Demystifying Bank Transfers

Many people, trying to create payment systems at different levels, often face the question of how to transfer funds from one place to another. For example, one person needs to be able to get money from another person, or some online payment or e-wallet system needs to be able to remit (or charge) the funds or to some individual’s bank account.

Fundamentally, there are three ways, in which funds can be moved between bank accounts. In this article we are going to look at these three ways and list some advantages and disadvantages of each of them.

Bank wire (bank transfer)

The first (and, perhaps, the most familiar) way is a bank wire, sometimes, also called a bank transfer, although the term “wire” is more appropriate. Bank wire is commonly done through a SWIFT system. Bank wire allows to move the funds from one bank to another (including, internationally). Generally, bank wires are executed quickly. If banks are located in the same time zone (or in neighboring time zones), the wire takes up to a few hours to clear. Execution of a wire, generally, involves bank representatives at each end of the wire, however, more and more banks now introduce automated wire submission services.

The problem with bank wires is that there are still very few systems, allowing to do wires in batch, so they usually have to be performed one by one. Beside that, bank wires, usually, carry a significant cost (especially, international ones).

Bank draft

Bank draft (sometimes also called bank transfer) is a transfer of money between two banks, using a clearing house. Examples include ACH in the US, BACS in the UK, and SEPA in Europe.

The information on the transfer is sent from the bank to the clearing house, which is responsible for contacting other banks involved and giving them respective instructions. Bank drafts are not performed in real time. Depending on the country, they take from one to three days. In many cases, if the transaction is not successful (due to lack of funds, or due to mistakes in the input), returns information might not be immediately available (see the article on ACH returns).

On the other hand, the cost of such transactions is significantly lower than the cost of wires, and bank drafts can easily be done in batches (sometimes, including hundreds of thousands of transactions).

Transfers through debit cards

This approach has a particular appeal to the US market, where the Durbin amendment regulates the interchange cost of debit card transactions. It will not necessarily work for low-amount payments, such as micro-payments, primarily, because, there is still going to be a 0.5% cost.

On the other hand, on high-ticket transactions (especially, in those cases when eventual profit margins allow it), this technique can successfully be used, limiting the selection of cards to Durbin-regulated ones, and using PIN-less debit networks.

Emerging technology

There are also initiatives, by various companies (such as Dwolla), to introduce “real-time ACH payments” (payments which will cost closer to ACH, but work as wires).

The problem with many of such systems is that the coverage of financial institutions by these systems is still very low, while a real-time transfer can be performed only if both accounts are at the banks, participating in the service.

Conclusion

Before deciding on your money-moving strategy, you should consider your specific use-cases and costs, and then – make your choices accordingly.