How do SWIFT transfers work?

SWIFT is used to send or receive currencies internationally, which happens via the SWIFT International Payment Network, a financial messaging system.
SWIFT is used to send or receive currencies internationally, which happens via the SWIFT International Payment Network, a financial messaging system.

SWIFT or Society of Worldwide Interbank Telecommunications is used to send or receive currencies internationally, which happens via the SWIFT International Payment Network.  This network is one of the largest financial messaging systems used by banks and financial institutions globally. Money transfer instructions are accurately and securely send through SWIFT through a standardized system of codes.

 

How does SWIFT work?

SWIFT assigns a unique code to each financial institution which the user has to be aware to send money to a particular account in that particular institution. The user can have an account in a different bank that is affiliated with SWIFT, so his bank sends a payment transfer SWIFT message to the recipient bank. Once the recipient bank gets this message it credits the money to the particular bank account mentioned in the message. Intermediate parties called Correspondent banks to come into the picture if the sending bank doesn’t have a direct relationship with the recipient bank. The movement of funds in the background is done by debiting and crediting several accounts by institutions on either side and relies on these banks maintaining accounts with each other (either directly or through intermediary banks). The payments take 3 to 5 working days to reach their destination and sometimes even longer due to the time difference between sending and receiving countries or multiple intermediary banks involved in the transfer.

Swift messages are programmed using FIN language. Swift uses different message codes for different types of transactions. Hence SWIFT is only a messaging system, it doesn’t do any fund holdings. Swift network is run from four data centers across the globe, at the United States, Netherlands, Switzerland and fourth at a secret location known to few employees for security reasons.

It was introduced in 1974 by seven major banks forming a society and today nearly 11,000 financial institutions of 212 countries worldwide use this system to send secure financial messages. SWIFT has a lion’s share in the market with its competitors like FedWire, Ripple and CHIPS.

SWIFT services not only banks but also exchanges, depositories, AMCs, Money brokers and Treasury market. Roughly around 50% of the SWIFT message traffic is for payment messages, while another 43% accounts for secure transactions and the remaining 7% is for treasury transactions. SWIFT makes money each time a message is sent through it. It sells software and earns one-time joining fee from member institutions and annual support charges. Since SWIFT transfer involves two currencies, the banks involved levy poor exchange rates and get profit from the difference. Correspondent banks deduct money as a handling fee.

As of May 2017, SWIFT has introduced universal real-time payment tracking by which banks that have signed up to SWIFT GPI can track the payments in real-time from end to end. The dashboards and reporting utilities introduced help clients to monitor messages in real-time. It has forayed into new services like data for business intelligence, reference data, and compliance services. The Indian equivalent of SWIFT is SFMS (Structure Financial Messaging System) that is used for intra-bank and inter-bank transactions.

SWIFT clients have very huge transactional volumes and hence manual entry of instructions in the SWIFT interface is a hitch. Automation in the area of message creation, transmission and processing is the need of the hour for SWIFT to scale up to heights.

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