Editor’s Note: Amidst the market implications of the conflict in Ukraine, the very real human cost is at the forefront of the world’s concerns. Our thoughts are with Ukraine and the people impacted by this war. All of the information in this article is public knowledge.
In the wake of the Russian invasion of Ukraine, sanctions designed to hurt the Russian economy and pressure Russia’s withdrawal from Ukraine are underway. In an announcement this week, several Russian banks are to be removed from the SWIFT bank connectivity network.
SWIFT, the Society for the Worldwide Interbank Financial Telecommunication, is the dominant global payment network for corporates. In simple terms, SWIFT is a network to move data from one party to another: a messaging service for financial data.
Are there alternatives to SWIFT?
In short, yes.
Removing Russian banks from SWIFT cannot completely stop funds from moving across borders. But, according to the Biden Administration, removing the selected Russian banks from SWIFT is expected to impact 80% of all banking assets in Russia.
The only action that could stop all money moving in and out of Russia is if every global bank blocks any transaction to/from any Russian bank domiciled in any country.
Other Messaging Networks
While SWIFT is the most common network for moving money globally, some countries have built their own messaging networks. For example, SPFS, or the System for Transfer of Financial Messages, is the Russian-equivalent of SWIFT. It was developed in 2014 when countries around the globe threatened to expel Russia from SWIFT due to its annexation of Crimea. It allows for transfer of funds between any two banks on the system.
Since only select Russian banks are to be removed from SWIFT, some Russian banks will still remain active on SWIFT. Funds could be moved from a sanctioned Russian bank to an unsanctioned Russian bank via a messaging network like SPFS.
Non-Russian banks with branches in Russia also remain active on SWIFT. Funds could also be moved from a sanctioned bank to a Russia branch of a foreign bank via a domestic messaging network.
Other countries have developed their own payment messaging systems. China has developed its own messaging network called CIPS. As of 2021, CIPS counted 80 financial institutions as its members, including approximately 23 Russian banks. Funds in the impacted Russian banks could be transferred to unsanctioned banks via CIPS, as there has been no news from China about removing Russian banks from this payment messaging system.
Although SWIFT is the most commonly-used bank connectivity channel globally for companies today, it is quickly becoming obsolete due to advancements in bank APIs. SWIFT bank connectivity, including SWIFT FILEACT, is a file-based system that requires many manual steps and is not able to deliver data in real-time. It is also highly vulnerable to internal and external fraud.
But, connecting to a corporate bank API is not easy. Consumer bank APIs came to market first and are relatively simple to connect to because consumer transactions are much simpler than commercial banking transactions. Through consumer bank API aggregators like Plaid or MX, consumers are able to quickly and easily connect financial tools like Venmo or Mint directly to their bank accounts. Corporate bank APIs are complex because they carry richer data such as languages and invoice numbers. As a result, connecting to a corporate bank API is also complex. Corporate bank API aggregators offer a streamlined process for connecting to corporate bank APIs but doing so is not an overnight process and depends on the readiness of the company’s bank partners.
Blockchain and Cryptocurrency
While corporate adoption of cryptocurrency has been limited so far, it does serve as an alternative to SWIFT. The drawbacks of using cryptocurrency are a very low acceptance rate – very few businesses accept cryptocurrency as a form of payment and the volatility in the value of cryptocurrencies. For example, the value of Bitcoin, the most widely-known cryptocurrency, has seen several peaks and valleys in the last five years.
Fax and Phone
According to the Biden Administration in the United States, phones and fax machines are still a possible route for sanctioned Russian banks. “If one of these de-SWIFTed Russian banks wants to make or receive a payment with a bank outside of Russia, such as a bank in Asia, it will now need to use the telephone or a fax machine. In all likelihood, most banks around the world will simply stop transacting altogether with Russian banks that are removed from SWIFT.”