What is SWIFT?
SWIFT or S.W.I.F.T. stands for Society for Worldwide Interbank Financial Telecommunications. It is a messaging system used by almost every major bank in the world to communicate with other banks and execute trillions of dollars of transactions every single day.
It is the primary means of communication between banks that need to do business with each other. On behalf of the clients of the banks, this communication system enables banks to send and receive payments among themselves.
SWIFT sends messages for wire transfers, securities transactions, and Treasury transactions.
The Origins of SWIFT
SWIFT was established in 1973 and is a cooperative that is owned by its members. These members are financial institutions. The members can use this secure system to execute financial transactions in a safe and secure manner.
It offers an encrypted and highly-secure proprietary platform for financial institutions to transmit information about financial transactions, which includes payment information and instructions.
Before SWIFT was created, financial institutions communicated with each other using a system called Telex. But Telex was very slow and not sufficiently secure. Telex also did not provide a universal standard and was prone to errors.
SWIFT was initially designed for communications between government Treasury agencies. But given the great features offered by SWIFT, it was expanded to include other financial institutions. Thus, SWIFT solved the problems associated with Telex.
In 1973, SWIFT operated in 15 countries. Today, it provides its services to over 11,000 financial institutions in over 200 countries and territories.
SWIFT is headquartered in Belgium. To serve its members across the globe, it has offices in Australia, Austria, Brazil, China, France, Germany, Ghana, Hong Kong, India, Indonesia, Italy, Japan, Kenya, South Korea, Malaysia, Mexico, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, UAE, and the United Kingdom.
In 1979, SWIFT delivered about 10 million messages in the entire year. In 2021, SWIFT delivered an average of 42 million messages per day. This is a testament to the growth and popularity of the platform.
What Types of Institutions Use SWIFT?
SWIFT is currently used by:
– Banks
– Stock Exchanges
– Brokerage firms
– Securities Dealers
– Asset Management firms
– Clearing Houses
– Foreign Exchange firms… and more.
SWIFT Does Not Hold Funds
It is imperative to note that SWIFT does not hold any funds itself on behalf of any members or clients. It is simply a messaging system for financial institutions that hold client funds in their accounts.
How SWIFT Processes Your Wire Transfers
You’re not a financial institution but you do use SWIFT services indirectly. SWIFT provides its communication services to your bank which, in turn, provides the SWIFT service to you when you send a wire transfer from your bank account or receive a wire transfer into your bank account.
Let’s take a look at how this works with a simple example.
You walk into your local bank branch and you state that you want to send a Wire Transfer.
What Is a Wire Transfer?
A wire transfer is an electronic transfer of funds via a network that is administered by financial institutions including your bank.
In a wire transfer, the financial institutions of the “Sender” and “Receiver” exchange information with each other. As such, you are required to provide detailed information including:
– Receiver’s name
– Receiver’s address
– Receiver’s bank name
– Receiver’s bank branch number and address
– Receiver’s bank routing number or SWIFT code
– Receiver’s bank account number or International Bank Account Number (IBAN)
– Sender’s reason for sending the funds
Note that no physical cash actually changes hands between the banks. Instead the transactions are settled electronically by simply crediting and debiting each of the bank’s accounts.
SWIFT Messaging System
As soon as your bank has collected all the necessary information from you, through the SWIFT messaging system, your bank sends a message to the Receiver’s bank with payment instructions.
The Receiver’s bank receives the information from the Sender’s bank. Then the Receiver’s bank makes a deposit of the wire transfer amount into its own reserve funds. Then, the Receiver and Sender banks settle the payment using their back-end system after the money has been deposited by the Sender’s bank.
When Will Your Wire Transfer Be Received?
The amount of time it takes for your wire transfer to get to the Receiver generally depends on whether it’s a domestic wire transfer or international wire transfer.
A domestic wire transfer is processed through a domestic automated clearing house (ACH), which can complete the transaction in 1 business day.
Whereas, an international domestic wire transfer is processed through a domestic ACH and a foreign ACH to complete the transfer.
– Intra-Bank Domestic Wire Transfers are the fastest. This refers to transfers within the same bank in the same country. They are often processed and completed within a few hours.
– Inter-Bank Domestic Wire Transfers are often processed and completed on the same day. This refers to transfers between different banks in the same country.
– Intra-Bank International Wire Transfers are the fastest international transfers. This refers to transfers within the same bank in different countries. They are often processed and completed in 1 business day.
– Inter-Bank International Transfers are often processed and completed in 2 business days. This refers to transfers between different banks in different countries.
Why Do Wire Transfers Get Delayed or Blocked?
In certain circumstances, a wire transfer may be delayed or blocked. These are a few reasons why:
– Wire transfers are heavily-regulated and monitored by government agencies with the help of financial institutions to ensure that no money is being sent for nefarious or criminal purposes. Governments and banks aim to prevent wire transfers from being sent for money laundering or funding terrorist groups.
And they seek to prevent money from going to countries that are under economic sanctions. Or simply to prevent money going to countries that have a track record of corruption, money laundering, or terrorist abuses.
If there is suspicion that any of these may be true, the bank can flag the wire transfer, and then delay or block it entirely.
– In some cases, a wire transfer may be delayed simply because the Receiver does not regularly receive that sum of money in their bank account. So the Receiver’s bank may be in the process of verifying the transfer for any irregularities. Once the transaction has been verified, the wire transfer will be completed.
SWIFT Code
We mentioned in our example above that your bank sends a message to the Receiver’s bank. This includes a SWIFT Code.
What is a SWIFT code?
SWIFT assigns a code of either 8 or 11 characters to each of its members. A code is unique to each member.
The SWIFT code consists of:
– First 4 characters: the code of the financial institution
– Next two characters: the code of the country
– Next two characters: the code of the town/city
– Last three characters: the code of the bank’s branch
SWIFT and Political Sanctions
Because most banks and central banks around the world use SWIFT to communicate with each other and transfer trillions of dollars across the globe everyday, SWIFT has become a powerful tool to sanction governments or countries that are deemed bad players on the geopolitical stage.
In 2012, the European Union sanctioned banks in Iran for funding terrorist groups by removing them from the SWIFT network. In 2022, the United States, Canada, United Kingdom, and European Union agreed to remove specific Russian banks from SWIFT because Russia invaded its neighbour Ukraine.
This prevents these banks, central banks, and governments from sending or receiving funds they need for their operations.
Competitors of SWIFT
Despite the dominance of SWIFT in global financial transactions, it does have a few smaller competitors including:
– Cross-Border Interbank Payment System or China Interbank Payment System (CIPS) is a payment system which offers clearing and settlement services for its participants in cross-border Chinese RMB payments. CIPS was launched in 2015.
– Fedwire is a real-time gross settlement funds transfer system operated by the U.S. Federal Reserve Banks that allows financial institutions to electronically transfer funds between its 9,289 participants.
– Ripple is a real-time gross settlement system, currency exchange and remittance network. Ripple was launched in 2012.
– Clearing House Interbank Payments System (CHIPS) is a private clearing house for large-value transactions. It is owned by The Clearing House Payments Company LLC and only has 47 member participants.