Why do we care about Money Transfers?
In today’s rapidly evolving financial landscape, the way we transfer money has undergone a remarkable transformation. For years we have been sending money from one account and waiting days until the money arrives at another. However, with the invention of instant payment systems, a new era of convenience, speed, and accessibility has emerged. This article will explore the evolution of money transfers, and compare traditional methods with the newer, instant alternatives.
The Evolution of Money Transfers
Over the years, money transfers have evolved from manual processes to automated electronic systems. As well, each country has its own system and characteristics. Later, SWIFT, introduced in the 1970s, streamlined cross-border transfers by standardizing messaging protocols between banks. Similarly, SEPA, launched in the second decade of 2000s, aimed to simplify euro-denominated transactions within the European Union. These systems marked significant progress, but they still suffered from delays due to clearing and settlement processes.
Characteristics of Traditional Transfers
Traditional Transfers are executed in batches. That means, every time you want to make a money transfer, your bank receives it and instead of executing it directly, it stays in their system for a period of time.
Once or twice a day, on working days, your bank takes together all the transfers waiting to be executed and executes them together, as a batch. The time in which the bank sends the payments is crucial, the final hour is called the “cutting hour”, or in other words the final time a bank executes a traditional transfer.
This is important because it marks the time limit of when a bank can send or receive transfers, and since every bank can have a different cutting time, this causes delays in payments. This can prove to be more difficult in cross border and international payments, with time zones and banking hours causing more delay in delivery.
The second important characteristic is that a traditional transfer is a one-way message, from bank A to bank B, but there is no response of confirmation from bank B to bank A, so you don’t really know if the money has been credited. In case of a problem you receive a new traditional transfer back, which also takes days to arrive. So, in case of a problem, you may need to wait even a week to know about it.
Characteristics of Instant Transfers
Instant money transfers, on the other hand, leverage real-time payment networks that enable immediate fund transfers, often within seconds. These systems operate 24/7, including weekends and holidays, offering unparalleled accessibility. The system is prepared to receive a response and guarantees the settlement of the funds, so you can count on being informed of confirmation that the money has been credited to the destination bank, or you’ll be notified if not.
Advantages of Instant Transfers
Instant money transfers have a set of impressive advantages:
- Speed: Send and receive money in seconds, instead of days. You can pay later, make payments in a pinch or other time-sensitive payments like salary advance and be sure the money will be available on time.
- Availability: With instant transfers, individuals and corporations can initiate transactions 24/7, even on weekends or holidays. This level of availability contrasts with traditional transfers, which may need to be completed during working days.
- Cost Efficiency: Instant payments can be automated at both ends. This reduces the amount of manual processes, paperwork and fees associated with traditional payments
- Enhanced User Experience: The real time experience of instant payment apps have contributed to a superior overall adoption. There’s no better feeling than receiving your money in real time.
- Disambiguation: With instant payments you receive immediate confirmation if the payment has been executed. If there’s a problem, you can start fixing it in minutes instead of days, or waiting for the payee to contact you.
Disadvantages of Instants Transfers
- Speed: Speed is a great advantage, but it also requires investment to avoid errors, fraud, etc. Because once any wire transfer is executed, it cannot be undone. Regulation is adding new tools to avoid those risks.
- Availability: Again, to be available 24/7 requires investment in building a robust system. There are many pieces in the value chain of an instant payment that need to be online at the same moment, which is not always the case.
- Pricing: Executing 100,000 synchronous payments individually instead of 100,000 asynchronous payments at once doesn’t have the same cost to the banking system and right now instant payments are more expensive than traditional transfers, especially for companies.
The evolution of money transfers from traditional methods, such as SWIFT and SEPA, to instant payment systems reflects the increasing demand for speed, accessibility, and efficiency in financial transactions.
While traditional transfers have played a vital role in the past, the arrival of instant transfers has revolutionized the way we move money, offering unparalleled advantages in terms of speed, accessibility, and cost-effectiveness. As technology continues to advance, it’s evident that instant money transfers are paving the way for a more connected and convenient financial future. But as we have seen, instant transfers have some areas that require more attention to avoid errors and fraud.