What is SWIFT?
The term SWIFT is one which you will come across frequently in the world of cross-border payments. What is SWIFT and what does it stand for?
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication, a Belgian company established in 1973. The company has a highly ambitious and very innovative vision aiming to create a worldwide financial messaging service and to introduce a financial lingua franca, a universal language for the exchange of international financial messages.
SWIFT provides a trusted and closed network and is used for the communication of financial messages across banks. SWIFT is used by around 11 thousand financial institutions in over 200 countries and is used for around 25 million communications a day. 98 per cent of all international fund transfers are carried out through the SWIFT network.
At this point, it is imperative to understand that SWIFT is a messaging service. It does not move funds but rather is used to send the messages accompanying the fund transfer. Before SWIFT was developed, banks used a system called TELEX for wire transfers. This was a system involving a manual process for writing and reading messages, a process which was not fool-proof.
As of date, SWIFT records an average of 44.8 million messages daily with an average daily net-net volume of USD 7.5 trillion in 2022 as per a report by Citi GPS.
SWIFT messages are standardised with the details being transmitted clearly and transparently with every financial institution having its unique code and every message having a distinctive reference number. SWIFT messaging has the following advantages:
Transparent The message mentions the amounts the route the funds will take, a detailed summary of all charges and the nature of the payment in unequivocal terms. There exists no opportunity for any ambiguity.
Traceable The transaction including the amount and the route to be taken for the same is laid out in the SWIFT message.
Consistent The structure of the messages makes the payment information contained in the SWIFT message easy to understand regardless of country or language.
Financial institutions engage a host of correspondent banks and depend on a spider web-like intricate network of intermediary banks. Intermediary banks are required as all banks do not have an established financial relationship. The SWIFT network enables such cross-border transfers as the banks may search the network for intermediary banks in geographies where they do not have a correspondent bank. Such intermediary banks are called routing banks.
For example, if you need to transfer funds in Great Britain Pounds (GBP) from your HDFC Bank account in India to the Isle of Man Bank in the Isle of Man, a self-governing body with the dependency of the British crown in the Irish Sea between England and Ireland. HDFC Bank has Barclays Bank PLC as its correspondent bank for GBP transactions. Barclays Bank PLC does not have a direct link to Isle of Man Bank. They will transmit the funds to Natwest, London, who in turn will transmit the funds to their correspondent bank Isle of Man Bank.
In this example, HDFC Bank and Barclays Bank PLC share a correspondent bank relationship. The same is shared between Natwest London and Isle of Man Bank. So the intermediary bank used by HDFC Bank in this transaction is Natwest London. The SWIFT network enables searching for a suitable intermediary bank and the SWIFT message records all details of the correspondent and intermediary banks along with details of the amount, the remitter and beneficiary as well as the purpose of the transaction.
The SWIFT network also utilises Nostro and Vostro accounts, accounts of correspondent banks held by each other.
For the SWIFT message to reach the proper and particular bank and branch a Bank Identification Code (BIC) is used in SWIFT messages. You may compare it to a postal code that identifies the precise location of, in this case, the bank branch.
Types of SWIFT messages
The following types of SWIFT messages are most commonly used:
MT101
MT101 is a request for transfer either customer to bank or interbank. The message format that enables a transfer of funds from an ordering customer/bank account to a receiving financial institution is referred to as a message in the SWIFT MT101 format.
MT103
MT103 is an interbank request used to transfer funds for a single customer. This SWIFT message is commonly known as an international wire transfer, Telegraphic Transfer (TT), etc.
MT202
MT202 is an instruction for a transfer of funds between financial institutions
MT202 COV
MT202 COV is a format of a SWIFT message used for bank-to-bank payments or in the case of a SWIFT message in the MT103 format sent using the Cover method. In such a Cover method the SWIFT message sent in the MT 202 includes fields for the originator of the transaction.
There are certain SWIFT messages used for confirmatory purposes for instruments of international trade such as Bank Guarantees (BG) or Letters of Credit (LC). These also include SWIFT messages sent to intimate changes in the terms of the LC or BG.
Structure of a SWIFT message
A SWIFT message follows the following structure:
1.
2.
3.
4.
5.
A sample of a SWIFT MT 103 message is given below:
Such is the dominant position enjoyed by SWIFT in the world of financial messaging that often banks in countries facing sanctions for various grave reasons are debarred from using its services. As of today, banks in Iran, Russia and Belarus, facing sanctions from the European Union (EU) do not have access to the SWIFT system.
