SWIFT (The Society for Worldwide Interbank Financial Telecommunication) is a global messaging system that communicates transaction orders through a network of financial institutions.
SWIFT is a member-owned cooperative used by thousands of banks worldwide to communicate information on financial transactions in a secure and standardized way.
Before SWIFT was introduced, banks used TELEX for international transactions. TELEX was a slow payment orders system that relied on describing every transaction with sentences instead of codes, which was difficult for both banks and users.
In 1973, SWIFT was founded. With it came a system of codes that transfer financial messages more efficiently than TELEX. SWIFT is headquartered in Brussels, Belgium, since the organization didn’t want to choose between London and New York as the major finance cities.
As of 2018, half of all high-value cross-border payments were made via SWIFT, which covers 212 different countries.
How does the SWIFT system work?
The SWIFT network doesn’t actually transfer money. SWIFT works by communicating transaction orders between institutions using SWIFT codes.
Thanks to SWIFT, we have standardized IBAN (International Bank Account Number) and BIC (Bank Identifier Code) formats for actual funds transfers.
SWIFT assigns every financial organization a unique code of eight or 11 characters. This code is called the SWIFT code, ISO-9362, or the BIC code. It comprises the institution code, the country code, the location code (or city code), and an optional branch code to identify individual branches.
The IBAN code and SWIFT code are not the same things—while the SWIFT code only identifies a bank, the IBAN identifies both the bank and a specific account at the bank. The United States doesn’t participate in IBAN and instead uses the ABA routing numbers for domestic payments and SWIFT codes for international payments.
When two banks have a relationship (commercial accounts with each other), the transfer is done as soon as the SWIFT message has been received. The money from one’s personal account is transferred to the other person’s account via the banks’ commercial accounts. The banks take a fee.
If the two banks do not have a relationship, an intermediary bank will facilitate the process. For that, you will be charged an additional fee.
If two currencies are involved in the transfer, one of the banks will do the currency exchange.
Since SWIFT doesn’t actually send money, it requires different interventions, making the process slow. It also adds costs to the transfers.
Who controls SWIFT?
SWIFT is a cooperative, meaning it’s not controlled by any one country. It’s governed by a 25-person board of directors and overseen by the G-10 country central banks:
Bank of Canada
European Central Bank
Banque de France
Bank of Japan
De Nederlandsche Bank
Swiss National Bank
Bank of England
USA Federal Reserve System
European Central Bank
National Bank of Belgium
SWIFT acts as a neutral utility, so it doesn’t make any decisions on sanctions. However, because SWIFT operates under Belgian law, it must comply with EU regulations, including sanctions.
Sending money with SWIFT
Let’s look at an example that demonstrates how sending money with SWIFT works: Bob wants to send $100 from his US bank account to Patrick’s bank account in Australia.
There are two scenarios based on the relationship between the two banks.
When the banks have an established relationship
If the banks have an established relationship, they have commercial accounts with each other. In this case, the process is easier and faster and look something like this:
Bob’s bank will send a SWIFT message or payment instructions to Patrick’s bank, which is often received in minutes
Bob’s bank will debit his personal account by $100 (money coming out)
Bob’s bank will credit the commercial bank account held with Patrick’s bank (money coming in)
Patrick’s bank will credit his personal account (money coming in)
In this case, the banks have an established relationship, so it’s reasonably easy to transfer the funds.
When the banks do not have an established relationship
In this case, things get slightly more complicated. Since the two banks don’t have commercial accounts with each other, the intermediary bank is used to facilitate the transfer. The intermediary bank is where the other two banks have commercial accounts.
Bob’s bank will send a SWIFT message to Patrick’s bank, and they will find the right intermediary bank. Let’s call the intermediary bank Bank M.
Once that is done, the process will look like this:
Bob’s bank will debit Bob’s personal account by $100 (money coming out)
Bob’s bank will ask Bank M to debit their commercial account by $100 and credit the commercial account of Patrick’s bank
Bank M deducts a small fee for acting as an intermediary (let’s say $1) from the transferred amount and credits the commercial account of Patrick’s bank by $99
Patrick’s bank will then credit Patrick’s personal account by $99 (money coming in)
These additional steps happen behind the scenes, which is why this process takes time (usually three to five business days) and additional fees.
Sometimes, the two banks don’t have commercial accounts with an intermediary or correspondent bank, so more than one intermediary bank needs to be involved. As you can imagine, this adds more processing time and, of course, more fees.
What happens when there are different currencies involved?
This scenario adds one more step to the process: the foreign exchange. One of the banks will do the exchange, most likely at a less desirable rate. That’s why transfer costs can add up to $65 or more.
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