By Phillip Silitschanu
In this article we’ll focus on just one of those types of transfers, Fedwire transfers, to help further an understanding of the pros and cons of this method of currency transfer. Other types of currency transfers are covered in other articles published here.
The Fedwire transfer system is a communications and settlement system jointly owned by the twelve U.S. Federal Reserve Banks. Fedwire transfers allow individuals and businesses that have bank accounts to send and receive cash transfers and payments on a same day basis. Fedwires are commonly used to send or receive individual payments, settle commercial payments, settle positions with other financial institutions or clearing houses, submit federal tax payments, or buy and sell federal funds.1
The Fedwire transfer system is a real time, gross payment system. There is no netting of transactions between the originating bank and receiving bank.2 For example: ABC Bank has a customer who wants to transfer US$10,000 to a customer at XYZ Bank, and at the same time there happens to be a different customer at XYZ Bank who wants to transfer US$5,000 to a different customer at ABC Bank. Because Fedwire transfers do not “net” between retail or commercial banks, ABC Bank actually transfers US$10,000; and XYZ Bank actually transfers US$5,000. If they used a currency transfer system which nets the currency transfers, then ABC Bank would only transfer US$5,000 to XYZ Bank.
A large number of banks in the United States (nearly 6,000) maintain Federal Reserve accounts.3 Because so many banks have Federal Reserve accounts, it can make it easier for those banks to execute currency transfers as Fedwire transfers. One of the advantages of Fedwire transfers is that they are final when sent, as the funds that are transferred are “good funds” – funds that can only be transferred from the sender if there are settled funds in their account.4
A Fedwire transfer is initiated when a drawer, the person or business “wiring” the funds, instructs their bank to send a Fedwire transfer. The drawer’s bank debits the drawer’s account, and that bank (the “originating bank”) sends an instruction to its Federal Reserve Bank to transfer the necessary funds to the account of the payee (the person or business receiving the transfer) at the receiving bank. There are twelve Federal Reserve Districts, with Federal Reserve Banks in Boston, New York City, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.5 If a particular Federal Reserve Bank holds the accounts of both the originating and receiving retail or commercial banks, then that Federal Reserve Bank can debit the originating bank’s account and credit the receiving bank’s account, and notify the receiving bank of the credit. Once the receiving bank receives this notification, it then credits the account of the recipient.6
The ability to send Fedwire transfers gives individuals and businesses a method to quickly and easily transfer funds to a recipient. However, this speed (transfers are same day, and often occur nearly instantly) comes at a price. Banks charge the sender to send a Fedwire, and some also charge the recipient to receive a Fedwire. Fees can vary widely, with some banks not charging to send or receive Fedwires, and some charging up to US$30 or US$40 in fees.7 For one time, urgent currency transfers, these fees may be acceptable to some senders and recipients of Fedwires. But, for currency transfers that occur on a regular basis, are not urgent, or for small nominal amounts of funds being transferred (where the fees can significantly cut into the net amount), there are other options besides Fedwire transfers.
Fedwire transfers are a useful and fast way to transfer money from one account to another. Costs to use Fedwire transfers can sometimes be higher than other methods of currency transfer, and because Fedwires are only sent by using actual, settled funds from the sender’s account, it is confirm the identity of the currency transfer recipient.
Phillip Silitschanu is the founder of Lightship Strategies Consulting LLC, and CustomWhitePapers.com. Phillip has nearly 20 years as a thought leader and strategy consultant in global capital markets and financial services, and has authored numerous market analysis reports, as well as co-authoring Multi-Manager Funds: Long Only Strategies. He has also been quoted in the US Financial Times, The Wall Street Journal, Barron's, BusinessWeek, CNBC, and numerous other publications. Phillip holds a B.S. in finance from Boston University, a J.D. in law from Stetson University College of Law, and an M.B.A. from Babson College.
1. Fedwire Funds Service, Federal Reserve Bank Services, https://frbservices.org/serviceofferings/fedwire/fedwire_funds_service.html.
2. International Finance, Transactions, Policy, and Regulation, Hal S. Scott, Anna Gelpern, 19th Ed., Thomson Reuters Foundation Press.
3. Number of Banks in the U.S., 1966-2014, Institute for Local Self-Reliance, https://ilsr.org/number-banks-u-s-1966-2014/.
4. International Finance, Transactions, Policy, and Regulation, Hal S. Scott, Anna Gelpern, 19th Ed., Thomson Reuters Foundation Press.
5. Federal Reserve Banks, What are Federal Reserve Banks?, Federal Reserve Bank of Richmond, https://www.richmondfed.org/faqs/frb.
6. International Finance, Transactions, Policy, and Regulation, Hal S. Scott, Anna Gelpern, 19th Ed., Thomson Reuters Foundation Press.
7. Wire Transfers: A Guide to What Banks Charge, Nerdwallet.