What it is:
A wire transfer is a method of transferring money electronically between two people or institutions.
How it works (Example):
A wire transfer is made between two financial institutions by a person issuing instructions to one institution. The instructions include the special bank routing costs, a unique code for each institution and branch, to ensure that the wire transfer ends up in the right bank and the right account. The institution then sends the instruction to the recipient, confirming the upcoming transfer. The instructions are sent via a secure wire system known as SWIFT, for international transfers or Fedwire, for domestic US transfers.
Once the transfer of funds is completed, both institutions maintain "reciprocal" accounts for the amount of the transfer until the transfer is settled. If a bank cannot set up such as account, the transfer is handled through a correspondent bank that will transfer the funds to the intended institution.
Wire transfers are regulated in the US by Federal Regulation J and by the Uniform Commercial Code.
Why it Matters:
International wire transfers can be costly, including the cost of the transfer itself and a fee to cover the spread in the exchange rates between two currencies.