What is Wire transfer (Large Value payment System)?

Barter System

  Over the centuries, payments were made across the people, through the process of the Barter system. In this system, things are exchanged with other things to complete the trade. But this method became inefficient when the person doesn’t want a thing he wishes for. Such that the person cannot trade with other people, in that situation. To eliminate this disadvantage, another medium (gold) was used in-between, through which trade can be placed, without giving any other goods. Thus people used this medium to trade between them. But over time, due to the difficulty and risky of transporting gold in large amounts, people have opted out of another method. It is called paper money. This is where banks also came into play.

Function of IOU

People have started depositing their gold in the banks, for which they got a receipt (IOU- “I owe you”) as proof. So, instead of trading with huge piles of gold, people started to trade with these IOU’s. So whoever holds that receipt, will be the owner of the gold. Thus the ownership of the gold had changed among the people, by trading with that receipt. All the transactions were based on the gold standard till 1971. But after 1971, this gold standard was eliminated, and people started to transact these banknotes purely on its own standard. Thus paper money has got its full form. This paper money is called fiat money since it is not backed up by anything. This fiat money is what is used till now. To know more about the origin of paper money, please visit the following article,

https://sciencetopic03.blogspot.com/2021/11/origin-of-paper-money.html

World currencies are backed up by US Dollar, which is backed up by gold before 1971, and to nothing after 1971.

People got very much accustomed to paper money as the transaction was very much easier than carrying gold. When the technology had entered, this money was converted digitally and was called digital fiat money. Thus trading became even simpler. Money was added into the circulation just by adding to the network digitally. As the transaction was even simpler in this digital method, trading happened in many digital ways. In this article, we are going to see the various payment methods that were used in the financial system, from cash in the past, to cryptocurrencies in the future. The main classifications of the payment system are,

Large Value Payment System

Retail Value Payment System

Large Value Payment system

The large value payment is one, which handles a huge amount of transactions at every fraction. These payments are mainly carried out between large companies and financial institutions around the globe. This system ensures that the recipient gets the money securely and at a stipulated time. It also ensures that the fund transfer should not be failed in any case, which could have a major effect on the global economy. One of the widely used Large Value payment systems is Wire transfer.

                      

The Wire transfer is basically a type of Electronic fund transfer that makes the movement of money wirelessly and spontaneously. It can be simplified as a direct bank-to-bank transfer either domestically or internationally. For domestic transactions, each country uses its own wire transfer methods. One of the important country-based wire transfer services is RTGS (Real Time Gross Settlement), which involves secure and fast transactions of the amount over the country. This RTGS system was developed independently by France and United Kingdom in the year 1984 and was later adopted by many countries. Some countries use additional systems, like Fedwire in the United States, and LVTS (Large Value Transfer System) in Canada. These wire transfers were mainly managed by the Central Bank of the country.

Similar to domestic payments, there is a system for international payments too. One of the important payment system that is carried out globally by the major financial institutions is SWIFT (Society for the Worldwide Interbank Financial Telecommunications- a financial messaging protocol). It was founded under the leadership of its CEO, Carl Reuterskiöld, in Brussels, Belgium on 1973. It was supported by 239 banks in 15 countries. This SWIFT mechanism currently connects 11000 member banks around the world for communication of financial instructions. Through this system financial instructions are transacted securely and at ease. Now let’s look at the process of wire transfer.  

Credit: By Սմբատ Հարությունյան - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=79716446

Process of Wire Transfer

Wire transfer is basically the transfer of payment instructions between the sender and receiver. It mainly works on the transfer of instruction and not the actual movement of money. Let’s understand the process through an example,

Consider Person A who is living in Canada, wants to send money to Person B in Australia. Once Person A steps into his bank in Canada (Bank A), he/she provides the recipient account information in his home bank, to credit a sum of money. The Canadian Bank validates the recipient bank details and looks at whether the Australian bank (Bank B) has an account in its bank. If it does, then the process will be simple. Bank A will simply debit the customer’s account and credits the Bank B account. Once credited, Bank B debits its account and credits the person’s B account. As Bank B has an account on Bank A, the process of money transfer is simpler, and the charge collected for the transaction including the exchange fee will be comparatively lesser. But what if the banks do not have accounts with each other? Then the process becomes difficult, as the sender bank will send that information to another bank that has an account in it, which further sends it to the recipient bank. As more banks are included in the transaction, the processing, and the exchange fee will be much higher. Domestically, this wire transfer service takes up to 24 hours of processing, whereas for international transfers it may take up to five working days.

Process of Wire Transfer

Sometimes citizens try to send a minimum amount to their friends and relatives in foreign countries. Such that, they will have to pay a huge amount of fee over the transaction sometimes. Thus many platforms offer money transfer service (like Wise, OFX, etc.), which offers a minimal charge over direct bank-to-bank transfers. These services have branches all over the world, so the transaction fees will be comparatively lower.

 As there will be so much of transactions taking place in a day, banks will not credit and debit the money for each transaction. It only passes the recipient information to the recipient bank during every transaction. The actual movement of money will take place only at the end of the day, by carrying out the same process while passing account information.  Transactions are done in wire transfers like SWIFT, via a unique code (swift code) assigned to each financial institution. Single trouble in this system could shuffle the global economy. Similar to SWIFT, another transfer that takes place between companies for the transfer of business instruction is EDI (Electronic Data Interchange). These are most widely used in E-commerce platforms for the reduction of paper and other services.

One more thing that needs to be considered in a wire transfer is the clearing house. This clearing house happens at a domestic range, which makes it to act as an intermediator between the sender and the receiver, to achieve a clean trouble free transaction. Thus when the amount is received from the international settlement, it is carefully routed to the correct recipient by this clearing house.  Some examples of clearing houses are Electronic Clearing Service in India and the National Automated Clearing house in the United States. The Clearing house gets functional, only when there is a Bank to Bank transfer. For retail payments such as card Payments, different systems like payment gateway and payment processors are used, which we will see in the post on Retail Payment System.

https://sciencetopic03.blogspot.com/2022/08/types-of-retail-payment-system.html