SWIFT: Route to International Payments

• 29 May 2019 | 2300 Views | By Mint2Save

The era of international payments has evolved itself into a common household necessity. What used to be a rare type of transaction, was surrounded by strictest laws, has now descended to a rather casual income source for new generation entrepreneurs. While there are a few currencies that rule international scenario, almost all countries have a fully or partially fledged transaction norms for them.

Owing to the increasing volumes of transactions, globalisation and rise of third generation countries, global co-operation was required to monitor international transactions and ensure its usage is never misused. Enter SWIFT, a global co-operative for secure international financial transactions.

Let us understand SWIFT by breaking it down into series of questions:​​

Why was SWIFT formed?​

Imagine in the 1970s, if you had to transfer money to over long distances, the only process was TELEX, which was slow, cumbersome and wasn’t that secure to make it scalable for future needs and demands.​

That was when SWIFT founded to overcome the problem, seven major international banks joined hands in 1973 and formed a cooperative society to operate a global network that would transfer financial messages in a secure, convenient and “swift” manner. ​

In other words, it was formed to bring standardization in International payments and banking processes and to avoid confusion, foster co-operation in the finance world, thus leading to greater transparency, convenience, and security.​

What is SWIFT?​

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a messaging network and not a payment gateway, which the financial institutions use to securely transmit information and instructions through a standardized system of codes.  ​

How does this SWIFT system work?​

SWIFT assigns a unique code to each financial organization that is present on its network, through which they can communicate with each other. This code is called Bank Identifier code (BIC), SWIFT ID/Code in different regions. It is an alphabetic 8 or 11 character code that represents the identity of the bank on the swift network. To understand it in a crude sense, it is like a WhatsApp messaging system only for banks, which use it for sending messages between them where every bank gets a unique ID and encrypted messaging feature to communicate with other users of the platform.​​

The SWIFT network, being a messaging platform, doesn’t actually transfer funds, but instead it sends payment orders between institutions accounts, using unique SWIFT codes of member institutions. It was SWIFT that standardized IBAN (International Bank Account Numbers) and BIC (Bank Identifier Codes) formats for Banks and Bank Account numbers. SWIFT is the owner and manager for the BIC system, thus implying that it can quickly identify a bank and send a payment to them securely.​​

Now, to get a deeper understanding of the coding system, let’s take an example of State Bank of India Vasant Vihar, New Delhi’s branch SWIFT code, which is SBININBB549, deconstructing it​

Bank code: SBIN (SBI Network)​

Country Code: IN (India) ​

Location Code: BB (Code for New Delhi)​

Branch Code: 549 (Unique code of Branch)​

Now that you know of it, let’s see how it works, let’s assume that you want to transfer money to a friend in Venice, you are a customer of SBI Vasant Vihar, New Delhi and you want to send money to your friend who has an account in UniCredit Banca Branch in Venice. Now what you can do is, walk into the SBI Branch with your friend’s account number and UniCredit Banca branch’s SWIFT Code. SBI will send a payment transfer message to Unicredit Banca over the SWIFT secure method. Once UniCredit Banca receives this SWIFT message from Vasant Vihar, New Delhi, it will credit the money to your friend’s account.​ Simple and “SWIFT” as the name suggests.

How Does SWIFT Earn?​

SWIFT is a co-operative society. All its members pay a one-time joining fee plus annual support charges that may vary according to member classes. In addition to its leading messaging platform, SWIFT has launched other money making services which include business intelligence, reference data, etc.​

Who Uses SWIFT?​

SWIFT was originally designed to facilitate communication about treasury transactions only, the robustness of its messaging platform allowed it to scale on a worldwide scale incorporating members like:​

• Depositories​
• Brokers​
• Exchanges​
• Asset Management Companies​
• Banks​
• Securities Dealers​

Why SWIFT?​

Some part of it can be attributed to “Network Effect” (service becomes more valuable when more people use it) because of its mammoth share and for obvious reasons its reach. SWIFT connects more than 11,000 financial institutions worldwide in more than 200 countries. ​

Since nearly every financial institution is present on SWIFT platform and uses SWIFT daily, it’s a no-brainer for a newcomer to be using nothing other than SWIFT platform. Competitive platforms and payment gateways like RIPPLE, CHIPS or Fedwire, etc. are also available but SWIFT has a market share of more than 50% overall, which makes it dominant in the Financial Market.​

Second major thing is the robustness of the platform, which has encryption, transparency, and uniqueness built into the core of its messaging platform, thus making it easily scalable and secure both at the same time. ​

Numerically, every day nearly 10,000 SWIFT member institutions send approximately 24 million messages on the network. To manage such mammoth data and to maintain real-time platform with no latency SWIFT has established three data centers one each in the United States of America, Netherlands, and Switzerland, which are connected through underground Submarine Communication Cables. In case of a failure of one data center, the other is able to handle the traffic and complete the whole network, ensuring zero breakdowns and real-time messaging.​

Conclusion​

One of the first fintech initiatives, SWIFT has become the industry standard for syntax in financial messaging globally. A message formatted in SWIFT can be easily read and understood by known text-processing systems.​ Although SWIFT originally started just for mere payment instructions, but it now has the capability to send messages for a wide variety of things which include security transactions and treasury transactions. Nearly 50 percent of SWIFT traffic is still for payment-based messages, but 43 percent now concerns security transactions, and the remaining traffic flows to treasury transactions, which are the new avenues of money making for SWIFT. No doubt it has become the go-to platform for international payments throughout the world.​