How the SWIFT System Works
What Is the SWIFT Banking System?
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. SWIFT is a vast messaging network banks and other financial institutions use to quickly, accurately, and securely send and receive information, such as money transfer instructions.
More than 11,000 global SWIFT member institutions sent an average of 42 million messages per day through the network in 2021, marking an increase of 11.4% over 2020.
In this article, we explore what SWIFT does, how it works, and how it makes money.
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a member-owned cooperative that provides safe and secure financial transactions for its members.
This payment network allows individuals and businesses to take electronic or card payments even if the customer or vendor uses a different bank than the payee.
SWIFT, today, is the largest and most streamlined method for international payments and settlements.
SWIFT works by assigning each member institution a unique ID code (a BIC number) that identifies not only the bank name but the country, city, and branch.
SWIFT has been used to impose economic sanctions, such as on
bad actors like Iran and Russia.
Inside a SWIFT Transaction
SWIFT is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes. Although SWIFT has become a crucial part of global financial infrastructure, it is not a financial institution itself: SWIFT does not hold or transfer assets. Rather, its utility lies in its power to facilitate secure, efficient communication between member institutions.
SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters, known as a bank identifier code, or BIC. The BIC may also go by the terms SWIFT code, SWIFT ID, or ISO 9362 code. To understand how the code is assigned, let’s look at the Italian bank UniCredit Banca, headquartered in Milan. It has the eight-character SWIFT code UNCRITMM.
First four characters: the institute code (UNCR for UniCredit Banca)
Next two characters: the country code (IT for the country Italy)
Next two characters: the location/city code (MM for Milan)
Last three characters: optional, but organizations use them to assign codes to individual branches.
Let’s assume a Bank of America Corp. branch customer in New York wants to send money to their friend who banks at the UniCredit Banca branch in Venice. The New York customer can walk into their Bank of America branch with their friend’s account number and
UniCredit Banca’s unique SWIFT code for its Venice branch.
Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch over the secure SWIFT network. When Unicredit Banca receives the SWIFT message about the incoming payment, it will clear and credit the money to the Italian friend’s account.
As powerful as SWIFT is, keep in mind that it is only a messaging system. SWIFT does not hold any funds or securities, nor does it manage client accounts.
When making an international money transfer, the SWIFT/BIC code is used to identify your particular bank. Your IBAN identifies your individual bank account used at that bank.
The World Before SWIFT
Prior to SWIFT, telex was the only available means of message confirmation for international funds transfer. Telex was hampered by low speed, security concerns, and a free message format. In other words, Telex did not have a unified system of codes like SWIFT to name banks and describe transactions. Telex senders had to describe every transaction in sentences that were then interpreted and executed by the receiver. This led to many human errors, as well as slower processing times.
To circumvent these problems, the SWIFT system was formed in 1973. Six major international banks formed a cooperative society to operate a global network that would transfer financial messages in a secure and timely manner.
Why Is SWIFT Dominant?
According to the London School of Economics, “Support for a shared network…began to achieve institutional form…in the late 1960s, when the Société Financière Européenne (SFE, a consortium of six major banks based in Luxembourg and Paris), initiated a ‘message-switching project.'”
SWIFT was then founded in 1973 with 239 banks in 15 countries. By 1977, it expanded to 518 institutions in 22 countries.
Who Uses SWIFT?
In the beginning, SWIFT founders designed the network to facilitate communication about Treasury and correspondent transactions only. The robustness of the message format design allowed for the huge scalability through which SWIFT gradually expanded to provide services to the following:
Brokerage institutes and trading houses
Asset management companies
Corporate business houses
Treasury market participants and service providers
Individuals or businesses making international wires or money transfers
Foreign exchange and money brokers
The SWIFT system offers many services that assist businesses and individuals to complete seamless and accurate business transactions. Some of the services offered are listed below.
SWIFT connections enable access to a variety of applications, which include real-time instruction matching for treasury and forex transactions, banking market infrastructure for processing payment instructions between banks, and securities market infrastructure for processing clearing and settlement instructions for payments, securities, forex, and derivatives transactions.