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Getting ousted from the SWIFT network is viewed as severe sanction. When the banks being expelled are all from a global superpower it’s an unprecedented move with consequences that extend well beyond the financial institution itself.
What’s SWIFT?
One of the biggest organizations in finance is also one that is difficult to define: SWIFT. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication, and is the global provider of secure financial messaging services. The organization is headquartered in Belgium, was established in 1973 and considers itself a neutral entity. It is a cooperative owned by its members and is overseen by the National Bank of Belgium in partnership with other major central banks, including the U.S. Federal Reserve System, the Bank of England and the European Central Bank.
Who uses SWIFT?
Anyone who works in corporate finance is familiar with the SWIFT system. In fact, any person who has sent money internationally through a bank wire transfer has likely used SWIFT, because sending a personal wire transfer typically requires providing the SWIFT code for the recipient’s bank. SWIFT transfers money between more than 11,000 financial institutions in over 200 countries worldwide. The network recorded an average of 42 million messages per day last year of which Russia accounted for 1.5 percent of the transactions
SWIFT codes are issued to banks, but they’re also issued to businesses. Many large, multinational corporations also have their own SWIFT BIC (business identification code) and send SWIFT payments.
The following is a list of the types of companies that use the network:
• Banks
• Brokerage institutes and trading houses
• Securities dealers
• Asset management companies
• Clearing houses
• Depositories
• Exchanges
• Corporations
• Treasury workstation software providers
• Foreign exchange and money brokers
Visit the Treasury Resource Center for Managing Treasury During the Ukraine-Russia Conflict
What does SWIFT do?
Let’s start with what SWIFT does not do. SWIFT is not a bank, it does not manage accounts for people or for banks and it doesn’t hold any third-party funds. How do we define SWIFT? Similar to a postal service that moves letters from one place to another, SWIFT is a service used to move money across international borders.
It is a file-based system that simply serves as the channel for sending financial messages that move funds across borders. Think of SWIFT as the delivery trucks and machines inside the post office that sort and then deliver your mail.
How does SWIFT work?
The SWIFT network is built upon unique alphanumeric codes, 8-11 characters, that are specific to each member. In a SWIFT banking setup, the SWIFT code may differ from branch to branch. When a bank or company uses SWIFT, they apply these codes to their transaction messages to ensure the money they want sent is delivered to the right recipient.
Let’s start with a simple example. Here’s how an individual located in New York City who banks with Citibank might use SWIFT to transfer money to a friend located in England who banks with HSBC’s Essex branch.
- The sender walks into their local Citibank branch in New York City. They have the friend’s name, address, account number, amount of the transfer, and the unique SWIFT code for their specific bank branch.
- Citibank sends a payment transfer SWIFT message to the HSBC branch over the SWIFT network
- HSBC receives the SWIFT message about the incoming payment and funds are moved from Citibank to HSBC
- HSBC credits the money to the recipient’s account in England
Now for a more complicated example. Here’s how a corporation with its own SWIFT BIC would use the network:
- Step 1: The finance team at a corporation creates a file – usually an XML, MT or CSV file – containing a dollar amount, the destination bank’s SWIFT code, recipient account number, beneficiary name and address. Multiple transactions can be batched together in one file.
- Step 2: The file is sent from the corporate to the bank via a SWIFT message
- Step 3: The bank picks up that file from its file server
- Step 4: The bank processes the transaction(s) in their downstream systems
If they process it successfully, the bank personnel will generate a second file of data — an acknowledgement — to confirm receipt. The process continues with…
- Step 5: The bank employee saves the acknowledgement to the bank’s fileserver
- Step 6: The acknowledgement file is sent back to the corporate via SWIFT
- Step 7: The finance team at the corporate constantly checks if it has arrived. Once it arrives, they pick up the file and move it to its next destination, usually to the ERP, to continue processing it.
As powerful as SWIFT is, keep in mind that it is only a messaging system. SWIFT does not hold any funds or securities, nor does it manage bank accounts.
Visit the Treasury Resource Center for Managing Treasury During the Ukraine-Russia Conflict
Does SWIFT make sanction decisions?
No, SWIFT does not have the authority to make sanctions decisions.
Though SWIFT complies with any applicable sanction laws, responsibility for ensuring that financial transactions sent via SWIFT comply with sanction laws rests solely with the government bodies and legislators in the countries in which the financial institutions reside. Because it is messaging network, SWIFT has no control over the financial transactions that are sent via their system.
Here again, SWIFT acts like the postal service: it delivers the letter – in this case a file containing a message with instructions to move money – between sender and receiver, but neither the postal service, nor SWIFT has authority over what is in the message.
Are there alternatives to SWIFT?
In short, yes. There are several alternatives to SWIFT including bank APIs.
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FinLync is an expert in corporate bank connectivity. FinLync is a privately held, global fintech company transforming the insights and functionality of corporate finance and treasury offices through its world-class products. FinLync’s corporate bank API aggregator and bank API-powered suite of apps empower treasurers to optimize cash, make better, faster decisions, save time and reduce the resources needed to manage complex finance needs. FinLync’s largest clients include Fortune 500 and Fortune 2000 companies. The firm has employees from 18 different countries and offices in New York, Los Angeles and Singapore. For press inquiries, please contact finlyncpr@fullyvested.com
