How Do Funds Transfer Systems Work

Domestic Funds Transfer

It is common for individuals and entities to transfer funds to their friends, family, business partners, and associates. The way funds transfer works is opaque to the individual as he or she simply instructs the banks (or enables funds transfer when using online banking) and waits for confirmation from the other end about whether the funds have reached the beneficiary or not.

Between the sender and the recipient lies an intricate network of financial intermediaries and relationships that underpin the funds transfer system.

For most domestic funds transfers, the process is straightforward as the sender and the beneficiary are located in the same country and hence, all it takes for the bank is to notify the other bank about the transfer and acknowledge receipt of the funds. In this respect, domestic funds transfers work almost in the same way that check clearances work.

The sender and the beneficiary “talk to each other” (as the jargon terms it) through the clearing house which means that the sending bank has to send the funds to the clearing house and the clearing bank (usually the central bank in each country) then deposits the money into the recipient bank which then credits the same to the customer’s account.

International Funds Transfer

However, the funds transfer involving countries and continents is vastly more complex than the domestic funds transfer is. First, the sender has to issue instructions to his or her bank to transfer the money.

Next, after the sender’s bank ascertains that the customer has enough money in his account (after converting it into the foreign currency using the prevalent exchange rate) stars the process by sending the money to the correspondent bank that is authorized to transact internationally.

After this, the intermediary debits the sender’s bank account held with it and credits the corresponding bank in the foreign country, which has a banking relationship with it.

In other words, both the intermediaries need to have accounts of each other in their banks, which would enable them to transfer the funds.

Once the intermediaries transact and transfer funds this way, the final leg of the funds transfer happens which is through the intermediary in the foreign country crediting the account of the receiver bank with which the recipient has a banking relationship. After this, the receiver bank checks the credentials of the recipient and if everything is ok, credits the account of the recipient. This completes the funds transfer process.

The Criticality of Funds Transfer System to the Global Economy

The above descriptions of domestic and international funds transfers are just basic descriptions without too much jargon like nostro account, vostro account, and the SWIFT system of validating payments. These would be discussed in detail in subsequent articles and it would suffice to state here that the financial web of relationships that enables international and domestic funds transfers has evolved over the years with the result that the present system handles complex, and humungous volumes of money every day.

Indeed, it can be said that without the backbone of the international funds transfer network, the global economy would come to an immediate standstill. Especially when one considers the fact that with globalization, international money transfers have become enterprises involving Trillions of Dollars, the funds transfer systems in most multinational banks in financial hubs like New York, London, Singapore, and Sydney work around the clock and in a coordinated manner to make funds transfer possible. Therefore, the next time you transfer funds to your family members or business associates located in another country, you would have an idea of what it takes to complete your request.

Concluding Thoughts

Finally, as mentioned earlier, this article is the basic introduction to an important aspect of banking and further research can be done by visiting the SWIFT website and other manuals that contain details about how funds transfers work in the global economy.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.