What is a wire transfer and should your company use it?
What is a Wire Transfer?
The history of money transfers goes back at least as far as the 19th Century. At that time, companies like Western Union established a standard for sending and receiving money that is still one of the most commonly used methods to date.
As common as they are, not many people fully understand what wire transfers are, nor why they’re so widely used.
Wondering what is a domestic wire transfer, or whether it’s more efficient than other payment methods? This blog breaks down everything you need to know, including:
- A 101 on wire transfers, how they work, and their pros and cons
- A comparative view of other available payment options
Wire Transfer 101
So, what is a wire transfer exactly? A wire transfer, sometimes referred to as a “money wire,” is a rapid, electronic transfer of funds between two entities, such as private individuals or businesses. A wire payment typically does not involve any movement of physical cash; instead, information about the sender, recipient, and overall transaction is sent to a bank or other financial institution representing the recipient.
These defining characteristics of wire transfers have been relatively stable since the inception of the term, which refers to the telegraph wires used to initiate such transfers between banks.
Wires between banks are often called “bank wires,” but these aren’t the only wire transfers that occur. Institutions such as cash offices and other non-banks like Western Union can also process wires, meaning bank numbers are not always required (more on specific requirements below).
Wires sent by US residents to entities abroad are called “remittance transfers,” monitored by the Office of Foreign Assets Control. Bank wires of over $10,000 must be reported to the Financial Crimes Enforcement Network (FinCEN) via a Currency Transaction Report (CTR).
There is usually a processing wire transfer fee to be aware of. This is because, although wires do empower near-instant turnover, the process is complex to keep secure.
How Wire Transfers Work
When you initiate a wire, you need to have the funds ready for transfer upfront. The funds are “paid,” or sent, right away. In addition, you’ll need to have a payment option ready immediately for any fees associated with the transfer, which average about $25 dollars for domestic transfers and $43 dollars for international transfers. Recipients may need to pay a wire transfer fee, as well.
In addition to the funds, the other thing you need to have ready for a wire is information.
What information is needed for a wire transfer? According to Forbes, the requirements differ depending on the institution used to initiate it (bank or non-bank). In particular:
- Wire transfers initiated from a bank require the recipient’s name, their account number, their bank’s routing number, and the exact amount of funds being transferred to them.
- Wire transfer requirements for non-bank institutions can vary, but they usually include the recipient’s name, their phone number, a home address, and the amount to transfer.
So, whether you initiate your wire at your bank, or an institution like MoneyGram, you’ll need to have the cash (or an accessible bank account) at the ready. Plus, you’ll need information about your recipient—their own account and routing numbers, or phone number and home address.
Pros and Cons of Wire Transfers
A wire transfer is one of the most common and effective ways to transfer money between private individuals and businesses. However, no system is 100% perfect, and there are trade-offs to consider between wire transfers and other options.
On the one hand, the main benefits of wire transfers include:
- Quick turnaround – In most cases, a wire transfer can be initiated within a matter of minutes. Then, processing can also be a matter of minutes, or hours, depending on the recipient’s location in relation to the sender, as well as local laws and restrictions.
- Safety and security – Wires are some of the most secure payment and transfer options available, far safer than sending cash or a check to someone in the mail. Oversight from the bank or financial institution ensures the money gets where it needs to, seamlessly.
On the other hand, the main disadvantages of wire transfers include:
- Inflexibility – Another part of what makes wires so secure is that once they are initiated, they typically cannot be cancelled or reversed. However, this can also lead to additional financial burdens in the event of a miscommunication between sender and recipient.
- Cost factor – The fee that applies to individual wires may not be all that high, relative to the amount of money being wired. But these costs add up over time, which makes wires better suited to one-off or infrequent transactions than recurring or bulk payments.
It’s important to weigh these pros and cons in the context of your personal or business needs and means, especially since wire transfers are not the only option available to you.
Other Available Payment Options
Wire transfers are commonly used by private citizens to send money to relatives or friends, such as gifts, or even for formal transactions, such as down payments on real estate purchases. For businesses, they are among the most common business-to-business (B2B) payment solutions.
But they’re not the only payment method used. Other options available include:
- Automated clearing house (ACH)
- Corporate card payments
- Cash or (paper) checks
- Transfer platforms (PayPal, etc.)
Of these methods, the least secure are cash and checks. The most similar to wire payments are ACH payments. In some cases, an ACH transfer and wire transfers can be mistaken for one another or referred to interchangeably, although they’re different.
Wire vs ACH Payments
Very similar to wire transfers, an ACH payment is a money transfer that occurs between banks or financial institutions through the ACH network, which is overseen by the regulatory institution Nacha.
The biggest differences between wire transfers and ACH payments are:
- International acceptance – Whereas wire transfers can be sent internationally, an ACH payment is restricted to only domestic transactions.
- Speed and cost factors – An ACH transfer tends to be cheaper than wire transfers, but they can take longer to process: up to three days, compared to the minutes or hours for wires.
Given the oversight from Nacha, as well as the lengthier and more complex money transfer process, ACH is generally considered to be more secure than wire transfers.
Corporate Card Payments
Another option available to businesses looking for ways to streamline payments is credit. Using a physical or virtual credit or charge card can work wonders in terms of security, flexibility, and ease of individual transactions, as well as overall spend management.
According to Paylane, the biggest differences between credit and wire payments include:
- Refunds or chargebacks, which are easy with credit but usually not available with wires.
- Easy mobile and single-click payments are available through credit, but not with most wires.
- Tracking and analysis of credit payment data is far easier with credit.
- Free or significantly cheaper transactions with credit.
For these reasons, utilizing a corporate card for payments, especially recurring or other B2B payments, can be much more beneficial than initiating multiple costly wire transfers.
In addition, the top smart card solutions can do more than just simplify payments and transfers. With built-in features like receipt matching, cash back, and automated spend management, a smart corporate card can help maximize your savings, as well.
Power Your Transactions with Ramp
Ramp is a premium corporate card designed to help companies save money. By using Ramp for your B2B and other payments, you gain flexibility and real-time visibility into your company spend, along with unlimited 1.5% cash back and a powerful spend management integrated right into your card.
Want to avoid reimbursing your employees via ACH or wire transfer every month? With Ramp, you can issue as many cards as you want. That way, employees aren’t paying for work expenses out of pocket and then waiting to be paid back.
Set limits, track spending, and embolden your employees. Start using Ramp to power your payments and your savings today.