How the SWIFT System Works?
SWIFT System for electronic fund transfer
Need to transfer money abroad? Today, it is easy to go to a bank and transfer money anywhere around the world, but how does that happen? The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system is behind most international money and security transfers. SWIFT is a vast messaging network banks and other financial institutions use to send and receive information such as money transfer instructions quickly, accurately and securely.
More than 11,000 global SWIFT member institutions sent an average of 42 million messages per day through the network in 2021, representing an increase of 11.4% over 2020.
In this article, we explore what SWIFT does, how it works, and how it makes money.
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a member-owned cooperative that provides safe and secure financial transactions for its members.
This payment network allows individuals and businesses to receive electronic or card payments, even if the customer or seller uses a different bank than the payee.
SWIFT works by assigning each member institution a unique ID code that identifies not only the name of the bank but the country, city and branch.
In February 2022, the U.S. And the European Union removed some major Russian banks from SWIFT, deepening its economic sanctions on Russia over its operations in Ukraine.
inside a swift transaction
SWIFT is a messaging network used by financial institutions to securely transmit information and instructions through a standardized system of codes. Although SWIFT has become an important part of the global financial infrastructure, it is not itself a financial institution: SWIFT does not hold or transfer assets. Rather, its usefulness lies in its power to facilitate secure, efficient communication between member institutions.
SWIFT assigns each financial organization a unique code consisting of either eight characters or 11 characters. The codes are called bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code interchangeably. To understand how the code is assigned, let’s look at UniCredit Banca, an Italian bank headquartered in Milan. It contains the eight-character SWIFT code UNCRITMM.5 . Is
First four characters: Institution code (UNCR for UniCredit Banka)
Next two characters: country code (IT for country Italy)
Next two characters: location/city code (MM to match)
The last three characters: are optional, but organizations use them to specify codes for individual branches.
Let’s say a Bank of America (BAC) branch customer in New York wants to send money to his friend who is a bank at the UniCredit Banca branch in Venice. New York customers can visit their Bank of America branch with their friend’s account number and Unicredit Banka’s unique SWIFT code for their Venice branch.
Bank of America will send the payment transfer SWIFT message to the UniCredit Banca branch on the secure SWIFT network. When UniCredit Banca receives a SWIFT message about an incoming payment, it will clear the money and credit it to the Italian friend’s account.
As powerful as Swift is, keep in mind that it is only a messaging system. SWIFT does not own any funds or securities, nor does it manage client accounts.6
world before swift
Prior to SWIFT, Telex was the only available means of message confirmation for international fund transfers. Telex was hampered by low speeds, security concerns, and a free messaging format. In other words, Telex did not have a unified system of codes like SWIFT to name banks and describe transactions. Telex senders had to describe each transaction in sentences which were then interpreted and executed by the receiver. This caused many human errors, as well as slow processing times.7
To address these problems, the SWIFT system was formed in 1973.8, with six major international banks forming a cooperative to operate a global network that would transfer financial messages in a secure and timely manner.9
Why is Swift dominant?
According to the London School of Economics, “support for shared networks … began to acquire institutional form … in the late 1960s, when the Société Financiere European (SFE), a consortium of six major banks based in Luxembourg and Paris ), launched a ‘message-switching project.'” 10
Then SWIFT was established in 1973 with 239 banks in 15 countries. By 1977, it had expanded to 518 institutions in 22 countries. In 2022, there are over 11,000 institutional members from over 200 countries and territories.11
Although there are other messaging services such as Fedwire, Ripple and Clearing House Interbank Payment System (CHIPS), SWIFT continues to maintain its dominant position in the market. Its success can be attributed to how it constantly adds new messaging codes to broadcast various financial transactions and to protect its platform.
Although SWIFT was introduced primarily for simple payment instructions, it now sends messages for a wide variety of operations, including security transactions, treasury transactions, business transactions, and system transactions. In the latest SWIFT report, data from January 2022 showed that 44.5% of SWIFT traffic is still for payment-based messages, while 50.6% represents security transactions, and the rest of the traffic is Treasury, business and system transactions. flows in.12
Swift’s global dominance has made it an important consideration in geopolitics. In 2012, the European Union disconnected banks in Iran from the SWIFT system. In February 2022, US and EU leaders agreed to delist some banks in Russia from SWIFT.
In the beginning, the SWIFT founders designed the network only to facilitate communication regarding Treasury and correspondent transactions. The robustness of the message format design allowed for enormous scalability through which Swift gradually expanded to provide services to:
Brokerage Institute and Trading House
asset management companies
Corporate Business House
Treasury market participants and service providers
forex and currency broker131415
Services Swift Offers
The SWIFT system provides a number of services that help businesses and individuals complete seamless and accurate business transactions. Some of the services offered are listed below.
The SWIFT connection enables access to a wide variety of applications, including real-time instruction matching for Treasury and foreign exchange transactions, the banking market infrastructure for processing payment instructions between banks, and payment, securities, foreign exchange and foreign exchange transactions. securities market infrastructure to process clearing and settlement instructions. and derivatives transactions.16
Swift recently introduced Dashboards and Reports
utilities that enable its clients to get a dynamic, real-time view of monitoring the messages, activity, trade flow, and reporting.17 The reports enable filtering based on region, country, message types, and related parameters.
Aimed at services around financial crime compliance, SWIFT offers reporting and utilities for Know Your Customer (KYC), sanctions, and anti-money laundering (AML).16
Messaging, connectivity, and software solutions
The core of the SWIFT business resides in providing a secure, reliable, and scalable network for the smooth movement of messages. Through its various messaging hubs, software, and network connections, SWIFT offers multiple products and services that enable its end clients to send and receive transactional messages.
How Does SWIFT Make Money?
SWIFT is a cooperative organization owned by its members.18 Members are categorized into classes based on share ownership.19 All members pay a one-time joining fee plus annual support charges that vary by member classes.
SWIFT also charges users for each message based on message type and length. These charges also vary depending upon the bank’s usage volume; different charge tiers exist for banks that generate different volumes of messages.20
In addition, SWIFT has launched additional services as described above. These are backed by the long history of data maintained by SWIFT. These include business intelligence, reference data, and compliance services and offer SWIFT other income streams.16
Challenges for SWIFT
The majority of SWIFT clients process huge transactional volumes for which manual entry of instructions is not practical. The need for the automation of SWIFT message creation, processing, and transmission is growing. However, this comes at a cost and increased operational overhead.
Although SWIFT has been successful in providing software for automation, that too comes at a cost. SWIFT may need to tap into these problem areas for the majority of its client base. Automated solutions within this space may bring in a new stream of income for SWIFT and keep clients engaged in the long run.
SWIFT and Sanctions
Because of their reliance on SWIFT to conduct fast, seamless, secure communication, countries around the world have an incentive to remain in good standing with the organization. SWIFT is overseen by central banks from Group of Ten (G10) countries, but it is a neutral organization operating for the benefit of all of its members. In recent years, the possible use of SWIFT membership as a potential sanction against members has emerged multiple times. In 2012, for example, the European Union passed a sanction against Iran that compelled SWIFT to disconnect sanctioned Iranian banks.
More recently, leaders from the U.K., EU, U.S., and Canada announced selected banks in Russia would be disconnected from SWIFT over its February 2022 invasion of Ukraine.21
The Bottom Line
SWIFT has retained its dominant position in the global processing of transactional messages. It has recently forayed into other areas, such as offering reporting utilities and data for business intelligence, which indicates its willingness to remain innovative. In the short- to midterm, SWIFT seems poised to continue dominating the market.
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