
You would walk to your branch, (or login to your online banking account) and enter information for your friend’s account and branch in Berlin. You enter the amount of transfer as 50 EUR.
As you have a US dollar account, the bank will apply a rate and deduct the equivalent of 50 euros in dollars from your account; it will take this amount and place it in an internal reconciliation account.
It will then send a message over SWIFT to its correspondence account for Euros which lets say is Deutsche Bank. Deutsche Bank receives this message and checks the final beneficiary bank.
If the beneficiary bank has an account at Deutsche Bank, then Deutsche Bank will transfer the funds (minus its fees) to the corresponding account of Regional Bank of Berlin; and notify them (again, via a SWIFT message) that they have incoming transfer and the amount. The process ends and then your friend’s account will get credit the net amount (the original 50 Euros, minus any fees).
If the beneficiary bank does not have an account with Deutsche Bank, Deutsche Bank transfer the funds from the Regional Bank of Omaha’s account with them to another bank which holds an account for the Regional Bank of Berlin; and the same process applies.
There are various regulatory measures in place – mainly to prevent the transfer of funds for illicit or illegal purposes; to stop the financing of terrorism, or to prevent money laundering. Recipient names are also checked against a global blacklist.
In some cases, extra information may be required (such as the purpose of funds) or more details of the recipient (such as a passport number).
In other instances the transfer may be rejected if the beneficiary account is closed or blocked; sometimes transfers are rejected simply because there is a typo and a 3 became a 8, etc.