What exactly happens to your money when you send it overseas?
International money transfer has become a part of everyday life. Banks, brokers and websites can send money abroad quickly and easily. But what's happening behind the scenes when you make a transaction?
If you use a high street bank for international money transfer, you’re tapping into a complex banking network in which each institution involved shifts debt from one place to another.
Why? Because money you pay into your account doesn’t just sit in a vault, it’s lent to your bank to loan out or invest. Consequently they're in your debt, and you have credit with them.
When you transfer to another account at the same bank, they just shift that debt from your account to another. If the other person’s account is in a different currency, the bank uses a predetermined rate to convert the amount, and charges a fee for doing so.
Transferring debt to another bank is more complicated, but it can be done in a few different ways:
SWIFT. Banks all hold accounts with each other, which they update to reflect the debt they hold after each transfer. SWIFT is the messaging system that sends all the information they need to do it. In practice, however, it can take transfers between several banks before the books are balanced.
IBAN. European banks making transfers within the European Union and within Switzerland also use the International Bank Account Number.
BACS use a central clearing system to calculate thousands of transfers at a time, meaning banks don’t have to settle their inter-bank account balances after every single transfer. PayPal work in a similar way.
CHAPS send the debt via a central bank, so every bank only needs to settle the balance with one institution – making it faster and more reliable.
Brokers can negotiate better exchange rates by buying large amounts of currency directly from exchanges. This involves a bank transfer to the broker's account, then they send the newly purchased currency to the requested destination.
If you think these systems are too complicated, you’re not alone. Dozens of fintech startups are developing systems to improve efficiency and cut costs.
Peer-to-peer networks connect people who want each other's currency – so if, for example, you wanted to send money from the UK to the USA, you'd simply swap your money with one (or more) people in the USA who want to send the dollar equivalent to the UK.
The hub-and-spoke model means that one company keeps the cash centrally, so that finances can be quickly transferred in and out without debt.