SWIFT: Full Form, Functions and Importance

What is SWIFT?

SWIFT can be described as a system used for transferring information, like banking orders or banking instructions to execute any financial transaction between two different countries through financial intermediaries. SWIFT, introduced in 1973, is a messaging system used by banks and other financial institutions all over the world. SWIFT does not actually transfer money. It is important to understand that SWIFT is not any finance house that is involved in any advancing of loans or any accepting of money from users, it rather provides messaging infrastructure for other financial institutions to execute Cross-Border transactions effectively and efficiently.

Key takeaways from Society for Worldwide Interbank Financial Telecommunication (SWIFT):

• SWIFT stands for Society for Worldwide Interbank Financial Telecommunication.
• SWIFT is used to quickly, accurately, and securely send and receive information, primarily money transfer instructions.
• SWIFT is the backbone for all international electronic funds transfers (EFTs).

History of Society for Worldwide Interbank Financial Telecommunication (SWIFT)

Before SWIFT, the world used telegraphic transfer to transfer funds internationally. This system was very slow as it was majorly based on human intervention and it usually takes two to four days to complete a transfer, it involved describing each transaction with sentences instead of extremely complex codes. The need of the globe was a framework that could change this slow and complex functioning of cross-border transactions and hence SWIFT was founded. The SWIFT platform headquartered in Belgium is controlled by the G-10 countries as well as the European Central Bank. SWIFT is a global member-owned cooperative that was founded in 1973 by 239 banks from 15 countries it went live with its messaging services in 1977 replacing the old telex technology that was then widely used by banks to communicate instructions. After that SWIFT was widely used due to its mass reach and efficient framework, it became a business practice to use SWIFT for any cross-border transaction, it gained massive business reach in the 1990s when the globe was entering the era of financial globalisation.

How does SWIFT Work?

1. SWIFT enables the payee to transfer money to an account located in another bank in another country to uniquely identify a financial institution.

2. SWIFT assigns every financial organisation a unique code, which usually has eight or eleven characters. As for the eleven-character swift code, the first eight characters will be the same as the eight-character swift code.

3. The last three codes are usually used to identify individual branches.

4. In the classical eight-character swift code, the first four characters are the institute code, which is used to identify the financial institution. The next two characters indicate the country code, and the last two characters represent the location or city code.

To understand the workings of SWIFT we will go through two cases:

CASE 1: The Two banks have a commercial account with each other.

Let’s assume that GFG Inc. wants to transfer 1 Million dollars from their account created in Bank of America in the U.S.A. to XYZ. Inc., situated in Australia, has bank account in the National bank of Australia, a simple scenario is that two banks both have a commercial account with each other which means they do have an established relationship. In that case, Bank of America (GFG Inc.’s bank ) will send a swift message or payment instructions to National Bank of Australia (XYZ Inc.’s bank), and within a few minutes then Bank of America (GFG Inc.’s bank ) will deduct 1 million dollars from their account and National bank of Australia (XYZ Inc.’s bank) will credit 1 Million dollars in their commercial account. The last step is to credit 1 Million dollars to XYZ Inc.’s personal account minus any fees charged for the transfer.

CASE 2: Interacting banks do not have a commercial bank account with each other.

Let’s assume that GFG Inc. wants to transfer 1 Million dollars from their account created in Bank of America in the U.S.A. to XYZ. Inc., situated in Australia, which has a bank account in the National Bank of Australia, this will be a complex scenario as two banks don’t have an established commercial relationship with each other. So in this case, they will look for an intermediary Bank, which has a commercial relationship with both banks. This third bank will act as the bank in the middle to handle the transaction, and the step will be like this. Bank of America (GFG Inc.’s bank ) will deduct 1 Million Dollars from their bank, Bank of America (GFG Inc. bank ) will notify the bank in the middle to debit their commercial account by 1 Million Dollars and credit the commercial account of National bank of Australia (XYZ Inc.’s bank) for the same amount. National Bank of Australia (XYZ Inc.’s bank) will then credit the money to XYZ Inc.’s account. In this scenario, since there are more steps involved in the whole process more fees might be charged, and more processing time will be needed than in the previous simple scenario.

