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How The SWIFT System Works

SWIFT is a cooperative network that allows financial institutions to securely send payment and other transaction messages. It assigns each member a unique identification code and uses these codes to route messages between members. When a customer wants to send money overseas, their local bank sends a SWIFT message to the receiving bank with the transaction details, and the receiving bank then deposits the funds in the recipient's account. SWIFT has over 11,000 member institutions that send around 33 million messages per day through its secure network.

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538 views

How The SWIFT System Works

SWIFT is a cooperative network that allows financial institutions to securely send payment and other transaction messages. It assigns each member a unique identification code and uses these codes to route messages between members. When a customer wants to send money overseas, their local bank sends a SWIFT message to the receiving bank with the transaction details, and the receiving bank then deposits the funds in the recipient's account. SWIFT has over 11,000 member institutions that send around 33 million messages per day through its secure network.

Uploaded by

yadavraje
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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How the SWIFT System Works

SWIFT for Electronic Funds Transfers


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 Society for Worldwide
Interbank Financial Telecommunications (SWIFT) system. SWIFT is 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 11,000 SWIFT member institutions send approximately 33.6
million transactions through the network.1 2 In this article, we will explore what
SWIFT does, how it works, and how it makes money.

KEY TAKEAWAYS

 Society for Worldwide Interbank Financial Telecommunications (SWIFT) is


member-owned cooperative that provides safe and secure
financial transactions for its members.
 This payments network allows individuals and businesses to take
electronic or card payments even if the customer or vendor uses a different
bank that the payee.
 SWIFT works by assigning each member institution a unique ID code that
identifies not only the bank name but country, city, and branch.
Inside a SWIFT Transaction
SWIFT 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 interchangeably called the bank
identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code.3 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.4

 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 York customer 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.5

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.6

To circumvent these problems, the SWIFT system was formed in 1973.7 Six
major international banks formed a cooperative society to operate a global
network that would transfer financial messages in a secure and timely manner.8

Why is SWIFT Dominant?


Within three years of introduction, SWIFT membership had increased to 239
banks across 15 countries.7 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 transactions.

While SWIFT started primarily for simple payment instructions, it now sends
messages for a wide variety of actions, including security transactions and
treasury transactions. Nearly 50% of SWIFT traffic is still for payment-based
messages, but 47% now concern security transactions, and the remaining traffic
flows to treasury transactions.2

Who Uses SWIFT?


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:9 1 0 1 1
 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


The SWIFT system offers many services that assist businesses and individuals
to complete seamless and accurate business transactions. Some of the services
offered include:

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 banks, and securities
market infrastructure for processing clearing and settlement instructions for
payments, securities, forex, and derivatives transactions.1 2

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.1 3 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).1 2

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.1 4 Members are
categorized into classes based on share ownership.1 5 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.1 6

In addition, SWIFT has launched additional 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.1 2

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 a 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 other areas, such as 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.

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