History and Context –
In 1872 the first wire transfers appeared; they leveraged the telegraph network, a remarkable breakthrough. This, more than 130-year-old legacy technology, is still facilitating funds transfers today. In 1974 the SWIFT network was established to standardize international wire payments. International banking is done primarily by national banks and regional banks work through these national banks to execute their global transactions.
The upside of these relationships is an existing network of banks that can manage global transactions.
The downside is that it takes too many banks to execute the transactions – and many banks equals many fees often with little to no notice. Wire transfers are bank centric rather than customer-centric.
For example – when a school receives a global tuition payment from India that money moves through the following banks
- Original payment sent from a regional bank in India
- to a national bank in India
- is exchanged into US dollars
- to a national bank in the US
- to a regional bank in the US
- to a the school account
Six accounts touch the money as well as four banks – WOW. And on top of all that, a wire transfer is difficult, seemingly impossible for either the payee or payer to track once it has been initiated. Therefore troubleshooting a missing payment is frustrating and often time consuming.
Before the Internet became the dominant communications and information network global wire transfers were good, but only in light of the dearth of other options.
However, the Internet has changed communications and information. Today, there are more and better options for transferring funds throughout the world.
Legacy Challenges Wire Transfers Brought to the Internet Age.
The original design for wire transfer security was utilizing specific cryptic information. When the system was put in place – brevity was at a premium. In communication each letter (and space) carried an expense. I kid you not – you paid by the letter! This brevity created a limited information payload for the wire. This scarcity of information is exacerbated with global transfer, where the non-numerical information is in another language, often character-based, rather than alpha numeric.
An obvious and daunting element of a wire transfer is that you need the destination address to send the money. This seems obvious, but imagine being in Turkey 70 years ago and being asked to send $15,000 to a US school. It was difficult to get information at all, much less specific wire information. The telegraph, telegram, letter, faxes, and phone calls were all ways this information was sent. Each of these took a combination of time and resources. You could do it, but it was not easy.
Today it is too easy. The ease in which you can publish the wire information and or; send an e-mail, text, or message creates a rich environment for fraud risk. This is a clear example of how much things have changed.
When sending a wire you know the destination, but you do not know the execution path – so you do not know the fees associated with the payment (these accumulate and are either taken out of the transaction – which creates a short – or are passed on to the payee). Depending on the institution a short payment can completely derail an enrollment or set into motion a second transaction, which uses the same flawed system that created the short to remedy it. The sender must then overpay to compensate for the fee heavy bank-centric method.
In addition to the fees, the exchange rate almost impossible to assess, as there is no competition in a Bank rate world. Banks set the rate daily…it is literally called a bank rate.
Wires transfers were designed to send money to an account – not to a person within an account. This creates mystery deposits where money is deposited, but the beneficiary (student) is unknown. Schools are admirable about getting the right tuition payment to the right student, but this is the type of operational inefficiency that drains business offices of their time, energy, and enthusiasm.
Wires require specific information to be successful and; at each bank the vocabulary and forms are slightly different, not radically but enough to create uncertainty and confusion. For international students this creates a challenging customer support experience. Phone support for internarial families must be done either early or late in the day. And then, there is often the requirement of a translator, potentially the student/son or daughter. Schools again are well intentioned in this effort – and again this is the type of activity that slows the business office down.
Challenges That the Internet’s Evolution Created for Wire Transfers
Security is the biggest challenge that the internet gave to wire transfers. The information you need to send a wire is the same information you need to write a check. Each year there are reports of fraud as a result of this vulnerability. When a criminal takes the wire instructions, which are often posted for easy access, and creates fraudulent checks using that information. These checks can then be passed to unknowing merchants. Often this occurs in the local community. Many schools have made their accounts deposit only accounts to protect themselves. This clever solution has an unfortunate downside for the merchant who takes a fraudulent check with the schools name on it. Financially, the school is protected, but its reputation suffers with another public relations hurdle.
Take a look at this 2017 report in Fortune magazine about Wire Transfer Fraud.
Smart Organizations evaluate new technologies and leverage them.
I would enjoy learning more about your school and how you manage your global transactions.