Guide

An in-depth look into SWIFT

Aurélien Gand
24
May 2023
0
min read

Swift is now 50 years old. The previously branded SWIFT has become the indisputable global messaging network used by financial institutions to communicate securely with each other. It is the largest and most secure payment messaging system in the world and is used by more than 11,000 financial institutions in over 200 countries.

What is Swift, exactly? Let's deep dive into what it does and how it works.

So what is Swift and who controls it?

Swift stands for Society for Worldwide Interbank Financial Telecommunications and was founded in 1973 to facilitate international payments. Its creation came in order to solve the issues faced when doing international transfers, which involved manual writing and reading of messages over Telex. Swift aimed at being faster, more reliable than what existed at that time.

Swift is owned by Swift SCRL, a cooperative owned by its member financial institutions. Swift SCRL is headquartered in Belgium and is managed by the Swift Board of Directors.

The Board of Directors consists of representatives from member banks and is responsible for setting the strategic direction of the organisation. It also oversees the organisation's management and ensures that the Swift network meets the needs of its users. The Board also has the authority to appoint the Chief Executive Officer, CFO, and other key executive positions.

It is important to note that Swift is not a payment system or a settlement system. It is then not subject to regulation as such by central banks or bank regulators.

However, it remains under central bank control as a critical service provider, with central banks of the G-10 nations (the Group of Ten: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States) and the European Central Bank overseeing the cooperative society. The goal is to ensure that potential risks to financial stability are properly managed.

Who uses Swift and what can Swift be used for?

Banks, financial institutions, governments and other organisations use Swift to transmit payment instructions securely and reliably. It is mostly used for international payments and money transfers, as well as for the exchange of securities and other financial transactions.

Swift is also used for various forms of communication between financial organisations, including payment investigations, cancellations, and amendments.

What is SwiftNet?

Swift can only exist with SwiftNet. SwiftNet is an application-level messaging service that connects financial institutions and businesses to the Swift payment network.

Over the years, innovative and customised solutions have to be put in place due to the rapid increase in traffic and changing user demands. Created in 2004, the IP-type protocol Swiftnet replaced an X.25 communication protocol, SWIFT II.

What are Swift codes, messages, and numbers?

Swift messages, codes, and numbers have become, over the years, the gold standards in the financial services industry, particularly in international transactions, enabling financial institutions to identify and communicate with each other.

This standardisation of bank identifiers particularly made Swift a breakthrough for worldwide financial transactions at the time.

A bank, country, region, and branch can all be identified within a Swift code, also called a BIC. The Swift codes of the banks are available online, and in some online banks, they are even already filled out when you input the recipient's IBAN number in the payment form.

When sending payments on behalf of their customers, financial institutions may submit a variety of customer transfer information to the receiving bank or payment processor via Swift. The following beneficiary information is often required: name of the recipient (business or individual)

  • address of the recipient (business or individual)

  • account number of the recipient. IBAN-formatted account numbers are typically used. IBAN begins with two country-code letters, two check digits, and then a string of letters and numbers. Although it differs from country to country, it is immediately recognisable.

  • payment purpose codes and other details

Can Swift transfers be processed in real time?

Swift transfers are not instant. They have to go through a set of procedures that typically takes 1-4 business days to complete:

  • Identification: customers are identified for anti-money laundering reasons.

  • Exchange rate: the bank or the money transfer company will detail their current exchange rates.

  • Sending: the bank or the money transfer service must receive the funds before the transfer is made.

  • Conversion and receiving: after the funds are received, they will be transferred into the required currency at the predetermined exchange rate, using the Swift network to reach the destination account.

Swift is improving on this matter, though. Swift introduced Global Payments Innovation (Swift gpi), an end-to-end transaction tracking technology, in 2017. The banks connected to this network give real-time information on the payment location and the collected fees, making the process completely transparent for both the clients and the payment institutions.

What are the challenges faced by Swift?

One of the main challenges is the cost of using the network. The fees charged by the network can be high, making it difficult for some businesses to use the network. Remember that Swift is only a communication channel for banks, so Swift users will have to pay their bank fees for international payments or payments in a foreign currency.

Banks will indeed handle the exchange for you if the recipient's account is in a different currency from the one you are transferring. The Swift message in this scenario will specify that the payment must be converted into a certain currency at a specific exchange rate. Payment conversion is never free. Exchange rates are not standardised, and exchange timing can be crucial if the rates are fluctuating.

As discussed above, another challenge is the speed of the network, which can still take up to four days for payments to be sent and received. This is due to the fact that these transfers frequently pass through many institutions and jurisdictions, requiring regulatory approval at several points of the transfer process. Swift then still requires some manual input in the message creation, processing, and transmission processes that also contribute to the limits of the system.

If Swift's dominant position is unquestionable after 50 years, it still has improvements to deliver to cope with an increasingly demanding international market.

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