The SWIFT service creates an international level of connectivity that speeds up global commerce and brings the world a little closer together. It provides a safe and secure means to facilitate cross-border payments and helps banks build an intermediary network.
In 2021, more than 11,000 global SWIFT member institutions sent an average of 42 million messages per day, marking an increase of 11.4% over 2020. Business is booming!
What is Swift?
SWIFT (The Society for Worldwide Interbank Financial Telecommunication) is a global messaging system that communicates transaction orders through a network of financial institutions.
SWIFT is a member-owned cooperative used by thousands of banks worldwide to communicate information on financial transactions in a secure and standardized way.
Before SWIFT was introduced, banks used TELEX for international transactions. TELEX was a slow payment orders system that relied on describing every transaction with sentences instead of codes, which was difficult for both banks and users.
In 1973, SWIFT was founded. With it came a system of codes that transfer financial messages more efficiently than TELEX. SWIFT is headquartered in Brussels, Belgium since the organization didn’t want to choose between London and New York as the major finance cities.
As of 2018, half of all high-value cross-border payments were made via SWIFT, which covers 212 different countries.
How does the SWIFT system work?
The SWIFT network doesn’t actually transfer money. SWIFT works by communicating transaction orders between institutions using SWIFT codes.
Thanks to SWIFT, we have standardized IBAN (International Bank Account Number) and BIC (Bank Identifier Code) formats for actual funds transfers.
SWIFT assigns every financial organization a unique code of eight or 11 characters. This code is called the SWIFT code, ISO-9362, or the BIC code. It comprises the institution code, the country code, the location code (or city code), and an optional branch code to identify individual branches.
The IBAN code and SWIFT code are not the same things—while the SWIFT code only identifies a bank, the IBAN identifies both the bank and a specific account at the bank. The United States doesn’t participate in IBAN and instead uses the ABA routing numbers for domestic payments and SWIFT codes for international payments.
When two banks have a relationship (commercial accounts with each other), the transfer is done as soon as the SWIFT message has been received. The money from one’s personal account is transferred to the other person’s account via the banks’ commercial accounts. The banks take a fee.
If the two banks do not have a relationship, an intermediary bank will facilitate the process. For that, you will be charged an additional fee.
If two currencies are involved in the transfer, one of the banks will do the currency exchange.
Since SWIFT doesn’t send money, it requires different interventions, making the process slow. It also adds costs to the transfers.