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

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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.
Key Takeaways
- What is SWIFT in banking? SWIFT refers to a messaging network between financial institutions that helps navigate international transactions. SWIFT itself is not responsible for the transactions – it just gives instructions on how the bank or other entity should proceed.
- What is the SWIFT code? SWIFT code is a unique number that identifies a specific branch of a financial institution.
- Are there alternatives to SWIFT? While there are alternatives, they are either not as widely used as SWIFT, or they have some other flaws that make them secondary to the SWIFT banking system. Those include international ACH transfers, international card networks or blockchain.
- Can every financial institution access SWIFT? No, the process of joining the SWIFT network is actually quite rigorous, and a financial institution needs to meet several criteria to be invited to join it.
- How did the SWIFT banking system come to be? The network was established in 1973 in Brussels by 239 participating financial institutions who recognized the need for change from the Telex technology.
What Is the SWIFT Meaning in Banking?
Let’s start from the beginning – what does SWIFT mean in banking? SWIFT stands for Society for Worldwide Interbank Financial Telecommunication and was first introduced 40 years ago. It’s 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 is, therefore, known as the most protected system in history.
How Does the SWIFT System Work?
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 use the 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?
Although SWIFT is a globally used network to send international payments, it’s not the only option available to businesses who want to expand to foreign markets.
The first one is Global ACH, also known as International ACH Transfer. When processing foreign payments this way, you use the other country’s payment rails to move money between the US and the foreign country. Those include EFT, BACS, and SEPA (Single Euro Payment Area), especially popular in Europe.
Another option is international card networks like VISA and Mastercard. Payment processing using this method is convenient and secure, not to mention widely used, as a significant portion of society has either a debit or a credit card. However, there’s one disadvantage to it: card payments might be subject to conversion fees, among other charges.
Finally, we also have blockchain and cryptocurrency. When you’re a blockchain user, you are not restrained by the same limitations as traditional international transactions – users can pay each other directly, minimizing the settlement times and processing costs.
Blockchain transactions can also be used to move around fiat currencies – and the process is pretty simple. You start by exchanging a fiat currency for a stablecoin. The stablecoin is then transferred to the other person’s account via blockchain, from where they can convert it into their preferred fiat currency.
Is the SWIFT Code the Same as the IBAN Code?
Although the two codes are related to your bank account, the SWIFT code and the IBAN (International Bank Account Number) code are not the same.
As you can see, the main difference between the two is that 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.
So, the short answer is no – not every financial institution has access to the SWIFT banking system.
What Was Before the SWIFT Banking System?
Financial transactions weren’t always that easy and quick. Prior to the SWIFT network, banks had to rely on Telex technology. 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. That’s why, in 1973 Brussels, 239 participating financial institutions came together to fund SWIFT, recognizing the need for innovation.
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 – will they be able to eventually replace SWIFT as the main way of sending international payments? Only time will tell.
SWIFT is just one of the payment processing elements. There’s much more that goes into that and having a reliable payment processing agent is crucial to ensuring the process goes as smoothly – and that’s precisely what My Payment Savvy is.