A comprehensive overview of SWIFT

February 2nd, 2023

Whether you're a bank, financial institution, or the average person, you've interacted with a SWIFT bank in one way or another.

As more nations and business entities continue to use the SWIFT platform to facilitate global banking activities, it is increasingly important for those in the sector to understand the inner workings of the system and the variety of benefits it provides.

In this article, we'll provide a comprehensive overview of SWIFT, including its history, services, and importance in the financial industry.

What is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication, otherwise known as SWIFT, is a global financial messaging network that connects over 11,000 financial institutions in over 200 countries.

It is the primary means by which international banking transactions take place and provides a secure and reliable infrastructure for financial institutions to communicate and transfer money across the globe.

What is a SWIFT Code?

A SWIFT code is a unique identifier that is used for the routing of international payments through the system.

Every single SWIFT code includes a standardised set of information that your bank requires to ensure the amount arrives safely with the recipient. If any of the information is incorrect, even offset by a single number, the funds will never arrive.

The SWIFT codes, also called SWIFT IDs or ISO 9362 codes, have 8 or 11 characters, which are broken down into:

First four — Financial institution code
Fifth and sixth — Country code
Seventh and eighth — City code
Ninth to eleventh — Optional branch identifiers

History of SWIFT

The SWIFT messaging system was founded in Brussels, Belgium in 1973 as a cooperative society comprising a number of international banks. From its humble beginnings, SWIFT has seen tremendous growth and innovation, with various messaging services being introduced and its network expanding to include banks from all around the world.

In the 1980s, the organisation implemented a number of standardisation initiatives, such as the SWIFT Codes, which are now utilised as the standard format for identifying banks and financial institutions globally.

The 1990s and 2000s saw the SWIFT network expand its services and offerings even further, with the introduction of compliance services like sanctions screening and anti-money laundering.

Who uses SWIFT?

Initially focused on facilitating communications for treasury and worldwide interbank financial telecommunications, SWIFT has evolved to provide a broad range of services to diverse entities. SWIFT has continued to expand, establishing itself as the predominant network for financial transmissions.

This growth can be primarily attributed to the system's remarkable scalability, security features, standardization protocols, and unwavering reliability.

The SWIFT network now caters to a wide range of organizations and individuals, namely:

Asset management companies
Bank or financial institution
Brokerage institutes and trading houses
Brokers and dealers
Clearing houses
Corporate businesses and non-bank financial institutions
Depositories
Foreign exchange and money brokers
Individuals or businesses making international wires or money transfers
Investment managers
Money brokers
Securities dealers
Treasury market participants and service providers

The services offered by SWIFT

SWIFT offers a wide range of financial services, which include:

Secure messaging for financial transactions – you can read more about this below.
Cross-border money transfers.
Currency exchange rate information.
Sanction screening services.
Interbank payments and settlements.
Treasury services management.
Connectivity solutions to financial institutions.
ISO 20022 standard for financial messaging.

SWIFT Messaging Services

The SWIFT Messaging Services provides a comprehensive communication platform for financial institutions worldwide.

The services are powered by standardised message formats and protocols, such as SWIFT MT (SWIFT Message Types) and FIN messaging, to ensure interoperability and consistency across the network.

They also include features such as real-time transaction tracking and confirmation, message validation and formatting, and messaging audit trails.

In addition to its messaging services, SWIFT also offers SWIFT FileAct, a service that enables financial institutions to securely and efficiently exchange large data files.

What is a SWIFT MT103?

The SWIFT MT103 is a financial transaction message used for cross-border transfers between banks. It consists of 14 lines that serve specific purposes and hold specific information, as summarised below:

Message type identifier
Sender's bank's SWIFT code
Receiver's bank's SWIFT code
Date and time of the message
Message reference number
Related reference number (optional)
Ordering customer's name and address
Ordering customer's account number
Beneficiary customer's name and address
Beneficiary customer's account number
Amount of transaction
Currency of transaction
Date of transfer
Message signature

The ordering institution's bank identifier code (BIC), also known as Line 52A, is an important aspect of the SWIFT MT103 message. It serves to identify the bank that is sending the payment instruction and is used to determine the specific bank branch's responsibility. The BIC, consisting of 8 or 11 alphanumeric characters, is a unique code that identifies financial institutions on the SWIFT network.

Line 52A is present in various SWIFT message types, including the MT103 and MT2021, and holds the ordering institution's BIC. The ordering institution is the financial institution sending the payment instruction, usually the bank of the person or entity initiating the payment. The ordering institution is responsible for sending the payment instruction to the receiving institution, which is typically the bank of the person or entity receiving the payment.

