According to analysts, in 2012, it was observed that SWIFT facilitated up to $6 trillion per day. In 2015, more than 6.1 billion payment instructions were sent through the network. Today, it is the world’s most significant electronic payment tracking system. However, contrary to what most people think, SWIFT does not do any of the fund transfers. As a matter of fact, it doesn’t even come into contact with the money. So, what is SWIFT? How does it work?
What is SWIFT?
Fully known as the Society for Worldwide Interbank Financial Telecommunication, it is a bank to bank payment instruction system. The standardized language communicates payment information from one institution to another. This communication is sent through a secure network that is available in 212 countries.
The SWIFT system can be used by money brokers, clearing systems, security broker-dealers, and even non-bank financial institutions, amongst others.
A Brief History of SWIFT
SWIFT was founded in 1973 in Brussels. It was a predecessor of Telex. Earlier, during the ear of World War II, Telex facilitated the formal way to send and receive data. The military was first to come up with this concept before financial entities adopted it.
Fast forward to the 70s, Telex was relatively slow, and its security didn’t match the then threat levels. During this period, electronic fund transfer systems were introduced. This move was aimed to eliminate paper in the processing of payments.
It was during this period that a group of banks launched SWIFT in 1973. It was a superior alternative to Telex. Being faster and safer, over 500 institutions in 22 countries adopted this newer system. And that’s how it grew to become the leading tracking system in the world.
How Does SWIFT Works?
This system utilizes a set of codes that indicate the source, destination, and means of a transfer. These codes comprise those of an institution, it’s country of origin, location, and Branch. In one way, it is similar to the routing numbers we use here in the US.
SWIFT doesn’t send money. It only facilitates communication between institutions that have an established working relationship. Each institution or bank is required to have a dedicated interface that is isolated from other networks for safety purposes.
Employees in these banks can log in and send messages manually to other banks. This aspect can be automated to improve service delivery. The message is then passed on a terminal and sent to the recipient’s country. The recipient then sends confirmation before a transfer is completed.
How SWIFT Moves Money Internationally
As mentioned earlier, for an international transfer to be made, the two banks must have a relationship. For example, let’s say two clients wish to transfer funds in the same bank, yet they are located in different countries. On behalf of the sender, Branch A will ask Branch B to transfer the funds. Branch B will then tell the other Branch to initiate the transaction via SWIFT. Branch A will get a notification of confirmation, and the funds will be wired to the receiver.
The transfer can also occur through looping to other institutions should there not exist a branch in the recipient’s country. The corresponding bank will also have to use a SWIFT system to carry out the transfer.
To facilitate these services, SWIFT gets a cut for every message sent. These fees are used to set up equipment, cater to consultation, security, and other factors that ensure their systems are on. The process is dialed in and many entities across the globe depend on the service – we’ll be eagerly watching to see how this service catapults in a new age of technology and instant transfers.