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How do local bank transfers work?

How much do local bank transfers cost compared to international bank transfers?

What is a local bank transfer

A local bank transfer is a method of electronically moving money from one bank account to another within the same country or region. It can also be used for international transactions, where funds are deposited into a foreign bank account. This process is also referred to as an international ACH (Automated Clearing House) or Global ACH, allowing for efficient and secure cross-border payments. 

Local bank transfers are becoming a popular peer-to-peer payment method globally, offering several advantages for both individuals and companies:

  • Peer-to-peer payments: Allows individuals to transfer and receive money directly for online transactions.
  • Speed and cost: Offers a fast and affordable way to handle payments for products and services.
  • Global reach: Enables companies to efficiently and cost-effectively make payments to an international workforce.
  • Convenience: Simplifies the process of sending and receiving money without the need for intermediaries.
  • Security: Typically involves secure transactions, reducing the risk of fraud.

How do local bank transfers work?

Local bank transfers work similarly to other money transfer systems, except instead of using banks to send the money, they use a peer-to-peer network. 

To understand how peer-to-peer financial services work, we first need to know how traditional international bank transfers work. Suppose you want to pay someone in another country using an international bank transfer, also known as an international wire transfer. In that case, you must initiate the payment by visiting your bank, making a phone call, or using an online banking platform. The bank takes your request and begins the process of transferring your money.

A bank can only transfer money by passing it to other banks until it eventually reaches its destination. Note here that the banks don’t physically pass the money. Instead, the banks pass on information about your payment request until it eventually credits the receiving bank account and debits the payer (the originator). The banks use the SWIFT network, a secure messaging system, to pass on this information.

The downfall of this method is that all banks are different and don’t have direct relationships with one another, so the information is never passed on directly. Some banks are well connected; others are not. It’s like taking a series of connecting flights to arrive at your destination, except you aren’t quite sure which route your connecting flight will take or how much it will cost to get there.

Suppose a corresponding bank is unable to contact the recipient’s bank directly. In that case, it will hire another intermediary bank or financial institution to transfer the request. This process continues until the information reaches its destination and the account balance is credited with the funds.

The more corresponding banks involved in the chain, the longer it takes and the more expensive it becomes to carry out an international transfer since every bank charges separate handling fees.

In addition to multiple handling fees, there are also:

  • Upfront fees

  • Outgoing international transfer fee

  • Currency exchange rate markup

  • Incoming international transfer fees on the recipient’s side

Note that currency exchange rate markups are nearly always hidden for SWIFT international money transfers. The bank making the currency exchange usually opts for the higher exchange rate and then pockets the extra profit.

Fortunately, local bank transfers remove the big banks from the process and instead rely on people’s local bank accounts to pass the transfer of funds, hence the phrase “peer-to-peer.”

When you want to transfer money abroad using a local bank transfer, you must choose a money transfer service such as Wise, PayPal, Revolut, or another electronic payment option. You then submit a money transfer request using the transfer service platform. The platform takes the request and locates another individual making a transfer request in the destination country. It then uses the money in the other individual’s account to credit your recipient’s bank account in the local currency.

Here’s an example of how this works:

Tom works remotely for a company based in Serbia. He is paid in Serbian dinar but lives in London, so he needs sterling to pay his bills. Then there’s Hannah, who lives in London and gets paid in sterling, but she has a mortgage in Serbia, so she needs Serbian dinar to make her repayments.

Tom’s Serbian employer uses the money transfer service to pay Tom in Serbian diner. The money transfer service receives another transfer request from Hannah in London, looking to pay her mortgage provider in Serbia using sterling. The transfer service takes Hannah’s sterling and gives it to Tom, and takes Tom’s Serbian diner and gives it to the Serbian mortgage provider on behalf of Hannah.

Both parties get their desired currencies. However, neither paid a cent in hidden bank charges, just a small fixed fee taken by the money transfer service and an up-front conversion fee taken at the real exchange rate.

How much do local bank transfers cost compared to international bank transfers?

International bank wire transfers cost $35-50 USD in fees and can take 1 - 5 days to clear. In comparison, local bank transfer payment systems cost up to $3-25 USD in fees and take up to 2 business days to clear.

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