What is a Local Bank Transfer? A Comprehensive Guide

A local bank transfer is an electronic method of moving money between bank accounts within the same country or region. This process can also facilitate international transactions by depositing funds into a foreign bank account, which is sometimes referred to as an international ACH (Automated Clearing House) or Global ACH transfer. Local bank transfers provide an efficient and secure way to make cross-border payments.

The Growing Popularity of Local Bank Transfers

Local bank transfers are gaining traction as a peer-to-peer payment method worldwide, offering several benefits for both individuals and businesses:

• Peer-to-peer payments: Enables direct money transfers between individuals for online transactions.
• Speed and affordability: Provides a quick and cost-effective solution for paying for goods and services.
• Global accessibility: Allows companies to make payments to an international workforce efficiently.
• Convenience: Streamlines the process of sending and receiving money without intermediaries.
• Security: Ensures secure transactions, minimizing the risk of fraud.

How Do Local Bank Transfers Work?

Local bank transfers operate similarly to other money transfer systems but utilize a peer-to-peer network instead of banks to send money. To better understand how peer-to-peer financial services function, it’s essential to first grasp the workings of traditional international bank transfers.

Traditional International Bank Transfers

When initiating an international bank transfer (also known as an international wire transfer), you must visit your bank, make a phone call, or use an online banking platform. The bank then processes your request and begins transferring the money. Banks can only transfer money by passing it through a series of other banks until it reaches its destination. However, banks don’t physically pass the money; instead, they relay information about your payment request until it credits the receiving bank account and debits the payer (the originator). The SWIFT network, a secure messaging system, facilitates this information exchange. The main drawback of this method is that banks have varying levels of connectivity with one another, so the information is never passed directly. Some banks are well-connected, while others are not. It’s like taking connecting flights to reach your destination without knowing the exact route or cost. If a corresponding bank cannot directly contact the recipient’s bank, it will engage another intermediary bank or financial institution to transfer the request. This process continues until the information reaches its destination and the account is credited with the funds. The more corresponding banks involved, the longer the process takes and the more expensive it becomes, as each bank charges separate handling fees. In addition to these fees, there are also:

• Upfront fees
• Outgoing international transfer fees
• Currency exchange rate markups
• Incoming international transfer fees on the recipient’s side

Currency exchange rate markups are often hidden in SWIFT international money transfers, with the bank making the exchange opting for a higher rate and pocketing the extra profit.

Local Bank Transfers: A Peer-to-Peer Solution

Local bank transfers eliminate the need for big banks by relying on people’s local bank accounts to facilitate fund transfers, hence the term “peer-to-peer.”To transfer money abroad using a local bank transfer, you must choose a money transfer service like Wise, PayPal, Revolut, or another electronic payment option. After submitting a money transfer request through the service’s platform, the platform 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, a remote worker for a Serbian company, is paid in Serbian dinars but lives in London and needs pounds sterling to pay his bills. Hannah, who lives in London and earns in pounds sterling, has a mortgage in Serbia and needs Serbian dinars for her repayments. Tom’s Serbian employer uses the money transfer service to pay him in Serbian dinars. The service receives another transfer request from Hannah in London, who wants to pay her Serbian mortgage provider using pounds sterling. The transfer service takes Hannah’s pounds sterling and gives it to Tom, while taking Tom’s Serbian dinars and giving it to the Serbian mortgage provider on Hannah’s behalf. Both parties receive their desired currencies without paying hidden bank charges, only a small fixed fee taken by the money transfer service and an upfront conversion fee at the real exchange rate.

Cost Comparison: Local Bank Transfers vs. International Bank Transfers

International bank wire transfers typically incur fees ranging from $35 to $50 USD and can take 1 to 5 days to clear. In contrast, local bank transfer payment systems charge fees of up to $3 to $25 USD and take up to 2 business days to clear. While international wire transfers offer the convenience of direct payments into the recipient’s bank account, they often involve hidden costs such as exchange rate markups and intermediary bank fees. Local bank transfers provide a more transparent and cost-effective alternative by using peer-to-peer networks and eliminating the need for intermediary banks. To save on international transfer fees, consider using online money transfer services like Wise, which offer competitive exchange rates and transparent fees. Premium bank accounts may also provide free or discounted wire transfer services, but be sure to weigh the benefits against any associated account fees.In conclusion, local bank transfers have emerged as a popular and efficient method for sending money both domestically and internationally. By understanding the differences between local bank transfers and traditional international wire transfers, individuals and businesses can make informed decisions to minimize costs and optimize their cross-border payment processes.