What is SWIFT, and how does it power cross-border payments?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. Founded in 1973, it is a global financial messaging network and cooperative organization facilitating secure and standardized communication and transactions between financial institutions worldwide. It also works to address the regulatory demands and competition businesses face.
When it launched, SWIFT’s mission was simple: To create a secure, standardized messaging system between banks across different countries.
Today, SWIFT powers payment functions and does bulk credit transfers, cash management, and corporate-to-bank payment initiations.
Payments before SWIFT
Before SWIFT was created, banks used telex technology to communicate instructions related to cross-border transfers. At that time, telex did not have standardized formats for financial messages. Each financial institution had its own proprietary message formats, making it challenging for different institutions to exchange information and instructions seamlessly. It was a manual process, hence very time-consuming.
Telex messages also had limitations in terms of message length and character sets. This restricted the amount of information transmitted in a single message.
The biggest concern for banks was security. Telex communication had security vulnerabilities. The transmission of messages through public telecommunication networks made them susceptible to interception, tampering, and unauthorized access.
SWIFT was established as a standardized messaging network specifically designed to address the shortcomings of telex.
How does SWIFT work for cross-border payments?
Sender initiates a message: A financial institution, the sender, creates a SWIFT message containing the necessary information for a specific transaction, such as payment instructions, beneficiary details, and relevant codes.
Message formatting: The sender formats the message according to SWIFT's standardized format.
Message transmission: The sender transmits the SWIFT message securely to the SWIFT network.
Message routing: Once the SWIFT message enters the network, SWIFT routes it to the recipient's financial institution based on pre-established connectivity arrangements and routing rules.
Message delivery: The recipient's financial institution, the receiver, receives the SWIFT message through their connectivity with the SWIFT network.
Message processing: The receiver's system processes the SWIFT message, extracting the relevant information and initiating the necessary actions based on the transaction type.
Acknowledgements and status updates: SWIFT provides acknowledgements and status updates to the sender. These updates include payment confirmation, settlement status, and potential errors or exceptions.
Confirmation: This is the final stage. Once the transaction is completed, the receiver's system sends a confirmation message back to the sender via SWIFT.
Benefits of using SWIFT for cross-border payments
Global Reach: SWIFT provides a vast network connecting thousands of financial institutions worldwide. This global reach ensures that financial institutions can easily communicate and transact with each other. Serves as the primary interbank messaging service for financial institutions around the world. It also works with 11,000 member institutions and facilitates $150 trillion in transactions annually.
SWIFT offers multiple connectivity options to suit its members' diverse needs and capabilities. Financial institutions can establish connectivity with the SWIFT network through dedicated leased lines, internet-based connections, or SWIFT's cloud-based solution called SWIFTNet.
Security: SWIFT messages are encrypted to protect the information they contain. It employs robust security measures, including encryption, a source to collect and exchange KYC information, digital signatures, and secure data centres to protect the confidentiality and integrity of financial messages. Due to FATF (Financial Action Task Force) anti-money-laundering regulations, every SWIFT message requires at least the sender's and recipient's actual name and address and is stored for 124 days. Their secure network also allows for fast and efficient payment processing.
Financial institutions can also perform validation checks against predefined rules to ensure the integrity and accuracy of messages. This helps identify errors or inconsistencies in messages early in the transaction lifecycle, reducing the likelihood of processing delays and rejections.
Standardization: One of the main reasons for SWIFT was to create a secure, standardized messaging system. SWIFT employs standardized messaging formats, ensuring consistency across different systems and institutions. This standardization simplifies communication and reduces errors, making it easier for financial institutions to exchange payment instructions and other relevant information. SWIFT is seen as being at the centre of most transactions, as it has been synonymous with cross-border payments since its launch.
SWIFT standards enable enhanced Straight-Through Processing (SIP). SIP is the seamless and automated processing of transactions from initiation to settlement without manual intervention. Although SIP is not advised for small businesses because of its cost, large corporations, especially in the e-commerce sector, can use it to authenticate their customers on the web, sell them, initiate a payment, and set delivery of the product.
Drawbacks of using SWIFT
High Fees: Joining and maintaining membership in the SWIFT network can involve significant costs. Financial institutions must pay membership and transaction fees and potentially invest in additional infrastructure to connect to the SWIFT network; maintenance FTE (full-time equivalent), location of infrastructure, traffic, contractual parties, etc.
Also, SWIFT charges a small fee for each message sent through its network. These fees vary depending on the type of message being sent and the destination country. Banks also charge commissions for international money transfers. This is a disadvantage for businesses that make smaller transfers or involve less common currency pairs.
There is a list of fees to be paid depending on the transfer type and bank used.
Outgoing wire transfer fee for sending your SWIFT payment.
incoming payment fee to receive money in your account through SWIFT.
Foreign exchange fee to convert your payment into another currency.
SWIFT tracing fee to check on the progress of your payment.
Fines for late payment apply if the payment has not been cleared by your due date even though the transaction was initiated before the deadline.
In 2021, SWIFT launched a service called Swift Go that enables banks to cater to small businesses and individuals making and receiving cross-border payments. However, many businesses have complained about the fees associated with it.
Lack of transparency: Despite the improvements brought by SWIFT GPI (which will be discussed later in this article), there still needs to be more transparency in the payment process.
The exact fees charged by intermediary banks, the timing of each payment stage, and possible currency conversion rates are unknown, leading to uncertainties for both the sender and the recipient of cross-border payments.
This is why businesses may have to pay fines for late payments because they sometimes have no full context on why payments may be delayed.
What we can expect from SWIFT in the future
In 2017, SWIFT launched SWIFT GPI (Global Payments Innovation), an innovation that lets you make high-speed cross-border payments in minutes or seconds. According to data from SWIFT, 50% of GPI payments are credited to end beneficiaries within 30 minutes, 40% in under 5 minutes, and almost 100% of GPI payments are credited within 24 hours.
Swift GPI is said to be the future of cross-border payments by making them more efficient and affordable for businesses and individuals worldwide. This innovation was created to address all the concerns users had about SWIFT. Customers can track payments in real-time, monitor their progress, and receive status updates. This transparency improves customer experience, reduces inquiries, and facilitates effective reconciliation and reporting. SWIFT GPI is also said to be tailored to each market segment.
The future with SWIFT proposes instant payments, increased transparency when making cross-border payments, and automated previously cumbersome manual processes.