Working out SWIFT
SWIFT has been a hot topic in the news lately but there seems to be an overwhelming amount of confusion about what SWIFT does and how they impact the global financial ecosystem. First, let’s uncover what SWIFT stands for, the Society for Worldwide Interbank Financial Telecommunication. As the name implies, SWIFT serves a communication network for banks, SWIFT is not moving money, transferring assets, or holding assets of any kind.
Next, let’s understand why a communication platform for financial messages is such a big deal. Sending payments internationally can be incredibly complex. To successfully send a cross border payment, one must be conscious of the changing currencies, fluctuating exchange rates, and actual language barriers in order to ensure payment accuracy. Before SWIFT, financial messages were send via a service called telex. Telex messages closely resembled the formatting of an actual handwritten letter, these messages included extensive manual activities that did not follow any type of structure, making the process incredibly time consuming.
When SWIFT was introduced in 1973, the cross-border payment messaging system was instantly streamlined and improved. Now, all payments sent via SWIFT are accompanied by a unique SWIFT code that quickly relays the required information for understanding the payment message. The formatting of these messages follows a strict code-based structure that allows for timely processing. An example of the code structure can be seen below.
How SWIFT Breaks Down Global Barriers
Every bank that is a part of the SWIFT network can take advantage of the code-based messaging system seen above. With this innovative code, SWIFT removed error prone and time-consuming manual activities associated with cross border payments and provided a secure and immediate connection. SWIFT provided structure to financial messaging when there was dire need for efficiencies, the platform has been incredibly well received and widely adopted since launch. According to SWIFT, 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.
Addressing Common Misconceptions
Is every country in the world a part of SWIFT?
No. However, in 2014 SWIFT reported over 200 countries and territories make up the SWIFT network.
If a country is not a part of SWIFT does that mean they cannot transact internationally?
No. Remember SWIFT is only the messaging system however, it is a very popular and widely used messaging system. There are other messaging systems that financial institutions use such as Fedwire, CHIPS, TARGET2, etc.
For further explanation, consider the two different scenarios listed below. In these examples, SWIFT can represent a cell phone, cell phones make cross border communications easier but, are not the only way to communicate with someone.
Communicating without SWIFT
Sarah lives in New York and wants to communicate with her grandmother who lives in Finland. Unfortunately, Sarah does not have access to a cell phone so she cannot text or call her. Sarah can still communicate with her grandmother; however, she will have to rely on a method that is not as fast or secure. Sarah can communicate with her grandmother via the mail service which sometimes takes weeks, carrier pigeons which are often intercepted, or in-person visits which require the coordination of a lot of moving parts.
Communicating with SWIFT
Sarah lives in New York and wants to communicate with her grandmother in Finland. Sarah has access to a cell phone so she can call and text her grandmother whenever she would like. Sarah’s phone calls always reach her grandmother quickly and securely, so she can communicate effectively whenever she would like.
Is it common for a country to get ejected from SWIFT?
No. This is happened only three times in recent history. First with Iran in 2012, then with North Korea in 2017 and again with Russia earlier this month.