12/5/22, 8:40 AM How the SWIFT Banking System Works

PERSONAL FINANCE

BANKING

How the SWIFT Banking System Works

7 minute and 45 second read time
By
SHOBHIT SETH
Updated July 07, 2022

Reviewed by
KHADIJA KHARTIT
Fact checked by
HANS DANIEL JASPERSON

What Is the SWIFT Banking System?

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 banks and other financial institutions use to quickly,
accurately, and securely send and receive information, such as money transfer
instructions.

More than 11,000 global SWIFT member institutions sent an average of 42

million messages per day through the network in 2021, marking an increase of
11.4% over 2020. [1]

In this article, we explore what SWIFT does, how it works, and how it makes
money.

KEY TAKEAWAYS
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 take
electronic or card payments even if the customer or vendor uses a
different bank than the payee.
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SWIFT, today, is the largest and most streamlined method for

international payments and settlements.
SWIFT works by assigning each member institution a unique ID code (a
BIC number) that identifies not only the bank name but the country,
city, and branch.
SWIFT has been used to impose economic sanctions, such as on bad
actors like Iran and Russia.

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.
Although SWIFT has become a crucial part of global financial infrastructure, it is
not a financial institution itself: SWIFT does not hold or transfer assets. Rather,
its utility lies in its power to facilitate secure, efficient communication between
member institutions.

SWIFT assigns each financial organization a unique code that has either eight
characters or 11 characters, known as a bank identifier code, or BIC. The BIC
may also go by the terms SWIFT code, SWIFT ID, or ISO 9362 code. [2] To
understand how the code is assigned, let’s look at the Italian bank UniCredit
Banca, headquartered in Milan. It has the eight-character SWIFT code
UNCRITMM. [3]

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12/5/22, 8:40 AM How the SWIFT Banking System Works

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 them to assign codes
to individual branches.

Let's assume a Bank of America Corp. branch customer in New York wants to
send money to their friend who banks at the UniCredit Banca branch in Venice.
The New York customer can walk into their Bank of America branch with their
friend’s account number and UniCredit 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. When 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. [4]

Tip: When making an international money transfer, the SWIFT/BIC
code is used to identify your particular bank. Your IBAN identifies
your individual bank account used at that bank.

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 that were then
interpreted and executed by the receiver. This led to many human errors, as
well as slower processing times. [5]  

To circumvent these problems, the SWIFT system was formed in 1973. [6] Six
major international banks formed a cooperative society to operate a global

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network that would transfer financial messages in a secure and timely manner.
[7]

Why Is SWIFT Dominant?

According to the London School of Economics, "Support for a shared
network...began to achieve institutional form...in the late 1960s, when the
Société Financière Européenne (SFE, a consortium of six major banks based in
Luxembourg and Paris), initiated a 'message-switching project.'" [8]

SWIFT was then founded in 1973 with 239 banks in 15 countries. By 1977, it
expanded to 518 institutions in 22 countries. In 2022, there were more than
11,000 institutional members hailing from more than 200 countries and
territories. [9]

Although there are other message services like Fedwire, Ripple, and Clearing
House Interbank Payments System (CHIPS), SWIFT continues to retain its
dominant position in the market. Its success may be attributed to how it
continually adds new message codes to transmit different financial
transactions and to the security of its platform.

Though SWIFT primarily started for simple payment instructions, it now sends
messages for a wide variety of actions, including security transactions, treasury
transactions, trade transactions, and system transactions. In Swift's latest
report, from January 2022, data showed 44.5% of SWIFT traffic is still for
payment-based messages, while 50.6% represents security transactions, and
the remaining traffic flows to Treasury, trade, and system transactions. [10]

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 for the huge scalability
through which SWIFT gradually expanded to provide services to the following:

Banks
Brokerage institutes and trading houses

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Securities dealers
Asset management companies
Clearinghouses
Depositories
Exchanges
Corporate business houses
Treasury market participants and service providers
Individuals or businesses making international wires or money transfers
Foreign exchange and money brokers [11] [12] [13]

SWIFT Services
The SWIFT system offers many services that assist businesses and individuals to
complete seamless and accurate business transactions. Some of the services
offered are listed below.

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. [14]

Business Intelligence
SWIFT has recently introduced dashboards and reporting utilities that enable
its clients to get a dynamic, real-time view of monitoring the messages, activity,
trade flow, and reporting. [15] 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 for Know Your Customer (KYC), sanctions, and anti-money
laundering (AML). [14]

Messaging, Connectivity, and Software Solutions

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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. [16] Members are
categorized into classes based on share ownership. [17] 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. [18]

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. [14]

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 Economic 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
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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 economic

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. And in 2022, leaders from the U.K., EU,
U.S., and Canada announced that selected banks in Russia would be
disconnected from SWIFT over its invasion of Ukraine. [19]

Important: As of Feb. 28, 2022, the United States, EU, U.K., and
Canada have agreed to levy economic sanctions against Russia in
response to its invasion of Ukraine by removing select Russian banks
from the SWIFT messaging system. Japan has announced it will do
the same. [20]

What is SWIFT in simple terms?

Behind most international money and security transfers is the Society for
Worldwide Interbank Financial Telecommunications, known as the SWIFT
system. SWIFT is a vast messaging network banks and other financial
institutions use to quickly, accurately, and securely send and receive
information, such as money transfer instructions.

How important is SWIFT to global finance?

SWIFT has become a crucial part of the global financial infrastructure. More
than 11,000 global SWIFT member institutions sent an average of 42 million
messages per day through the network in 2021, marking an increase of 11.4%
over 2020. [21]

Who owns the SWIFT system?

SWIFT is a cooperative company that is owned and controlled by its
shareholders (certain member financial institutions), representing some 3,500
such firms from across the world. SWIFT is overseen by the G-10 central banks.
[17]

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Do all banks use SWIFT?

No. In fact, many smaller banks in the U.S. and most credit unions are not
members of the SWIFT network.

Can banks transfer money without SWIFT?

Yes, but doing so relies on slower, legacy systems to process the payments
(often relying, in part, on manual settlement). This makes international
payments more difficult, slower costlier, and uncertain.

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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Related Terms
Society for Worldwide Interbank Financial
Telecommunications (SWIFT)
Society for Worldwide Interbank Financial Telecommunications is a cooperative providing
secure messaging for fund transfers across national borders.
more

What Is a Wire Transfer? How it Works, Safety, and Fees

A wire transfer is an electronic transfer of funds across a network administered by
hundreds of banks around the world. more

Instructing Bank
Responsible for initiating the funds transfer process, an instructing bank is one of the
banks playing a role in funds transfers between two parties.
more

Correspondent Bank: Definition and How It Works

A correspondent bank is a financial institution authorized to provide services on behalf of
another financial institution.
more

Bank for International Settlements (BIS)

The Bank for International Settlements is an international financial institution that serves
as a bank and forum for national central banks.
more

What Is an International Bank Account Number (IBAN) and

How Does It Work
An international bank account number (IBAN) is a standard numbering system, developed
to identify bank accounts from around the world.
more

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