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How do International Money Transfers Work?

People send money abroad for a variety of reasons, including gifting money to friends and family, buying a house abroad, making an overseas purchase for goods and services, making overseas bill payments, and moving money between personal accounts etc. Regardless of the reason for making international money transfers, there is a specific process involved in the transfer.

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What is an International Money Transfer?

An international money transfer involves transferring money from one country to another. The amount of money the receiver receives will depend on the exchange rate at the time of sending the funds. 

How do They Work

The process for sending an international money transfer will differ depending on whether you are sending the funds via a bank or a specialised international money transfer provider:

Bank

Banks use one of two standardised methods to identify bank accounts when making an international money transfer. The International Bank Account Number (IBAN), and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) code. The IBAN is used to identify the recipient’s account, and the SWIFT code is used to identify the bank. Depending on the bank, the transaction process takes approximately three to five working days. The funds are converted, and the recipient receives the money in their local currency. If the transaction is made between banks that do not have an existing financial relationship, an intermediary bank is required which could delay the process further.

Specialised Provider

With a specialised provider, an international money transfer works by having the sender provide their personal details to the agent either online or in person. They will verify the sender’s details and take details from the recipient such as full name, location, amount being sent. Depending on the provider, it can accept credit cards, debit cards and bank transfers as payment. The sender can also use cash when making the payment at an agent location. Some specialised providers offer instant transfer services, whilst some could take a few days.

There are typically two options when sending an international money transfer:

Forward Contract

A forward contract is an agreement between two parties to exchange two currencies at a determined date in the future. These contracts protect buyers against fluctuations in currency prices. To cancel a contract, both parties must agree to the termination. In general, forward exchange rates for currency pairs are held for up to 12 months. However, some of the pairs of currencies are referred to as the “major pairs”, which can exchange rates for up to 10 years. These include:

  • Euros and the U.S dollar
  • The Japanese yen and the U.S dollar
  • The British pound sterling and the U.S. dollar
  • The Swiss franc and the U.S. Dollar

Several providers also offer contracts for as short as a few days. It is also important to mention that there is a £30,000 minimum for forward contracts. 

Spot Contract

When making an international money transfer, the spot contract is the most common type of contract. They are ideal for businesses and individuals who need to make a quick overseas payment. You are given the exchange rate available at the time of the transfer and funds are delivered on the same day. 

In the United Kingdom and Europe, the Financial Conduct Authority (FCA), regulates online providers. They can not operate without being licensed as Electronic Money Institutions. A licensed practitioner is subject to European rules that protect payment service users.

What Factors Affect an International Money Transfer?

There are several factors that affect an international money transfer and they are all determined by the exchange rate. The exchange rate is defined as the conversion rates between the two countries. The supply and demand for currencies will cause daily fluctuations which means that you can not determine how much money the recipient will receive until you are about to make the transaction. For this reason, it’s important to understand the economic conditions that determine exchange rates. 

  • Currencies: Depending on what currency you’re using and exchanging it into, the amount you could get will also change depending on each currency’s value going up and down.
  • Send Amount: The amount you send to another person in a different country could affect how much you pay. Simply because of some providers giving you a better exchange rate or lower fees when you send a certain amount.
  • Banks/Operators/Countries: There are usually fees in place by banks and firms, which tends to vary depending on the country and operator.
  • Interest Rates: When interest rates are high, lenders are given higher rates which attracts more foreign capital, and this boosts exchange rates. Interest rates, inflation and Forex rates are all interrelated and have an accumulated effect on foreign currency.
  • Inflation: Inflation can have an effect on foreign currency exchange rates. Currencies depreciate when inflation rates are high and when they are low,  the currency’s value increases. When inflation is low, the prices of goods and services rises at a slower rate
  • Speculation: If it has been predicted that a country’s currency will increase, investors will seek to make a quick profit by placing a demand on that currency. As a result, the exchange rate for the currency will increase.
  • A Country’s Balance of Payments/Currency Account: A country’s current account reflects earnings and balance of trade on foreign investment. It is made up of the total number of a country’s transactions including its debt, imports, exports etc. When a country spends more on imports than it earns profits from exports, the currency account goes into deficit which causes depreciation. Balance of payments leads to fluctuations in exchange rates. 
  • Terms of Trade: Terms of trade is the ratio between import and export prices, and it is related to the balance of payments and current accounts and will improve if its export prices rise at a higher rate than its import prices. This leads to higher revenue which increases the country’s currency value causing a higher demand for the currency, and as a result, exchange rates appreciate. 
  • Political Performance and Stability: A country’s economic performance and political state affect the strength of its currency. When there is less risk of political turmoil in a country, it attracts more foreign investment. When there is more foreign capital in a country, the value of the domestic currency increases.  
  • Government Debt: Government debt can influence the Forex currency exchange rate. Foreign investors protect themselves against governments defaulting on debt by selling their bonds on the open market. The value of the exchange rate will fall as a consequence. 
  • Recession: Interest rates fall when a country is going through a recession. A recession reduces the chances of acquiring foreign capital, as a result, the currency of that country weakens which lowers the exchange rate.

Summary

International money transfers are a convenient way to send money abroad; understanding how money transfers work and the factors that determine foreign currency exchange rates will assist you in better evaluating the optimal time to make a money transfer.