As other answers have stated, there are a number of ways and many different types of clearing channels that one can send money to a beneficiary. Each method has various pros and cons and serve different types of purposes.
A "wire transfer" is a somewhat generic term that usually refers to an older set of technologies that allow a person or organization to send some amount of money to a bank account at some other bank or financial institution, usually via one or more intermediates or correspondents, and assisted through either a centralized clearing/settlement bank (Eg. Fed Funds/Federal Reserve, CHIPs) or through some centralized message broker (Eg. SWIFT Network).
Lets keep this about SWIFT; this is an organization that essentially provides a messaging service between financial institutions that are members all over the world. These participants dont really have any "money" being held in accounts with SWIFT, but instead they exchange different types of messages with each other. These messages usually have to do with various money movement, balance reconciliation, and reports. In the case of money movement, if a participant Deutsche Bank in lets say Germany has a relationship with a participant Bank of America in the United States, then Deutsche Bank may have an account with funds (USD or Euro) on the books with Bank of America (and vice-versa). Colloquially this is refered to as a NOSTRO account (Our financial institution account at another bank) and VOSTRO account (their financial institution account at our bank). On the ledgers for these two banks they are basically seen as assets being held by another bank.
So what are these NOSTRO and VOSTRO accounts used for? A number of things, but usually it is working money that allows for a bank like Deutsche Bank for instance, to quickly move money for one of their customers to a beneficiary account holder at Bank of America. Here is what would typically happen in a normal wire transfer:
- The "debtor" is a customer and account holder at Deutsche Bank and communicates "intent" to pay a "beneficiary" with an account at Bank of America.
- Deutsche collects the payment instructions, account numbers, account holder identity, BIC or IBAN (unique identifiers for banks across the world), etc...
- SWIFT is determined to be how the payment instruction message is to be sent to Bank of America and the MESSAGE is sent to the SWIFT network.
- SWIFT sends a message to Deutsche letting them know how much money will be drawn from Deutsches NOSTRO account at Bank of America to cover the payment.
- SWIFT sends a message to Bank of America letting them know to fund the beneficiary account for the amount of the payment, and to draw the money to cover that transfer from Deutsches account at Bank of America.
In the example above, the "Debtor Agent" Deutsche Bank in this instance is responsible for transfering the funds from the customer account to cover the payment. They are also responsible for making sure there is enough money in their NOSTRO account at Bank of America to cover the transfer to the beneficiary. Things like foreign currency exchange details, fee structures and responsiblities are all determined before hand. The important thing to note though is that this whole song and dance is basically a coordinated series of accounting entries local to each banks ledger (eg. every dollar must be deducted from one place and credited to another with everything balancing to 0 in the end), and with messaging occurring between the banks to ensure that this all occurs appropriately.
This same principle occurs when intermediate or correspondent banks are involved. Lets say that the beneficiary of the payment happens to be an account holder at Bank of New Zealand. The problem is that Deutsche Bank does not have a direct banking relationship with Bank of New Zealand and they do not have accounts with one another. We can still potentially send this payment however by specifying an intermediary bank that happens to have relationships and accounts with both. In this instance we can identify the routing as Deutsche -> Bank of Australia -> Bank of New Zealand. We essentially move money from the debtor account to Deutsches account at Bank of Australia, then from Deutsches account at Bank of Autralia to Bank of New Zealands account at Bank of Australia, then from Bank of New Zealands Account at Bank of Australia to the beneficiary account at Bank of New Zealand. The SWIFT network greases the wheels for all of this by sending payment transfer messages to all three financial institutions so that the payment can make its way.
Domestic wire transfers work a little bit differently than SWIFT and are very country and region specific. In the United States, all US banks will have a central bank account at the Federal Reserve. The Fed Funds network is a Federal Reserve bank service that allows banks to exchange domestic wire transfers directly between any two US banks via transfer of funds from one Federal Reserve settlement account to another. There is an analogue to this in the European Union as well.
If it all seems convoluted, and slow, that is because it is. These systems for international money movement have been established decades ago, however it still works and is still very much in use. Most of the time when you as a customer of a bank use payment services, you are generally not sending wire transfers directly, although you absolutely can. Wire transfers and sending them successfully can be very complicated so most of the time these details are abstracted away from your typical retail checking account holder. Most of the time when you and I send money domestically or internationally, we typically have many other suitable options to use than a classic wire transfer so a retail consumer sending wire transfers is typically seen as an exception case as opposed to business as usual so it is generally not as easily accessible and widely variable depending on who your bank is. When you look at other ways to send money, eg. ACH, Zelle, SEPA, etc.. much of the time it is abstraction from the same accounting that is constantly going on between banks behind the scenes, just usually on a massive scale. ACH for instance will be settled and cleared between two financial institutions in bulk, where they may process millions of ACH transactions between debtors and beneficiaries at different banks, but the money to cover the net sum (positive or negative) of all these transactions still needs to be available in settlement accounts at either a central bank or between shared accounts between two banks internationally. For example if Deutsche bank processed 2 million non-wire transactions between it and Bank of America and they found that their account at Bank of America will be short 10 million USD net, then you guessed, Deutsche Bank will need to use SWIFT to wire that 10 million USD to Bank of America to cover the difference.
Zelle is an interesting case because it is so convenient for customers that it almost appears to work like magic, but there is a dirty little secret behind the scenes that most people dont really know about. Zelle is a messaging platform, much like SWIFT, however Zelle participants agree to immediately credit a beneficiary the amount of the Zelle payment even if the sending bank hasn't cleared the funds to them yet! This is known as counterparty risk, where I am crediting my customer the funds on a payment he received, even before I myself as a bank received the funds from the other bank. If the other bank is not operating in good faith, or has a liquidity crisis, or whatever, I as a bank might be out the money. Once it is in my customers account, they could potentially liquidate and/or close the account after receiving the Zelle and I have no way to recover the funds. Usually the settlement funds are sent via ACH or wire but that might not happen for several days. Again though, wire transfers form the basis of how banks maintain liquidity on a payment network.
So why are direct wire transfers still being used? There is a direct and clear assurance as to exactly how the money will be moved, estimates on when it will arrive, and in many jurisdictions a wire transfer is a legal contractual agreement between you and your bank. You agree to pay $25-$50 USD in fees, and the bank agrees to deliver your money by a specific date. If they are not successful in doing so you may hold them liable for damages. This is why wire transfers are popular as a means of corporate payables, real estate transactions, legal payments and corporate tax payments.
So basically payments are complicated, and your options can vary wildly depending on who you bank with. Your best bet is to phone or walk into your local branch office and speak to a representative about your options and they will be able to walk you through the details.
Source: I currently work for a large financial institution as a software engineer in the payments space and am directly involved with systems that deal in wire transfers.
