22 July 2016
We all accept that money transfers happen all over the world, all of the time, and perhaps are aware that something called SWIFT is involved somewhere in the process. But if we’re honest, very few of us probably understand what the transfer actually entails, and the part that SWIFT has to play.
Let’s start with a very brief introduction of the mechanics of money transfers, without getting into complicated explanations.
Transfers to and from accounts in the same bank: This is relatively easy as no money enters or leaves the bank; it’s settled on their own books. One easy electronic transfer. So far, so simple.
Transfer between two different financial institutions: This is known as correspondent banking, and it’s where things get slightly more complicated. For the receiving bank to be sure that the funds are available to be credited to the target account, they will need to hold an account at the originating bank. Once that account is credited then payment can be transferred to the target account at the receiving bank. So that already makes for an extra couple of steps in the process.
But what if the receiving bank does not hold an account with the bank where the payment originates from?
Then the number of steps and interim transfers increases, with transfers sometimes having to be routed through several banks to reach the final destination.
But despite this added complexity, payments can still happen relatively quickly, mostly within a maximum of a few days. So how are these banks, operating all over the world and in different countries and languages, all able to talk to each other?
Before the creation of modern messaging networks, banks had to rely on Telex as a means of messaging to carry out international funds transfers.
One of the main problems, besides slow speed and lack of security, was that Telex used a free-text format. With no standardised system of codes, transactions were explained by the sender in words and sentences, which had to be interpreted before they could be executed by the receiver. As you can imagine, this left a lot of room for human error.
In 1974, seven international banks got together to form a cooperative society to create a global network that could replace Telex and begin to transfer financial messages more securely and efficiently. And so the Society for Worldwide Interbank Financial Telecommunications (SWIFT) was born, with the first messaging network going live in 1977.
Today, this vast network is used by banks and other financial institutions to quickly, accurately, and securely send and receive not only money transfer instructions, but communicates security and treasury transactions.
With around 11,000 users in 200 countries and territories, sending more than six billion messages per year, SWIFT dominates the bank messaging market.
Let’s take the example used above, of transferring between customer accounts at different financial institutions. SWIFT assigns a unique eight or 11-character identifying code which provides all the required information for the instruction: the institute, country, the city or location and (optionally) the branch. For example, ABN AMRO Bank’s Rotterdam branch has the unique identifier:
It’s important to understand though, while the effect of this message is to “send” money between the two banks, the SWIFT message is actually only an instruction. The movement of funds is done by debiting and crediting several accounts at each institution and relies on banks holding accounts with each other, either directly or through intermediary banks.
With its powerful market position, and the cooperative nature of its set-up, SWIFT also has a large role to play in bringing improvements to the financial industry.
SWIFT’s original purpose was to create a standard and today it continues to focus on finding ways to harmonise. From creating data standards, to playing active roles in several Market Practice groups and providing a platform for FinTech innovators to meet the market, SWIFT’s importance to the progress and security of financial messaging cannot be underestimated.
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