What Is SWIFT and How Does It Work?

What Is SWIFT and How Does It Work?

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Introduction

Have you ever wondered how international companies handle secure money transactions? The backbone of these transactions is the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system.

SWIFT was founded in 1973 and has since become the global standard for financial messaging for banks and other financial institutions. It's a vast messaging network that financial institutions use to send and receive information quickly, accurately, and securely.  Communications can be anything from money transfer instructions to restocks.

Today SWIFT is a massive and practically globe-encompassing network that processes millions of messages daily. More than 11,000 global SWIFT members sent an average of 7.615 billion messages throughout the network in 2022 so far, with 251 million messages sent in September 2022 alone. SWIFT has become the go-to method for banks to communicate due to the improvements it brought forward to fix the problems that hounded its predecessor – the telex transfer system. SWIFT, in many ways, vastly simplified the connectivity issues faced by financial institutions that span the globe.

Telex was slow and unreliable, often resulting in human error, and lacked security measures which left it susceptible to breaches. SWIFT addressed these issues by creating a network of over 11,000 institutions that is significantly more secure than previous methods. When SWIFT was first created, the internet was not yet widely available; SWIFT was actually ahead of its time. Nowadays though, it's starting to face similar problems as predecessor networks.

What Is the SWIFT Banking System?

SWIFT is a member-owned cooperative through which the world’s financial institutions send and receive information about financial transactions in a secure, standardized environment. SWIFT also sells software and services to help financial institutions meet compliance standards, manage their payments infrastructure, and connect to other members of the global banking community.

As of December 2019, SWIFT had 11,265 active participants from 200 countries and territories.

SWIFT processes literally billions of messages every year, currently, servicing its member banks as well as other financial institutions globally on behalf of their clients. This messaging system facilitating cross-border payments is collectively known as the SWIFT network or simply the Swift system.

SWIFT has become an important part of the infrastructure for global finance, but it is not a financial institution. SWIFT does not hold or transfer assets, but its usefulness lies in its ability to facilitate secure and efficient communication between member institutions.

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Components of SWIFT Banking

The SWIFT Banking system is a global network that enables financial institutions to send and receive information about cross-border payments. The system consists of the following components:

  • The SWIFT network, which provides the infrastructure for exchanging messages between financial institutions
  • The SWIFT messaging service, which standardizes the format of messages exchanged over the network
  • The SWIFT membership rules and procedures, which govern how member institutions can use the system
  • A range of value-added services that make it easier for member institutions to exchange messages and manage their accounts with each other

SWIFT services fall under four key areas: Securities, Treasury and Derivatives, Trade Services, and Payments and Cash Management.

SWIFT messages follow a consistent format to make identification easy. They all start with the literal ‘MT’ for Message Type. This is followed by a 3-digit number that denotes the message type, category, and group. There are ten categories, with Category 1 through 9 ranging from “Customer Payments and Cheques” to “Cash Management and Customer Status,” and an additional Category “n” for “Common Group Messages.”

What is SWIFT Code?

The SWIFT code is an international standard used to identify financial institutions. It is comprised of eight or eleven characters, known as the bank identifier code, or BIC. The BIC may also be referred to as the SWIFT code, the SWIFT ID, or the ISO 9362 code.

Each financial institution is assigned a unique SWIFT code. For example, UniCredit Banca — located in Milan, Italy — uses UNCRITMM for its eight-character SWIFT code. Let's take a closer look at how these codes are assigned:

  • The first four characters represent the institute code (in this case, UNCR for UniCredit Banca).
  • The next two characters indicate the country code (IT for Italy).
  • Following that are two more characters denoting the location or city code (MM for Milan).
  • And finally, there may be three additional optional digits used by organizations and are assigned to individual branches — but they are not typically included when referencing a specific bank's SWIFT BIC.

How SWIFT Payment Works

Assuming a customer of Bank of America in New York wants to send money to their friend who banks with Bank of the Philippine Islands (BPI) in the Philippines, they can go into their local Bank of America branch with their friend's account number and the unique SWIFT code for BPI's branch.

Bank of America will then send a payment transfer SWIFT message to the correct BPI branch over the secure SWIFT network. Upon receiving the SWIFT message about an incoming payment, BPI will clear and credit the money to the Philippines-based friend's account.

Although SWIFT is very powerful, it should be noted that it is simply a messaging system. It is not responsible for holding funds or securities, or managing client accounts.

Who Uses SWIFT

SWIFT was designed to streamline communication about this reasury and correspondent transactions. However, the message format design was robust enough to allow for huge scalability. As a result, SWIFT gradually expanded its services to include:

  • Banks
  • Securities dealers
  • Clearinghouses
  • Trading houses and brokerage institutes
  • Asset management companies
  • Exchanges
  • Depositories
  • Treasury service providers and market participants
  • Corporate business houses
  • Businesses or Individuals making international money transfers or wires
  • Money and foreign exchange brokers

SWIFT Payment Costs

When you send or receive a SWIFT payment, there may be several fees:

  • An outgoing wire transfer fee for sending your SWIFT payment
  • An incoming payment fee for receiving money in your account via SWIFT
  • A foreign exchange fee to convert your payment into another currency
  • A SWIFT tracing fee to check on the progress of your payment

Before confirming a SWIFT payment, ask your bank for a complete breakdown of all applicable fees.

Banks are charged a one-off fee to use SWIFT's service, as well as yearly fees that are dependent on the number of messages sent, message types, and length. Customers have these fees passed on to them by banks, along with additional fees depending on the transaction. When paying SWIFT fees, the money is going to your bank and not directly to SWIFT.

There are three different options for who pays the fees on a SWIFT payment. The first option is that the sender pays all of the fees. The second option is that the receiver pays all of the fees. And lastly, there is an option to split the fees between both parties.

Service providers that engage in SWIFT transactions often charge their customers a fee for the service. If your bank has an account with the recipient's bank, the fees will likely be lower since they have a direct relationship. However, if your SWIFT transaction requires going through multiple other banks, you could end up paying significantly more in fees.

Banks also typically charge foreign exchange fees and late fees where applicable.

Challenges for SWIFT Payment

For the majority of SWIFT's client base who process huge transactional volumes, manual entry of instructions is not practical. The need to automate SWIFT message creation, processing and transmission is growing; but this comes at a cost in terms of increased operational overhead.

While SWIFT has been successful in providing software for automation, that too comes at a price. In order to keep clients engaged in the long run, tapping into these problem areas may bring in a new stream of income for SWIFT.

Lastly, as mentioned earlier, given the speed of technological change, SWIFT is now encountering many of the same issues its predecessor networks struggled with in the past. Given how different the infrastructure and technology background is between the era of something like Telex and SWIFT, the latter isn’t poised to follow in the former’s footsteps any time soon, as there are several ways to address its own problems today.

Pay remote teams with Skuad

SWIFT payments are part and parcel of remote work management and payroll, or in the case of independent contractors, invoicing. Skuad’s global employment and payroll platform fully supports and integrates all the requirements for the SWIFT banking system to work in your favor, regardless if you’re working with full-time employees or freelancers.

Better yet, as your partner for global expansion, Skuad manages concerns far more complex and potentially costly than that, including compliance to local employment legislation. Attempting to manage everything in-house will only slow down your growth. Choose a reliable global payment provider instead — Skuad will manage HR and payroll globally and at the same time guarantee compliance with all relevant local labor laws practically anywhere in the world. Skuad handles all of these problems and more so you can focus on growing your business globally.

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