When it comes to finance, it's important to know the difference between SWIFT and local payment types. These are vital components for both international and domestic transactions.
In this article, we'll cover what they are, what they can do, and how they work.
Defining SWIFT and local payments
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. It’s a messaging network used by financial institutions around the world. Basically, it’s a secure platform for exchanging information and instructions related to financial transactions. SWIFT helps banks communicate and transfer funds across borders while ensuring safety and standardisation.
Local payments, on the other hand, are transactions that occur within a specific country or region. They use the domestic payment systems and infrastructure available in that jurisdiction. It’s like when you transfer money from one bank account to another, but you're using your local bank's network instead of an international one. These payment types may include electronic funds transfers, real-time payment systems, debit and credit cards, direct debits, etc.
Local payment types
These payment types usually have different names, like 'local ACH', 'domestic', or 'regular' payments. The payment methods available also vary depending on the country or region. Here are some common local payment methods:
- Electronic Funds Transfer (EFT): this is when individuals and businesses transfer funds electronically within the same country. It's a popular and simple option for domestic transactions.
- Cash: simple and straightforward, cash transactions are still popular for many people and businesses.
- Bank-to-Bank / A2A transfers: another way to move money within the same country, this option is usually available through banking apps.
- Real-Time Gross Settlement (RTGS): these systems allow for the quick transfer of large sums of money. They're often used for high-value transactions requiring immediate settlement.
- Direct debits: authorised entities can withdraw funds from a customer's bank account for recurring payments, like utility bills or subscriptions.
Debit and credit cards: these widely used payment methods allow individuals to buy things or withdraw cash electronically.
- Mobile payment systems: with the ease and convenience of smartphones, mobile payment systems let you pay friends, buy things, and even check your balance from anywhere.
Fun fact; both local and international payments are also referred to as payment rails.
Breaking down SWIFT GPI
Within the realm of cross-border payments, SWIFT GPI (Global Payments Innovation) is an initiative aimed at improving the customer experience.
SWIFT GPI has four key pillars that enhance international payment processes:
- Faster Payments: SWIFT GPI wants to make international payments faster by providing real-time tracking, transparency, and predictability throughout the payment process. This helps reduce processing times and enables faster availability of funds for the recipient.
- End-to-End tracking: with SWIFT GPI, you can track the entire journey of payment from initiation to completion. Banks and customers can see the status of transactions, ensuring transparency and enabling timely intervention if necessary.
- Transparency of fees: SWIFT GPI promotes upfront transparency regarding fees associated with international payments. This helps senders and receivers have a clear understanding of the charges involved and guides their decision-making process.
- Unaltered remittance information: SWIFT GPI ensures that remittance information accompanying cross-border payments remains unaltered throughout the payment chain. This helps preserve the integrity of payment instructions, reducing the risk of errors or misinterpretation.
E2E flow of funds
By focusing on these pillars, SWIFT GPI aims to enhance the efficiency, transparency, and security of cross-border transactions, addressing some of the challenges associated with traditional international payments.
It's important to understand how funds flow from sender to receiver is crucial when comparing SWIFT and local payment types. Although both involve financial institutions and intermediaries, there are notable differences in their processes.
For local payments, funds typically move within a single country or region, using domestic payment systems and infrastructure. The sender initiates the payment through their bank, which then routes the funds to the recipient's bank within the same jurisdiction. Settlement is usually swift and occurs within the local clearing and settlement systems.
On the other hand, SWIFT payments involve international transfers across borders. The sender's bank sends payment instructions via the SWIFT network, which are received by the recipient's bank. Correspondent banks may be involved in the process, acting as intermediaries to facilitate the transfer. The funds undergo multiple stages of processing and verification, including compliance checks, currency conversion, and intermediaries' involvement. This process can take longer than local payments due to additional steps and the involvement of multiple entities.
While SWIFT is primarily used for international transactions, local payment types are primarily designed for domestic use. The choice between SWIFT and local payments depends on the nature of the transaction, the countries involved, the required speed, and other considerations.
Interested in finding out more about embedded payments, read on here.