Understanding Structure of SWIFT

SWIFT code is an 8 to 11 Digit Code, depending upon the country. Let’s suppose the SWIFT Code is ABCD-XY-MN-123.

1. Bank Code: Where the First four letter signifies the Bank Code, i.e., ABCD

2. Country Code: The next two letter signifies Country Code, i.e., XY

3. Location Code: The next two letters signify Location Code, i.e., MN

4. Branch Code: The next three letters signify Branch Code, i.e., 123

Functions of SWIFT

A wide range of functions are performed by SWIFT for the financial industry:

1. Global Transactional Messages: SWIFT provides a secure, reliable, and efficient network for the smooth movement of messages. Through its various messaging hubs, software, and network connections, which facilitate faster transactional messaging for financial institutions.

2. Real-time View: SWIFT provides their clients a real-time view to monitor messages, activity, trade flow, and export reporting, which makes it easier to track transactions and helps banking operations.

3. Foreign Exchange (Forex) Transactions: SWIFT offers access to many valuable applications, such as real-time instruction matching for treasury and foreign exchange (forex) transactions, which enhance user security and resilience on Forex Transactions.

4. Business Analysis: SWIFT Carries out macro-economic analyses, which helps financial institutions carry out their banking operations carefully.

5. Other Services: SWIFT provides business intelligence, reference data, and compliance services. Produces messaging management software packages for its clients.

6. Offers Professional Training: SWIFT provides professional training to its users so that they understand the whole framework of SWIFT and grasp the workings of managing their needs.

Importance of SWIFT

SWIFT is widely used by Banks, Foreign Investors, Asset Management Companies, Depositories, etc. SWIFT has proved to be an important component for carrying their business operations effectively. Some of the key importance of SWIFT to the finance industry are:

1. Global network: The SWIFT network has been crucial in facilitating International Trade easily. SWIFT has provided a platform for the globe to perform cross-border transactions faster and securely.

2. Efficiency Process of Fund Transfer: Standardised processes are used to carry out transactions, which makes it faster and more efficient and saves time, which was not the case in traditional telegraphic transfer.

3. Accessibility: Under any Cross border two different enterprises across the globe interact, which comes with the challenge of communication, but SWIFT breaks down these barriers to make communication between countries as seamless as possible.

4. Accountability– SWIFT uses data encryption techniques, which makes it extremely secure to use, and users can trace their payment from bank to bank, so both know when the payment was sent and received and whether it is been received by the correct enterprise.

5. Wide Acceptability– SWIFT is now being used throughout the Globe by almost 11,000 institutions in more than 200 countries around the world – making it almost universally accepted. Hence, it is almost a business practice to use SWIFT.

Difference between SWIFT and IBAN

IBAN and SWIFT codes are utilised to facilitate banking operations. They serve different purposes and cannot be interchanged.

1. SWIFT was designed to promote efficiency in International Bank transfers and minimise errors due to missing or incorrect account information, whereas the IBAN is a unique identifier that may consist of a country code two check digits, and a bank account number the country code and check digits ensure that it is a valid and accurate identifier for the specified bank account.

2. The IBAN is used to identify bank accounts of individuals, while specific banks are identified by IBAN.

3. The IBAN is used to facilitate transfers internationally, while the communication between financial institutions is facilitated by SWIFT.

4. IBAN is widely used in Europe and a few other countries, while Swift codes are used globally.

5. SWIFT code is an 8 or 11-digit code (as the case may be), whereas IBAN is a 15 or 20-digit alphanumeric code that can extend to 34.

In the recent trends, when we are promoting financial globalisation, and the goal is to promote a faster and more efficient way of transferring and tracking funds, SWIFT has an extremely crucial role to play as SWIFT allows all the transactional messaging to integrate into the bank systems, and so there is no manual intervention. 95% of SWIFT payments throughout the world are all completed comfortably within 24 hours, and they are valued in trillions. SWIFT has proved to be a backbone of financial transactions throughout the world, but also with the introduction of blockchain, the role of SWIFT would begin to change. It will still be the messaging to support international payments, but they would have to adapt to take account of that new type of payment. That is certainly a possibility for the future.