Introduction
Editor’s Note: This post was originally published in February 2022 as sanctions such as removing Russia from the SWIFT network were being discussed in reaction to Russia’s invasion of Ukraine. The original post remains intact below, but we have updated the post to add more information on the big picture of SWIFT alternatives.
As a treasurer, you need quick and precise access to real-time banking data. The traditional means of achieving this is through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. But today, there is a better alternative: bank APIs. But connecting to bank APIs has historically been a complex and expensive process. Fortunately, there is a better way to connect to bank APIs. Read on.
Are there alternatives to SWIFT?
Yes, there are alternatives to SWIFT and host-to-host connectivity. Here are the alternatives:
- Other messaging networks
- Bank APIs
- Phone or Fax
- Blockchain or Cryptocurrency
Let’s separate the wheat from the chaff. Other messaging networks exist, but they are highly geographically limited and therefore defeat much of the purpose of a SWIFT alternative. Unless you want to return to the dark ages, we can remove phone or fax as a true alternative. Blockchain or cryptocurrency can technically do the job, but as described in the original post below, the volatility in valuation and lack of acceptance is limiting.
Where does that leave us? With bank APIs.
Check out the 2022 Annual Power Rankings Report for Corporate Bank APIs
Bank APIs are Faster and More Secure than SWIFT
Heraclitus said “There is nothing permanent except change” and bank connectivity technology is no exception. SWIFT was founded 50 years ago, in 1973 – the US war in Vietnam was ongoing, the Sydney Opera House was opened, and the world was listening to Roberta Flack, Jim Croce and Marvin Gaye. It would be ten more years before IBM would announce its first ever laptop computer.
Since 1973, technology has advanced at lightning speed. The internet, the smartphone, bluetooth technology, and AI-backed tools have all revolutionized so many parts of our personal and business lives. But, SWIFT’s technology has not materially changed from their original offering.
The revolution has arrived: bank APIs.
Bank APIs provide a faster and more secure way to move data between corporations and their banks. For treasury practitioners and their partners in IT, APIs are nothing new. Most people already use API connections in their every day life and in their work life – whether it’s the weather API that pipes the forecast into their smartphone, or the API that connects the HR system to the payroll system. Most treasury teams are also familiar with real-time data – just not real-time bank data – because of the limitations of SWIFT and host-to-host bank connectivity.
Why have bank APIs taken so long?
The technology of APIs has been around for some time. So why has it taken so long for bank APIs to overtake legacy bank connectivity methods like SWIFT and host-to-host? There are two reasons:
1. Until recently, banks saw API connections as a nice-to-have. Banks likely had a project to create bank APIs on the To Do list since APIs became common. But, there was no hair-on-fire reason to prioritize them until 2013. In that year, the European Union amended regulation called PSD2 (Payment Service Providers Directive 2) which forced banks to make all the information a bank had about a client available to the client or their proxy. The way banks chose to comply with this new rule was to create open banking APIs. Other regulations similar to PSD2 have been implemented in major countries around the globe since then.
Banks have now prioritized the creation of API connectivity, and in fact, there are more than 90+ live bank APIs available and in use on the market today, and growing every day.
2. Until now, it was incredibly difficult to connect to a bank API. The instruction manual for connecting to a single bank API is hundreds of pages long and takes an army of specialized developers. Most corporations would need to connect at least 4 bank APIs (balances, transactions, payment initiation and payment status) across each of their banks. With some corporations having more than twenty bank partners, it would be an uphill battle for even the most generously-resourced treasury and IT teams, and require significant ongoing maintenance.
Check out the 2022 Annual Power Rankings Report for Corporate Bank APIs
Making bank API connections easy
Countless treasury and finance teams have understood the value of advancing to bank APIs, and some have made a valiant effort to build connections themselves.
Enter the multi-bank API aggregator.
A bank API aggregator is a technology provider that connects to multiple banks in one integration effort. It acts as a “google translator” between all the unique formats and messages from each bank, and renders them into a single endpoint that connects to existing systems. This makes it easier for companies to connect to bank APIs and, in turn, access balances and transaction data and initiate payments all in real-time – — something that was not possible before without significant development effort and resources. This type of third-party technology partner allows companies to quickly advance their bank connectivity without building out an in-house infrastructure or needing to spend months trying to connect with each individual bank’s API separately.
Original Post
——Original Post published February 28, 2022—-
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.
Bank APIs:
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.”
