How do online banks interact with each other for money transfers?
What technologies and methods do online banks use to transfer funds between each other? Is having a unified API standard practice, or are there alternative ways for banking systems to interact?
Online banks interact with each other for money transfers through specialized APIs and protocols such as SWIFT, SEPA, ACH, and ISO 20022, which ensures secure exchange of financial data and execution of transactions in real-time. These technologies allow banks to automate interbank transfers, ensuring transparency, security, and compliance with international standards. While unified APIs are becoming an increasingly common practice, there are also alternative methods of interaction, including direct bank connections and third-party platforms.
Contents
- Main Interbank Transfer Protocols
- API Integrations and Their Role
- Interaction Technologies and Standards
- Alternative Interaction Methods
- Challenges and Future Trends
- Practical Implementation Examples
Main Interbank Transfer Protocols
Online banks use several key protocols to interact when conducting money transfers. Each of these protocols has its own characteristics and is used depending on the type of transfer, geography, and currency.
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the global standard for international transfers. As noted in research, SWIFT APIs enable processing of international transactions by transmitting data through the international payment system and delivering it to the SWIFT network [source]. This protocol supports transfers in more than 200 countries and is a universal solution for cross-border operations.
SEPA (Single Euro Payments Area) is designed for euro-denominated transfers in Europe. As emphasized in sources, SEPA uses ISO 20022 payment messages, which simplifies compliance and reconciliation between banks [source]. This protocol brings together more than 30 countries, processing each payment the same way, regardless of the origin point within the eurozone.
ACH (Automated Clearing House) is a system for domestic transfers, particularly popular in the United States. ACH enables both credit and debit transactions between banks, ensuring payment processing within several days [source].
API Integrations and Their Role
APIs (Application Programming Interface) play a key role in the modern interbank interaction system. Fintech companies have developed APIs that have significantly simplified the process of international transactions [source].
Types of Banking APIs
- Bank Transfer APIs allow automation of payments, financial management, and eliminate the need to visit a bank and handle paperwork [source]
- Transfer APIs, such as those from Plaid, provide access to ACH, RTP, FedNow, Request for Payment (RfP), and bank transfers [source]
- International Payment APIs can process data through the international payment system and deliver it to the SWIFT network [source]
An example of successful integration is the Vest service, which requires users to connect their bank account to the app to add funds for investments. Vest likely uses services like Plaid, which include APIs that allow the user’s bank to securely exchange information with the investment app [source].
Interaction Technologies and Standards
Modern interbank interaction technologies are based on several key standards and protocols.
ISO 20022 is the new payment message standard designed to go beyond SWIFT and create interoperability between payment systems such as ACH, CHAPS, and CHIPs [source]. This standard provides strong control over transactions, especially for the middle office of banks [source].
Format compatibility is an important aspect of modern banking interactions. The SWIFT protocol is compatible with all payment formats (SEPA, ISO 20022, local formats), making it a universal solution [source].
Instant payments are becoming increasingly popular. For example, TIPS (TARGET Instant Payments Settlement), launched in 2018, is market infrastructure that enables SEPA instant credit transfers on a pan-European level [source].
Alternative Interaction Methods
Despite the growing popularity of unified APIs, there are other ways for banking systems to interact.
Direct bank connections (EBICS) are an alternative to SWIFT in some regions. EBICS or SEPA-based APIs may be more cost-effective and faster for domestic payments [source].
Third-party platforms provide a single entry point for interaction with multiple banks. For example, Prometeo API allows businesses to manage international payments, verify bank accounts, and consolidate financial data across borders [source].
OFX (Open Financial Exchange) is another alternative that can download transactions from 348 banks and supports bill payment, check stop, intrabank and interbank transfers [source].
Challenges and Future Trends
The modern interbank interaction system faces several challenges and development prospects.
Security challenges remain a key issue in interbank interactions. The need to ensure data security and prevent fraud requires constant improvement of protocols.
Cost is an important factor. As noted in research, SWIFT transactions can be expensive due to high transfer fees and intermediary fees that may be applied by banks along the transaction route [source].
Future trends include further adoption of instant payments, expanded use of ISO 20022, and development of more flexible APIs. New standards such as ISO 20022 are designed to go beyond SWIFT and create interoperability between payment systems [source].
Practical Implementation Examples
In practice, banks use various integration approaches to ensure interbank transfers.
Stripe supports various global payment APIs, including SWIFT APIs, Wise APIs, and SEPA APIs [source], allowing developers to integrate various payment methods into their applications.
HighRadius emphasizes that payment APIs are a prime example in the banking API landscape that enable customers to initiate transactions, transfer funds, and make payments directly from their bank accounts [source].
Viva.com provides specific parameters for bank transfers, such as ‘bankCommandId’, ‘isInstant’, and ‘instructionType’, demonstrating the technical implementation of APIs for interbank transfers [source].
Sources
- International money transfer API and how it works - Fincra for Business Blog
- Banking API - Modern Treasury
- Bank Transfer API - The Ultimate Guide
- Bank transfer API | Viva.com Developer Portal
- Transfer - A complete bank transfer API - ACH, RTP & FedNow | Plaid
- A single API for cross-border banking | Prometeo
- Global payment APIs explained | Stripe
- What Is a Money Transfer API?
- Is there an API to get bank transaction and bank balance? - Stack Overflow
- Bank API Integration: Everything You Need To Know - HighRadius
- Is your bank ready for the ISO 20022 mandate? - Finzly
- SWIFT vs SEPA vs ACH: Choosing the Right Payment Rail for Global Transfers - Kanzum
- Swift payments: how it compares to BACS, CHAPS, and SEPA - Currency Cloud
- The Stablecoin Era - Squads
- International Payment Methods Guide: When to use ACH, SEPA and SWIFT - Telleroo
- SWIFT, SEPA, BACS, CHAPS, Faster Payments: What Do These Payment Terms Mean? - Moneff
- SWIFT vs SEPA payments - the main differences | Advapay
- Enabling domestic instant payments | Swift
- EBICS or SWIFT: which one to choose? | Cegid Allmybanks
- What bank connectivity protocols are there? - Cobase
Conclusion
Modern online banks interact with each other for money transfers through a complex ecosystem of protocols, APIs, and standards. The main technologies include SWIFT for international transfers, SEPA for euro-denominated operations in Europe, and ACH for domestic payments, especially in the United States. ISO 20022 emerges as a new standard seeking to create interoperability between different payment systems.
The existence of a unified API is becoming an increasingly common practice, but is not an absolute standard. Banks use various approaches: from direct connections via EBICS to integration with third-party platforms such as Plaid, Prometeo, and Stripe. Each method has its advantages and limitations depending on the type of operations, geography, and security requirements.
For effective interbank integration, it is important to consider several factors: transfer speed, cost, geographic coverage, currency, and security requirements. The future development of this field is related to the further adoption of instant payments, expanded use of ISO 20022, and the development of more flexible and secure API integrations.