How The SWIFT System Works

how swift payment works

Need to transfer money overseas? Today, it is easy to walk into a bank and transfer money anywhere around the globe. But how does this happen? Behind most international money and security transfers is the SWIFT system, a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information such as money transfer instructions. Every day, nearly 10,000 SWIFT member institutions send approximately 24 million messages on the network. In this article we will explore what SWIFT does, how it works, and how it makes money.

What is SWIFT?

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes.

SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters. The code is called interchangeably the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code. (See related: What's the difference between an IBAN and a swift code ?) To understand how the code is assigned, let’s look at Italian bank UniCredit Banca, headquartered in Milan. It has the 8-character SWIFT code UNCRITMM.

  • First four characters: the institute code (UNCR for UniCredit Banca)
  • Next two characters: the country code (IT for the country Italy)
  • Next two characters: the location/city code (MM for Milan)
  • Last three characters: optional, but organizations use it to assign codes to individual branches. (The UniCredit Banca branch in Venice may use the code UNCRITMMZZZ.)

Assume a customer of a Bank of America branch in New York wants to send money to his friend who banks at the UniCredit Banca branch in Venice. The New Yorker can walk into his Bank of America branch with his friend’s account number and UnicaCredit Banca’s unique SWIFT code for its Venice branch. Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch over the secure SWIFT network. Once Unicredit Banca receives the SWIFT message about the incoming payment, it will clear and credit the money to the Italian friend’s account.

As powerful as SWIFT is, keep in mind that it is only a messaging system—SWIFT does not hold any funds or securities, nor does it manage client accounts.

The World Before SWIFT

Prior to SWIFT, Telex was the only available means of message confirmation for international funds transfer. Telex was hampered by low speed, security concerns, and a free message 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 every transaction in sentences which were then interpreted and executed by the receiver. This led to many human errors.

To circumvent these problems, SWIFT system was formed in 1974. Seven major international banks formed a cooperative society to operate a global network that would transfer financial messages in a secure and timely manner.

Why is SWIFT Dominant?

Within three years of introduction, SWIFT membership had increased to 230 banks across five countries. Although there are other message services like Fedwire, Ripple, and CHIPS, SWIFT continues to retain its dominant position in the market. Its success is attributed to how it continually adds new message codes to transmit different financial transaction.

While SWIFT started primarily for simple payment instructions, it now sends messages for

wide variety actions including security transactions and treasury transactions. Nearly 50 percent of SWIFT traffic is still for payment-based messages, but 43 percent now concern security transactions, and the remaining traffic flows to treasury transactions.

Who Uses SWIFT?

In in the beginning, SWIFT founders designed the network to facilitate communication about Treasury and correspondent transactions only. The robustness of the message format design allowed huge scalability through which SWIFT gradually expanded to provide services to the following:

• Banks

• Brokerage Institutes and Trading Houses

• Securities Dealers

• Asset Management Companies

• Clearing Houses

• Depositories

• Exchanges

• Corporate Business Houses

• Treasury Market Participants and Service Providers

• Foreign Exchange and Money Brokers

Services Offered by SWIFT

  • Applications—SWIFT connections enable access to a variety of applications which include real-time instruction matching for treasury and forex transactions, banking market Infrastructure for processing payment instructions between the banks, and securities market infrastructure for processing clearing and settlement instructions for payments, securities, forex, and derivatives transactions.
  • Business Intelligence—SWIFT has recently introduced dashboards and reporting utilities which enable the clients to get a dynamic, real-time view of monitoring the messages, activity, trade flow, and reporting. The reports enable filtering based on region, country, message types, and related parameters.
  • Compliance Services—Aimed at services around financial crime compliance, SWIFT offers reporting and utilities like Know Your Customer (KYC ), Sanctions, and Anti-Money Laundering (AML ). (See related: US And EU Sanctions Against North Korea )
  • Messaging, Connectivity, and Software Solutions—The core of 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 which enable its end clients to send and receive transactional messages.

How Does SWIFT Make Money?

SWIFT is a cooperative society owned by its members. Members are categorized into classes based on share ownership. All members pay a one-time joining fee plus annual support charges which 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.

In addition, SWIFT has launched new services. These are backed by the long history of data maintained by SWIFT. These include business intelligence, reference data, and compliance services and offer other income streams for SWIFT.

Challenges for SWIFT

The majority of SWIFT clients have huge transactional volumes for which manual entry of instructions is not practical. The need for automation for SWIFT message creation, processing, and transmission is growing. However, this comes at a cost and operational overhead. Although SWIFT has been successful in providing software for the same, 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 new stream of income for SWIFT and keep clients engaged in the long run.

The Bottom Line

SWIFT has retained its dominant position in the global processing of transactional messages. It has recently forayed into newer areas offering reporting utilities and data for business intelligence, which indicates its willingness to remain innovative. In the short to mid term, SWIFT seems poised to continue dominating the market.


Category: Bank

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