What is SWIFT?
The SWIFT messaging system, commonly known as SWIFT (Society for Worldwide Interbank Financial Telecommunication), is a global messaging network used by financial institutions to securely transmit information and instructions relating to financial transactions. It is the primary means of communication for international money transfers, payments, securities transactions, and other financial messages between banks and other financial institutions.
SWIFT provides a standardized format for these messages, allowing different financial institutions to communicate and exchange information effectively. The system enables banks to send and receive messages regarding fund transfers, payment instructions, trade finance, foreign exchange, securities, and other types of financial transactions. The SWIFT network operates based on a secure, closed-loop messaging system. Messages are sent from one financial institution to another via a series of secure hops until they reach the intended recipient. The system ensures the confidentiality, integrity, and authenticity of the messages exchanged.
SWIFT assigns a unique identification code, known as the Bank Identifier Code (BIC) or SWIFT code, to each financial institution connected to the network. This code is used to identify the sender and recipient of messages and helps ensure accurate routing of transactions. Notably, SWIFT is a messaging system that facilitates communication between financial institutions, while IBAN is a standardized format for identifying bank accounts. SWIFT codes are used to identify financial institutions, whereas IBANs are used to identify specific bank accounts.
How does SWIFT work?
SWIFT was initially designed and established to enhance the speed and security of communication between banks, primarily for the efficient processing of international payments. It’s important to note that SWIFT functions solely as a messenger between banks, facilitating the exchange of information. SWIFT itself does not deal with or possess any monetary funds.
When a SWIFT transfer occurs, participating banks facilitate the movement of funds from one account to another. This process relies on a network of Nostro and Vostro accounts established between banks specifically for executing SWIFT transactions. These accounts serve the purpose of handling incoming and outgoing payments and are utilized in the transfer of funds as instructed within the messages transmitted via SWIFT.
In summary, SWIFT’s core role is to enable secure and prompt communication between banks, allowing the transmission of payment instructions. The actual movement of funds occurs through the underlying network of Nostro and Vostro accounts established by participating banks.
Obtaining SWIFT Access.
Contrary to popular opinion, traditional banks are not the only financial institutions that can obtain access to the SWIFT system. There are three (3) primary strategies for obtaining access:
- Becoming a SWIFT Member: Financial institutions can become direct members of SWIFT by joining as a SWIFT user or a SWIFT service bureau. Becoming a member allows the institution to connect directly to the SWIFT network, enabling them to exchange messages with other members worldwide. SWIFT users have their own SWIFT infrastructure, whereas service bureaus provide SWIFT connectivity on behalf of multiple financial institutions.
- Partnering with an Existing SWIFT Member: Financial institutions can also choose to partner with an existing SWIFT member institution. By forming a correspondent banking relationship with a SWIFT member, the institution can leverage the member’s SWIFT connectivity to send and receive messages. This option can be suitable for smaller institutions or those with limited SWIFT usage requirements such as neobanks.
- Engaging a SWIFT Service Provider: Financial institutions can engage a third-party SWIFT service provider or SWIFT service bureau to access the SWIFT network. These providers offer SWIFT connectivity and related services to financial institutions, allowing them to connect to the SWIFT network without building and maintaining their own infrastructure. Here, this is most often accomplished through a partnership with a licensed Electronic Money Issuer or similar payments institution.
Direct SWIFT membership is somewhat limited, however, deposit taking institutions together with regulated securities industry participants can become direct members. These financial institutions include:
- Commercial Banks: Traditional commercial banks are the most common members of SWIFT. They use the network for various banking operations, such as international payments, trade finance, and securities transactions.
- Investment Banks: Investment banks involved in capital markets, securities trading, and investment activities can also become members of SWIFT. They utilize the network for messaging related to securities settlement, custodial services, and other investment banking operations.
- Brokerage Firms: Brokerage firms engaged in securities trading and execution services can connect to SWIFT to facilitate efficient communication with other financial institutions, especially for trade confirmation and settlement purposes.
- Asset Management Companies: Asset management firms that manage investment portfolios and funds can join SWIFT to communicate with custodian banks, execute trades, and handle other asset management-related messaging.
- Clearing and Settlement Institutions: Clearinghouses, central depositories, and other clearing and settlement institutions can connect to SWIFT to exchange messages related to the clearing and settlement of financial transactions, ensuring smooth processing and reconciliation.
- Central Banks: Central banks, as key players in the financial system, can become members of SWIFT. They utilize the network for interbank communication, foreign exchange operations, and other central banking activities.
SWIFT Membership Process.
Obtaining SWIFT membership involves a somewhat typical application and due diligence process. There is significant emphasis in the evaluation process on the applying financial institution’s AML & KYC procedures. As explained below, there are of course costs associated with this process.
However, perhaps the most costly element of becoming a SWIFT member comes after the application is approved. The applicant can expect multiple technology “audits” to ensure connectivity between the financial institution and the SWIFT network. These include:
- Connectivity Setup: Once the institution is approved as a SWIFT member, the next step is to establish connectivity to the SWIFT network. This involves setting up the necessary technical infrastructure, including SWIFT messaging software, secure communication channels (such as leased lines or VPNs), and compliance with SWIFT’s security standards.
- Testing and Certification: Before going live on the SWIFT network, the institution will need to participate in testing and certification activities. This ensures that the institution’s messaging infrastructure is properly integrated with SWIFT, and the messages conform to the required standards. SWIFT provides guidelines and support during this testing phase.
Costs to Obtain SWIFT Access
SWIFT operates as a cooperative society that is collectively owned by its members, who are classified into different categories based on their ownership share. Each member is required to pay a one-time fee and annual charges, the amounts of which vary depending on the member class.
In addition to membership fees, SWIFT generates revenue by charging users for the type and length of messages sent through the system. These charges are determined by the volume of usage by each bank, which is why fees for international payments can differ between banks. Commercial policies on international fund transfers implemented by individual banks also contribute to the variation in fees.
Furthermore, SWIFT offers additional services such as business intelligence, professional applications, global payments innovations, and compliance solutions, for which separate charges apply.
By way of an example, for an early stage financial institution, you can expect to be assessed a “joining fee” of EU5,000 – EU15,000. On a transactional basis, SWIFT charges transaction fees for each message sent or received through the network. The fees may vary depending on the message type, volume, and currency. Different fees may apply to payment messages, securities transactions, trade finance messages, and other types of SWIFT messages. These transactions costs typical land in the fraction of a percent to 1% range.
As always, be sure to reach out to me with any questions or book a meeting here.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.
Find Adam: https://linktr.ee/adamtracy
Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.