Who owns the SWIFT banking system?

Headquartered in La Hulpe, Belgium, SWIFT is a cooperative owned by around 3,500 member organizations. Its oversight comes from central banks of G10 countries, the European Central Bank, and the National Bank of Belgium.

The board of 25 directors, elected by shareholders, governs and manages SWIFT. The board's responsibilities include overseeing operational management, promoting global expansion with a focus on neutrality, and ensuring the security, reliability, and resilience of SWIFT's infrastructure.

How does SWIFT make money?

SWIFT generates revenue through two primary channels:

Membership Fees

Participating institutions pay an annual fee for access to SWIFT's messaging service, varying by institution type and SWIFT system engagement level.

Message Fees

SWIFT charges for secure message transmissions based on factors like message type, length, and urgency, reflecting in higher fees for complex messages.

Exchange Rate Margins

In currency conversion transactions, banks apply margins on exchange rates, profiting from the rate difference offered to customers.

Intermediary Bank Fees

Intermediary banks involved in SWIFT transactions may impose handling fees, complicating cost estimates for consumers.

Processing Time and Refunds

SWIFT transfers may take days to complete, with potential fee accumulation if payments are reversed or refunded.

Consumer Impact

Sending small sums through SWIFT may lead to relatively high fees, with cost-sharing options from banks to mitigate cumulative expenses, particularly with multiple intermediaries.

How does SWIFT work with Nostro and Vostro Accounts?

Nostro and vostro accounts help facilitate international payments by providing a record of the transaction for each party involved. SWIFT utilizes these accounts for payment instructions.

Nostro accounts are held by a bank in a foreign country with another bank, allowing the first bank to hold funds in the foreign currency. Vostro accounts are held by a foreign bank with a local bank, enabling the foreign bank to hold funds in the local currency.

These accounts aid in cross-border transactions by ensuring payment records for both parties.

It is easier to explain the nostro and vostro functions with the following examples:

Banks that do have nostro or vostro accounts

In a situation where both the U.S. bank and Bank of India have established Nostro or Vostro accounts, consider a scenario where a U.S. client wishes to transfer $10,000 to a foreign account at Bank of India (which holds a Vostro account). With both institutions being SWIFT members, an intermediary bank isn't required.

The U.S. bank sends a secure SWIFT message directly to Bank of India to initiate the transfer. The U.S. bank debits its Nostro account (held with Bank of India) and credits Bank of India’s Vostro account. Subsequently, Bank of India transfers the funds from its Vostro account to the receiver’s account within Bank of India.

Banks that do not have nostro or vostro accounts

In a scenario where both the U.S. bank and Bank of India have established Nostro or Vostro accounts, a different situation arises when they lack these accounts and an established relationship.

In this case, an intermediary bank (which is also a SWIFT member) becomes necessary.

The payment process involves the U.S. bank sending a SWIFT message to the intermediary bank, instructing the transfer. The intermediary bank has Nostro accounts with both the U.S. bank and Bank of India.

It debits its U.S. bank Nostro account and credits its Bank of India Nostro account. Finally, Bank of India transfers the funds from its Nostro account to the receiver’s account within Bank of India.

Multiple intermediaries can lead to slower transfers, increased risk of errors, and higher fees.

The role of Swift in the financial industry

As explored above, SWIFT plays a vital role in the financial industry. Its robust offerings allow financial institutions to offer:

Facilitate cross-border payments and money transfers.
Exchange financial transaction information.
Meet regulatory and compliance requirements.
Enhance operational efficiency and reduce costs.
Access real-time payment tracking and confirmation.
Collaborate with other financial institutions and market infrastructures.
Improve security and prevent fraud.

By providing these services, SWIFT helps ensure the smooth functioning of the global financial system and supports the growth of international trade and commerce.

SWIFT and Integrated Finance

When choosing Integrated Finance, you become global by default.

How? Our Fintech infrastructure enables you to global trade with outbound payment coverage of over 130 currencies via the SWIFT network alone. In other words, whomever your customers need to pay or get paid is most likely already signed up for the network, making payments easier and communications between countries as seamless as possible.

In addition to enabling your customers to pay and get paid globally, you can also localise your product by offering domestic and instant payments to attract more customers, reduce transaction costs, and settle funds faster.

Schedule a live demo to find how you can offer both cross-border and local payments.

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