Over the past week, blocking Russia from SWIFT has been one of the biggest rallying cries globally.
While that’s all well and good, you might be asking yourself: WTF is SWIFT anyways?!
That’s a great question, and one totally worth answering.
We’re going to do our best to explain it (for the record, the guy writing this processed countless numbers of SWIFT transactions in a previous job. He also played squash in the company gym for a while, with a friend working there. That’s where a lot of this knowledge is coming from).
What is SWIFT?
SWIFT is a Belgian FinTech company that makes international financial transactions cheaper and more efficient.
SWIFT stands for the “society of worldwide interbank financial telecommunication.” (You can see the acronym is more fitting).
In short, SWIFT is a protocol and network that enables banks and financial institutions to easily trade money, financial instruments and provide information on corporate actions. (Think: dividend payments or stock splits).
SWIFT is members-only, and to get in you need, at a minimum, some form of a banking or brokerage license. Speaking from our experience setting up abroaden, you can’t just buy those off of a shelf.
Users in the network send billions of messages a year, totaling quadrillions-USD worth of transactions annually.
How does SWIFT work?
SWIFT works on two levels:
- It standardizes the different parts of financial transactions into uniform fields, making the different parts unambiguous (and increasing trading efficiency).
- It provides a secure network, where, through extraordinarily strict protocols, it’s practically impossible to fake a SWIFT message. Before sending a message, for example, the two parties do a “digital handshake” that verifies their authenticity.
To the first point, it helps to break down some different fields.
If you’ve ever transferred money on your banking app, you’ve almost certainly used a BIC.
BIC stands for “Bank Identification Code” (so if you say “BIC code” you’re saying “code” twice. I know, I must be super fun at parties).
The BIC is the unique address for the receiving financial institution (i.e the bank getting the message).
If you’re sending a SWIFT, there’s likely a financial transaction behind it. Here, the sender puts the nominal and potentially cash amount that they want to send and receive.
The financial instrument
If stocks or bonds are involved, the SWIFT message will have the specific code for that security (banker-speak for an investment asset).
SWIFT uses the international security identification number (ISIN) format by default and not the stock ticker code.
Trade date and settlement date
The dates record when a transaction takes place, which is important for accounting purposes.
Additional information about the transaction.
Crucially, SWIFT has fields for what we call “trade references.”
Trade references make it possible for banks and institutions to credit and debit their customers’ accounts.
Think of it this way. A customer in bank A wants to sell shares of Unilever directly to a client in bank B (avoiding the stock market, which happens all of the time between big traders).
Bank A sends a SWIFT message to Bank B with Bank B’s BIC and other trade details.
Bank A uses the reference field to say which account in Bank B should get the shares.
Without this reference, bank B will have no idea what to do with the shares and will send them back, in turn, making the trade fail.
Just for your information, this example is oversimplified. When banks trade with each other, they do so through a common counterparty or central securities depositary, like Euroclear Bank, also a Belgian bank. (+32 represent 🇧🇪).
They usually don’t trade with each other directly, but you get the idea.
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Reconciliation and security
At the end of each day, SWIFT members send out a message listing all of their transactions with other members.
They use this information to reconcile all transactions to make sure that the books balance. If they don’t, then teams in the institutions investigate to reconcile the “break.”
There’s also a monthly reconciliation message that acts as a third safeguard.
(That’s right, Blockchain nerds. The system already has a strict control process in place).
When I send money (abroad) do I send a SWIFT message?
You might be thinking: “awesome; the last time I made a payment or sent money abroad, I sent a SWIFT!”
That’s not (quite) true.
First, whenever you’re making a domestic payment from your bank, you’re using the local payment network.
In Europe, we use SEPA, which while following parts of the SWIFT protocol, is a separate payment standard.
What’s more, is that these payments all go through the central bank. Generally, each commercial and retail bank keeps accounts with each other. When their customers make transactions, the banks adjust their balance sheets between those two accounts.
All of that sits in the central bank.
(That probably came off a bit trippy. Here’s an article we wrote about the concept way back in 2019 that goes into a bit more detail).
In the US, interbank payments clear via ACH and CHIPS. The US does not use the SWIFT protocols internally. Instead, institutions connecting to the outside world use SWIFT and then translate it into the American system.
When you send money abroad, you’re indirectly sending a SWIFT (sort of).
When you do a currency exchange and send money abroad, you’re doing so on top of two different banks or financial institutions.
What will generally happen is that these two partners have different currency accounts with each other.
First, they’ll check to see if they have the balance on each other’s accounts to do the transaction instantly. If they do, you’ll see the payment go through immediately.
In this case, they do basic accounting, debiting your account in the currency you’re converting and crediting it to the one you’re sending.
If they don’t, they’ll pool their transactions together throughout the day.
Once there’s enough in place, they go to the currency market, make a bulk exchange, then send a SWIFT message with the total amount.
The two will then send the individual client accounts in a separate file, using a different secure protocol.
Additionally, SWIFT messages are kind of expensive. Unless you’re moving a significant amount of money (think at least 100,000 EUR), using the network is far from cost-effective.
That’s why most banks and other financial institutions pool their client transactions together when making cross-border payments for retail customers.
Right. Hopefully, this article helps clear up any curiosities or misunderstandings about SWIFT you might have.
Of course, we oversimplified a lot of what this incredible network does. There’s tons more to it, and most of it gets deeply technical.
In any case, we hope you get the picture.
Any questions? Hit us up on Instagram or LinkedIn to let us know!