How Online Money Transfers Work

By: Brian Boone

Western Union, one of today's main online money transfer operators, began as a transcontinental telegraph operator in 1851.
Western Union, one of today's main online money transfer operators, began as a transcontinental telegraph operator in 1851.
Ben Hider/Getty Images

Online money transfer is where the old-fashioned concept of wiring money converges with the modern technology of electronic funds transfer, or EFT. You probably use EFT all the time -- it's simply a completely electronic way of transferring money from one bank account to another bank account. Data is exchanged; paper money is not. Using a debit card at a store transfers money from your checking account into the store's banking account. Direct deposit payroll moves money from your employer's bank account into yours. Both of these transactions are examples of EFT, and so is online money transfer.

But online money transfer is distinctly different from EFT -- this is not about a way to pay your bills over the Internet. Online money transfer is the modern-day equivalent of wiring money: You can send someone money instantaneously simply by transferring money (or the data that represents that money) from you to another person. Usually involving little more than contact information -- such as a cell phone number or an e-mail address -- for the sending and receiving parties tied to a bank account, online money transfer can be done for a small fee from a secure, Web-based service via any computer with Internet access. There's no need to go to a money wiring office, telegraph station or even a bank.


So that's how you send money. But why would you want to … and is it safe?

Online Money Transfer Basics

The main reasons to send money via an online money transfer service are undeniable: Online money transfer is fast, convenient and safe.

Mailed checks can take days to be delivered, and they can be lost in the mail or stolen. If that money is being sent internationally, where it might be needed most, there's also the matter of currency conversion fees, which are generally costlier than a money transfer fee. Online money transfer allows nearly instantaneous delivery -- it takes data only seconds to travel on the Internet -- with no physical complications to virtually anywhere in the world.


Numerous safety measures are in place to ensure that your money goes exactly where it needs to go. Multiple layers of data encryption are used for online money transfers. That way, if by chance the data is stolen or hacked en route to the recipient, it's all coded multiple times so that it's illogical, illegible jibber-jabber. It's money on a screen to you, but once you hit send on a secure money transfer Web site, it goes out into the Internet as coded data, and once it's received by the recipient's bank or service, it's decoded and deposited as currency.

All online banking transactions, including online money transfer services, are processed by the Automated Clearing House (ACH), an independent agency that offers secure financial data transmission. The various services offer other levels of protection, such as confirmation phone calls to both parties (who have to verify private information), confirmation e-mails, and even insurance policies that guarantee your money will be sent and your bank accounts won't be compromised.

OK, so it's safe for you, and for the person that needs money. But how much does it cost to send money online, and where do you go to do it?

Online Money Transfers: Companies and Costs

There are four main online money transfer services. Two have been in the money-sending business for decades. One, Western Union began as a transcontinental telegraph operator in 1851, and introduced money transfer over telegraph lines, or "wiring," in 1871. It was a fairly unsophisticated process: You'd give cash to the telegraph office, a message would be sent to the waiting friend at the other telegraph office hundreds of miles away, and they'd receive cash. Today, you no longer have to go to the train station or the Western Union outpost -- you can send money online via Western Union's Web site. For example, "Money in Minutes" transfers money from one person's bank account to another in, well, minutes. The service fee is on a sliding scale, so you'll pay anywhere from 8 to 10 percent of the total amount of money you're sending [source: Western Union].

MoneyGram, another holdover from the money-wiring era, also offers instant online money transfers at a flat rate of 8 percent, no matter the size of the amount sent. If the money isn't being sent to alleviate an emergency and can wait a couple of days, MoneyGram has a three- to five-day transfer service for which the fee is 3 percent [source: MoneyGram].


Owned and operated by eBay, PayPal is primarily an online payment system. But it can be used to transfer money. Both the money sender and money recipient should have PayPal accounts. Accounts are free, but must be tied to some kind of savings or checking account. To send money on PayPal, you simply enter the recipient's e-mail address that's on record with the service, and the money is transferred from your account to the recipient's. Warning: PayPal is not an instant online transfer service. It will take no less than three to five business days for the transaction to clear. On the bright side, it's very cheap: PayPal's fee is 2.9 percent of the amount sent, plus 30 cents [source; PayPal].

iKobo, whose business is primarily international, uses loadable debit cards to handle its online transfers. Essentially, the recipient gets an iKobo bankcard, and the sender tells iKobo how much money to put on the card. It's not instantaneous, however -- the money is available in eight business days. But that's if they already have an iKobo card. Getting the card adds at least a week to the timeframe. iKobo charges an $8 flat fee when the sender uses a checking account. When you use a credit card, the fee is based on a sliding scale from 8 to 30 percent of the transaction [source: iKobo].

Online Money Transfers: Credit Cards and Fees

Credit cards have an interesting history.
Credit cards have an interesting history.

In some cases, you don't have to have a bank account to send money online -- or even to receive it from an online transfer. A credit card is a viable tool in this regard. But do note that, as is usually the case with credit cards, it's going to cost you. While most online transfer services (Western Union, MoneyGram) treat debit and credit cards the same for the money sender -- it's just a method of payment -- iKobo, for example, can charge as much as 30 percent if the sender uses a credit card [source: iKobo].

Fortunately, if you do use a credit card to apply funds to an online money transfer, credit card companies view it as a purchase, not a cash advance, because the money is not going to you. As far as the credit card company is concerned, you are purchasing a service. This is far more economically sound than using a credit card cash advance and simply sending the needy party a check; cash advance fees can run as high as 4 percent [source:]. But that's 4 percent on the transaction. The balance of that cash advance then goes on your credit card bill, where it's also subject to the usual credit card monthly interest rate. Payday loan houses, which are appealing because they don't require credit checks, charge even higher interest rates; the annual percentage rate (APR) can run, on average, 400 percent [source: Davidson & Miller].


As stated, iKobo's model uses a preloaded debit card. This is good for sending money to people who don't have a bank account, while offering the flexibility of point-of-purchase ease of use a standard bank-issued debit card offers. The sender can upload an amount onto the recipient's card for as little as $8 if the money comes from a checking account, as opposed to a credit card. The recipient, however, ends up paying for the convenience. The card carries a $1.99 monthly maintenance fee, a $2.25 ATM withdrawal fee, and 55 cents for point-of-purchase, like a store [source: iKobo]. All of these fees come off the balance of the card.

For more information regarding online money transfers and related personal finance topics, visit the links on the following page.

Lots More Information

Related HowStuffWorks Articles

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  • Davidson, Emily and Miller, Valary. "The Truth About Payday Loans." Accessed 15 January 2010.
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  • iKobo. "Fees." Accessed 15 January 2010.
  • MoneyGram. "Corporate - Company Information." Accessed 15 January 2010.
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  • MoneyGram. "Pricing Input - USA." Accessed 15 January 2010.
  • PayPal. "About PayPal." Accessed 15 January 2010.
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