Need to transfer money overseas? Today, it is easy to walk into a bank and transfer money anywhere around the globe, but how does this happen? Behind most international money and security transfers is the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. Let’s learn more about SWIFT and what it does.
SWIFT is merely a platform that sends messages and does not hold any securities or money.
It facilitates standardized and reliable communication to facilitate the transaction.
SWIFT is used to transmit messages relating to cross-border financial transactions.
What is Society for Worldwide Interbank Financial Telecommunications (SWIFT)?
SWIFT is a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
SWIFT is merely a platform that sends messages and does not hold any securities or money. It facilitates standardised and reliable communication to facilitate the transaction.
It was founded in 1973 and is headquartered in La Hulpe, Belgium. SWIFT went live in 1977 with 518 institutions from 22 countries, its website states.
The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organisation in over 200 countries and territories. SWIFT itself had replaced the much slower and far less dynamic Telex.
Functions of SWIFT:
- SWIFT does not facilitate funds transfer: rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other.
- SWIFT is a secure financial message carrier in other words, it transports messages from one bank to its intended bank recipient.
- Its core role is to provide a secure transmission channel so that Bank A knows that its message to Bank B goes to Bank B and no one else. Bank B, in turn, knows that Bank A, and no one other than Bank A, sent, read or altered the message en route. Banks, of course, need to have checks in place before actually sending messages.
- Messages sent by SWIFT’s customers are authenticated using its specialised security and identification technology.
- Encryption is added as the messages leave the customer environment and enter the SWIFT Environment.
- Messages remain in the protected SWIFT environment, subject to all its confidentiality and integrity commitments, throughout the transmission process while they are transmitted to the operating centres (OPCs) where they are processed until they are safely delivered to the receiver.
- On receiving this message through SWIFT, banks abroad, mostly branches of domestic banks abroad provide funds to the company.
How does transaction occur in SWIFT?
Financial institutions connected to SWIFT use its messaging system to establish relationships with other banks and make payments.
The secure messaging system allows banks to honour the payment instructions without question, subsequently helping banks process high volumes of transactions at speed. Each year, trillions of dollars are transferred using the system.
Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
Citibank would then send a SWIFT message to HSBC. Once that is received and approved, the money would be credited to the required account.
How is the organisation governed?
SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
Its lead overseer is the National Bank of Belgium.
It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, the United Kingdom, the United States, Switzerland, and Sweden, alongside the European Central Bank.
The SWIFT oversight forum was established in 2012.
The G-10 participants were joined by the central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China.
In 2021, the SWIFT financial messaging platform recorded an average of 42 million FIN messages per day, as per the data on its website. The full-year figure was an 11.4% growth on a year-over-year basis.
Europe, the Middle East, and Africa, combined, sent approximately 4.66 billion messages. The Americas and the United Kingdom stood second with 4.42 billion interactions, with the Asia Pacific on third with approximate 1.50 billion messages.
Alternative Mechanism to SWIFT:
1. System for Transfer of Financial Messages (SPFS)
- SPFS is a Russian equivalent of the SWIFT financial transfer system, developed by the Central Bank of Russia.
- It was established by the Russian central bank which handles about a fifth of domestic payments.
- It has only 400 users.
2. Financial messaging system of the Bank of Russia (FMS)
- The FMS forms an alternative electronic financial messaging channel which is often called a ‘SWIFT analogue’.
- The FMS guarantees the uninterrupted transmission of financial messages within the country.
3. Cross-Border Interbank Payment System (CIPS)
- China also has an alternative to SWIFT called the Cross-Border Interbank Payment System (CIPS).
- But CIPS is much smaller, with roughly 1,300 financial institutions participating, most of them indirectly.
4. Platform based on inter-ledger protocol
- There are financial technology companies like Ripple, which has been offering its platform based on inter-ledger protocol (the same technology behind cryptocurrencies) as an alternative.
- Cryptocurrencies are another avenue for cross-border remittances. Russia has also been working on a ‘digital’ rouble, which is still not launched.
Alternative Mechanism for India:
1. Rupee-Rial Architecture:
- India can adopt a mechanism that can be modelled on the rupee-rial architecture that was used to clear payments to domestic firms when the US imposed sanctions on Iran.
- Under the rupee-rial mechanism, Indian refiners used to import crude oil from Iran and make payments to the designated rupee-account at Uco Bank and IDBI Bank.
- This money was, in turn, used to pay Indian exporters. This continued until crude oil was on the exempted list of US sanctions.
2. Rupee-Rouble Trade Arrangement:
- Following the collapse of the Soviet Union in 1991, India entered into a rupee-rouble trade arrangement with Russia to ensure that defence and other imports could continue.
- In 2018, a pilot project was run where Indian importers paid in roubles for diamond imports.
- These payments were made to the Indian branch of Russia’s Sberbank. SBI and Canara Bank have a joint venture (The Commercial Indo Bank), which might be able to help Indians there.
Article written by: Aseem Muhammed