SWIFT Banking System: What Is It and How Does It Work?

Most international money wires have been possible with the infamous SWIFT code. If you’re dealing with international payments regularly, you must know of its existence. However, many of you might be faintly aware of the code’s purpose.

SWIFT is widely used in almost every country, with just a few exceptions, as it’s one of the most secure methods of sending international payments all over the world.

This article discusses the definition and purposes of the SWIFT network system. By the end of this brief guide, the SWIFT code won’t be a stranger but a sign of reliable transaction of your hard-earned money.

What Is the SWIFT Banking System?

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication and was first introduced 40 years ago. SWIFT is also a global financial messaging network that is used by 11,000 financial institutions to make over 30 million transactions daily.

The SWIFT messaging system sends encrypted information between banks worldwide and therefore is known for being the most protected system ever known.

How Does the SWIFT System Work?

How Is Money Transferred?

To understand how the SWIFT network works, you need to know how money is actually sent from bank to bank. To transfer money, you need the bank account number of the recipient, their name, and – obviously – available funds. However, unlike popular belief, your money isn’t actually ‘sent’ physically to the other bank.

What happens is that financial institutions have agreements that are overseen by central banks. Whenever money leaves one institution, the bank simply registers the reduction in the amount of money they owe you. Following this logic, the recipient’s bank adjusts its records of the account that received the money.

SWIFT Payments Abroad

International money transfers with SWIFT work similarly to those conducted domestically. The operation is based on orders that are communicated between financial institutions. Just like when you send money locally, your funds are adjusted internally but never physically transferred to another institution.

The only difference is that this communication process is securely arranged through the SWIFT network. Every financial institution has a unique SWIFT number comprised of 8 or 11 characters. Each SWIFT code is a combination of:

• Institute code
• Country code
• Location code (city code)
• Branch code (optional)

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a messaging system that communicates transactions, so when it comes to transferring a different currency, one of the banks will be responsible for the currency exchange.

International Transaction to a Commercial Bank

International money transfers always charge a fee, but there are no additional costs when the two parties have a mutual agreement. In such a case, the transfer is completed once the SWIFT message reaches the destination bank.

International Transaction with an Intermediary Bank

In a different type of scenario where two different financial institutions have no agreement, an intermediary bank steps in. The intermediary bank is the one binding the two parties and facilitates the process for an additional fee.

SWIFT Code Example

To illustrate what a SWIFT code looks like, we will take an example of an Italian bank – Unicredit Banca. Its SWIFT code is UNCRITMM where:

• UNCR stands for Unicredit Bank
• IT stands for Italy
• MM stands for Milan (head office)
• XXX – Additional three characters can be added for a specific bank branch

Example of SWIFT Transfer

For consumers, this is a straightforward process of transferring money to an international bank account number. All you need to have is your friend’s account number and their SWIFT code for the branch. Additionally, an international transfer may require other details like full name and address.

On the other side of the transaction is the correspondent bank which uses the SWIFT messaging network to convey the request. The recipient’s bank registers the message and credits the money to your friend’s account.

Therefore, any SWIFT transaction is effortless and is mainly done by the platform rather than humans (unlike the previous messaging system, which we will discuss further in this article).

Who Is SWIFT Network For?

The secure SWIFT network has become available to many financial institutions other than just banks. It has advanced the previous system that required a lot of manual input and was rather time-consuming to attend to every client’s needs.

The SWIFT founders’ idea was initially to facilitate financial messages more efficiently than the predecessor. However, soon it has expanded and is largely used by other financial institutions:

• Corporate business houses
• Investment managers
• Foreign exchange
• Clearing systems
• Money brokers
• Depositories

What Are the Alternatives to the SWIFT System?

It’s hard to answer this question because some alternatives that exist are geographically limited. In comparison to SWIFT, they are either not globally used or don’t provide the same level of security.

One of the alternatives is a fax machine. Anybody could fax a cheque, but now it may seem like stone age technology. Another no less appealing method is by phone, but we doubt there is anyone reading a card number to a friend over the phone.

Although the two options seem to be rather slow, they are at least secure, unlike the next alternative – blockchain. And lastly, there is an Application Programming Interface (API), a breakthrough innovation that could potentially replace SWIFT. Just like the SWIFT system, APIs are also a messaging system that utilizes software.

Is SWIFT Code the Same as IBAN Code?

Although the two codes are related to your bank account, the SWIFT code and the IBAN code are not the same.

A SWIFT code (also known as a Bank Identifier Code or BIC) is a unique code that identifies a specific bank or financial institution. It is used for international wire transfers and other financial transactions. In short, SWIFT codes are unique characters that pinpoint the exact bank (a branch or headquarter) which is involved in the transaction.

An IBAN (International Bank Account Number), on the other hand, is a unique identifier for an individual bank account. It is used to identify a specific account when sending or receiving international payments. IBANs vary in length depending on the country, but they are usually between 16 and 34 characters long and include both letters and numbers.

While both the SWIFT code and the IBAN are used in international transactions, they serve different purposes. The SWIFT code identifies the bank or financial institution, while the IBAN identifies the specific account.

Do All Financial Institutions Have Access to the SWIFT System?

There are about 11,000 SWIFT members, which makes the platform quite dominant in the market. However, it doesn’t mean it is indeed universal for everyone. Becoming a SWIFT member isn’t as simple as making an international transaction. On the contrary, a financial organization has to go through a rigorous application process.

Becoming a SWIFT member isn’t obligatory either. As a matter of fact, smaller banks don’t need to join the SWIFT network to operate in the US.

To join the network, SWIFT has a few rules that include:

• A financial institution must be a licensed bank or financial institution
• It must have a certain level of capital and creditworthiness
• It must also demonstrate that it has the technical capability to connect to the SWIFT network and adhere to SWIFT’s security and operational standards

To join SWIFT, a financial institution should receive an invitation, as not everyone is eligible to join the network. Fees are another factor that is discussed with a SWIFT representative before joining their membership.

In summary, not all financial institutions have access to the SWIFT system. Only those that meet the membership criteria and successfully go through the application process can become members and use the network.

What Was Before SWIFT?

Financial transactions weren’t always that easy and quick. Prior to the SWIFT network, banks had to rely on telex technology. So, to send or receive a payment, the information was transmitted manually, meaning a telex sender had to describe the transaction in sentences.

You can imagine how hard it must have been back then. Some important details could be lost in translation or ambiguously explained by the sender. A receiver could also make a mistake or two when processing the payment. This system was slow and inefficient, and there was no standardized format for the messages, which often led to errors and misunderstandings.

Telex technology was a failure, but it gave the beginning to SWIFT. Since the old-fashioned and paper-based system had to be changed, international banks gathered up to come up with the best solution. So far, their solution hasn’t disappointed, but neither did it majorly improve over the past few years.

Final Word

The SWIFT messaging system is likely to stay with banks and other financial institutions for many years. It is undoubtedly secure and encrypted, and it has rarely caused any trouble to its clients. Serving banks for 40 years has only strengthened its reputation and solidified the platform as the number one means to transfer financial messages globally.

However, it doesn’t mean it is the only option available. A handful of competitors are fighting their way through to recognition. By this, we mean blockchain and APIs. Although at relatively early stages, they both can revolutionize the financial market and eventually replace SWIFT, just like it once replaced Telex.