We’ve discussed the many methods of transferring funds between banks inside the US, and today we’d like to go global. It’s a big world out there, and although you can probably name a dozen ways to get in touch with people in other countries, many people are at a loss for options when it comes to sending money overseas.
As far as the average consumer is concerned, using an intermediate payment company is easy and quick enough to justify paying the small percentage that the company takes off the top. Moving money between US banks is complicated enough, and even if you regularly send or receive money to or from another country, you may have questions about how it all works.
A Tale of two giants
Millions of people work in one country to support a family in another, or sell products and services to consumers in another country, or work for a company based in another country. The list goes on— there are many reasons why you might need to send a small amount (less than $1,000, say) overseas. If you’re one of those people, and you live in the US, odds are good that you rely on either PayPal or Western Union for money transfers.
Western Union has a long history; it’s almost difficult to imagine what the world would be like without the innovations they’ve made in 160 years of operation. As a telegraph company, Western Union created the first transcontinental telegraph line in 1861, and they introduced the US’s first commercial satellite in 1974. They invented the stock ticker in 1869 and were one of the eleven companies tracked by the Dow Jones Transportation Average when the NYSE’s first opening bell rang in 1884.
No one sends telegrams anymore, but money transfer services are more lucrative than ever. Since 1980, money transfers have been Western Union’s top source of revenue, and over 100,000 real-world locations make their service accessible to consumers who do not have Internet access.
PayPal is new on the scene by comparison. They’re a payment processor, which means they deal with the banks involved in a transaction so that you don’t have to reveal your bank account numbers to that Etsy seller from Poland in order to buy that Soviet-era alarm clock. EBay bought PayPal in 2002, and today there are “more than 106 million active registered accounts” according to the company’s webpage.
Of course, there’s a lot of regulation involved in dealing with millions of international customers and their banks, and PayPal operates in different capacities in different countries. In China, PayPal can only operate domestically. In the US, PayPal is not a bank and is subject to state payment processor regulations; in the EU, PayPal has a banking license. It gets complicated very quickly.
PayPal and Western Union are hardly alone in the global payments market. This almost nostalgic piece in Wired serves as a reminder of how far we’ve come, and how fast online payment processors have become part of so many people’s livelihoods.
How international money transfers work
We might think of PayPal, Western Union, and the like as front-ends for international payments. They’re the companies with which we as consumers are familiar, but they in turn rely on other services to facilitate funds transfers.
Just as ACH and Fedwire operate as transfer networks in the US, other networks facilitate international payments. SWIFT, the Society for Worldwide Interbank Financial Telecommunication, is a key player in the global payments game. SWIFT does not actually move money; their network transmits messages between banks that allow the banks to make transfers. Rather than giving someone your bank account number, then, you use a SWIFT account number and SWIFT does the rest. They’re also not a corporation, but a cooperative owned by the banks who use the network. Based in Belgium, with a chairman from Pakistan and a CEO from Spain, SWIFT is about as international as a financial entity gets.
For large international (and domestic) transactions, there’s CHIPS. Their site boasts, “CHIPS is responsible for over 95% of USD cross-border and nearly half of all domestic wire transactions totaling $1.5 trillion daily.” Their members include the largest banks in the world, and they’re behind the scenes of most of the money transfers that fuel the global economy. Member banks combine a large number of transactions into one big transfer to another bank, and CHIPS settles the score and moves the money.
Exchange rates are always a factor in international money transfers, whether you’re sending $50 to a relative overseas or a company is paying millions to buy property in another country. Some networks will use the rate at the moment a payer initializes a transaction; others will process the payment based on the rate at the moment the payee’s bank receives the funds. And if either country involved has regulations that specify which exchange rate should be applied, the game changes again.
International laws and other complications
But wait, there’s more. Countries have different banking regulations and practices, and consumers around the world have different needs in terms of security and privacy. For instance, a company called MutoNovo provides anonymous wire transfers of large amounts, like a PayPal for the very rich and mysterious.
Regulatory bodies around the world have systems in place to monitor transactions for suspicious activity. Governments, banks, payment processors, and companies around the world have a common interest in making sure that you can send and receive money easily and quickly. They also have a common interest in making things difficult for countries, organizations, companies, and people they don’t like. Earlier this month, the US Senate approved new sanctions against Iran that could lead to Iranian banks being expelled from SWIFT; a New York Times article explains that the Senate’s goal is to place further strain on the Iranian economy so that Iran will comply with US demands. The US cannot actually force SWIFT to do anything, and according to the Times, “The legislation does not specify what action would be taken against SWIFT if it did not comply.”
What is clear is that these payment networks are absolutely vital to the global economy, and the actions and reactions of a major player like SWIFT can have serious implications. The recent legislation regarding Iran and the ways in which different countries have addressed payment processors like PayPal demonstrate how much international politics can influence the financial landscape.
As with anything else in the wide world of finance, there’s a price to pay for simplicity and security. You can store your life savings in a shoebox and never set foot in a bank, but for most of us, the risks and inconvenience involved in sidestepping the global financial system don’t come with much—if any—benefit. So it’s a good thing we’ve got options.