Hello, dear readers of the Insurancevlog ! Need to transfer money abroad? Today it is easy to go to a bank and transfer money anywhere in the world, but how does it work? Behind most international money and securities transfers is the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system . SWIFT is an extensive messaging network used by banks and other financial institutions to send and receive information, such as money transfer instructions, quickly, accurately, and securely.
In 2020, over 11,000 SWIFT member organizations sent over 35 million transactions per day over the network. In March 2021, the organization registered an average of 42.5 million messages per day since the beginning of the year.
In this article, we’ll take a look at what SWIFT does, how it works, and how it makes money.
Inside a SWIFT transaction
SWIFT is a messaging network that financial institutions use to securely transmit information and instructions through a standardized code system.
SWIFT assigns each financial institution a unique code consisting of 8 or 11 characters. The code is interchangeably called Bank Identifier Code (BIC), SWIFT Code, SWIFT Identifier, or ISO 9362 Code. To understand how the code is assigned, let’s turn to the Russian bank Sberbank, headquartered in Moscow. It has an 8-digit SWIFT code SABRRUMM.
- First four characters: institution code (SABR for Sberbank)
- Next two characters: country code (RU for country Russia)
- The next two characters are the location/city code (MM for Moscow).
- The last three characters: are optional, but organizations use them to assign codes to individual branches.
Suppose a Bank of America (BAC) New York branch customer wants to send money to a friend who works at a Sberbank branch in Moscow. A customer in New York can log into their Bank of America branch by providing their friend’s account number and Sberbank’s unique SWIFT code for their Moscow branch.
Bank of America will send a SWIFT message about the payment transfer to the UniCredit Banca branch via a secure SWIFT network. As soon as Unicredit Banca receives the SWIFT message of 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 just a messaging system. SWIFT does not own any funds or securities and does not manage client accounts.
The world before SWIFT
Prior to the advent of SWIFT, telex was the only available means of confirming a message for international funds transfers. Telex was hampered by slow speeds, security issues, and a loose message format. In other words, Telex did not have a single system of codes, like SWIFT, for naming banks and describing transactions. Telex senders had to describe each transaction in sentences, which were then interpreted and executed by the receiver. This has led to many human errors.
To get around these problems, the SWIFT system was created in 1973. Six major international banks have formed a cooperative society to operate a global network that ensures the safe and timely transmission of financial messages.
Why is SWIFT dominating?
According to the London School of Economics, “Support for the common network…began to take institutional shape…in the late 1960s, when the Société Financière Européenne (SFE, a consortium of six large banks based in Luxembourg and Paris) initiated the “Message Switching Project.”
Then in 1973 SWIFT was founded with 239 banks in 15 countries. By 1977 it had expanded to 518 institutions in 22 countries.
While there are other messaging services such as Fedwire, Ripple, and the Interbank Payments System (CHIPS), SWIFT continues to maintain its dominant position in the market. Its success is due to the fact that it constantly adds new message codes for the transmission of various financial transactions.
While originally used for simple payment instructions, SWIFT now sends messages for a wide variety of activities, including securities transactions , treasury transactions, trade transactions, and system transactions. Nearly 50% of SWIFT traffic still comes from payment messages, 47% from securities transactions, and the remaining traffic goes to treasury, trading and system transactions.
Who uses SWIFT?
Initially, the founders of SWIFT designed the network to facilitate the exchange of information only about treasury and correspondent transactions. The robustness of the message format design allowed for tremendous scalability, through which SWIFT gradually expanded to provide services to the following entities:
- Brokerage institutions and trading houses
- Securities Dealers
- Asset management companies
- Clearing houses
- Currency exchange
- corporate business houses
- Treasury Market Participants and Service Providers
- Foreign exchange and money brokers
Services offered by SWIFT
The SWIFT system offers many services that help businesses and individuals make smooth and accurate business transactions. Some of the services offered are listed below.
SWIFT connections provide access to a variety of applications, including real-time instruction matching for treasury and forex transactions, banking market infrastructure for processing payment instructions between banks, and securities market infrastructure for processing clearing and settlement instructions for payments, securities , forex , and operations with derivatives .
SWIFT has recently introduced dashboards and reporting utilities that allow clients to gain a dynamic, real-time view of monitoring messages, activity, trade flow, and reporting. The reports allow you to filter by region, country, message types, and related parameters.
Focused on financial crime compliance services, SWIFT offers reporting and utilities such as Know Your Customer (KYC), Sanctions and Anti-Money Laundering (AML).
Messaging, communication and software solutions
The essence of SWIFT’s business is to provide a secure, reliable, and scalable network for messages to move seamlessly. Through its various messaging centers, software, and network connections, SWIFT offers many products and services that enable end customers to send and receive transactional messages.
How does SWIFT make money?
SWIFT is a cooperative society owned by its members. Members are divided into classes based on shareholding. All members pay a one-time entry fee plus annual support fees, which vary by class of member.
SWIFT also charges users per message based on the type and length of the message. These fees also vary depending on the amount of bank usage; there are different fee levels for banks that generate different message volumes.
In addition, SWIFT launched additional services. This is supported by the long history of data backed by SWIFT. These include business intelligence, reference data and compliance services, and other sources of revenue for SWIFT.
Problems for SWIFT
Most SWIFT clients have huge transaction volumes for which manual entry of instructions is impractical. There is a growing need to automate the creation, processing and transmission of SWIFT messages. However, you have to pay for this and increase operating costs.
While SWIFT is successful in providing automation software, it also comes at a cost. SWIFT may need to exploit these problem areas for much of its customer base. Automated solutions in this area can bring SWIFT a new source of income and keep customers engaged in the long term.
SWIFT has maintained its dominant position in the global processing of transactional messages. It has recently branched out into other areas, such as providing reporting tools and business intelligence data, which shows its commitment to staying innovative. In the short to medium term, SWIFT looks set to continue dominating the market.
- The 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 accept electronic or card payments, even if the customer or provider uses a different bank than the payee.
- SWIFT works by assigning each participating institution a unique identification code that identifies not only the name of the bank, but also the country, city and branch.
And that’s all for today about how the SWIFT system works . I hope the article was useful to you. Share the article on social networks and instant messengers and bookmark the site. Good luck and see you on the pages of the Insurancevlog project !