SWIFT: A great platform for foreign trade
SWIFT connections enable access to a variety of applications which include real-time instruction matching for treasury and foreign exchange transactions
Sk. Shamim Iqbal
Every day, nearly 10,000 Society for Worldwide Interbank Financial Telecommunication (SWIFT) member institutions send approximately 24 million messages on the network. In this article we will explore what SWIFT does, how it works, and how it makes money. Prior to SWIFT, Telex was the only available means of message confirmation for international funds transfer. Telex was hampered by low speed, security concerns, and a free message format--in other words, Telex did not have a unified system of codes like SWIFT to name banks and describe transactions. Telex senders had to describe every transaction in sentences which were then interpreted and executed by the receiver.
The main difference between an International Bank Account Number (IBAN) and a Society for Worldwide Interbank Financial Telecommunication (SWIFT) code lies in what they identify. A SWIFT code is used to identify a specific bank during an international transaction, whereas IBAN is used to identify an individual account involved in the international transaction. Both play an essential role in the smooth running of the international financial market.
SWIFT is a cooperative society owned by its members. Members are categorized into classes based on share ownership. All members pay a one-time joining fee plus annual support charges which vary by member classes. SWIFT also charges users for each message based on message type and length. These charges also vary depending upon the banks usage volume different charge tiers exist for banks that generate different volumes of messages. In addition, SWIFT has launched new services. These are backed by the long history of data maintained by SWIFT. These include business intelligence, reference data, and compliance services and offer other income streams for SWIFT.
To circumvent these problems, SWIFT system was formed in 1974. Seven major international banks formed a cooperative society to operate a global network that would transfer financial messages in a secure and timely manner. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes. SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters.
Assume a customer of Bangladeshi Banks branch in Dhaka wants to send money to Client whose banks at the HSBC Bank branch in London. Bangladeshi client can walk into his Bank with his clients account number and HSBCs unique SWIFT code for its London branch. Bangladeshi bank will send a payment transfer SWIFT message to the HSBCs London branch over the secure SWIFT network.
Once HSBC, London branch receives the SWIFT message about the incoming payment, it will clear and credit the money to the English clients account. 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 client accounts. While SWIFT started primarily for simple payment instructions, it now sends messages for wide variety actions including security transactions and treasury transactions. Nearly 50 percent of SWIFT traffic is still for payment-based messages, but 43 percent now concern security transactions, and the remaining traffic flows to treasury transactions.
In the beginning, SWIFT founders designed the network to facilitate communication about Treasury and correspondent transactions only. The robustness of the message format design allowed huge scalability through which SWIFT gradually expanded to provide services to the institutions banks for ensuring foreign trade business. SWIFT connections enable access to a variety of applications which include real-time instruction matching for treasury and forex transactions, banking market infrastructure for processing payment instructions between the banks, and securities market infrastructure for processing clearing and settlement instructions for payments, securities, forex, and derivatives transactions.
SWIFT has recently introduced dashboards and reporting utilities which enable the clients to get a dynamic, real-time view of monitoring the messages, activity, trade flow, and reporting. The reports enable filtering based on region, country, message types, and related parameters. Aimed at services around financial crime compliance, SWIFT offers reporting and utilities like Know Your Customer (KYC), Sanctions, and Anti-Money Laundering (AML). The core of SWIFT business resides in providing a secure, reliable, and scalable network for the smooth movement of messages. Through its various messaging hubs, software, and network connections, SWIFT offers multiple products and services which enable its end clients to send and receive transactional messages.
The majority of SWIFT clients have huge transactional volumes for which manual entry of instructions is not practical. The need for automation for SWIFT message creation, processing, and transmission is growing. However, this comes at a cost and operational overhead. Although SWIFT has been successful in providing software for the same, that too comes at a cost.
SWIFT may need to tap into these problem areas for the majority of its client base. Automated solutions within this space may bring in new stream of income for SWIFT and keep clients engaged in the long run.
SWIFT has retained its dominant position in the global processing of transactional messages. With its distributed ledger and ability to enable transactions with minimal fees, blockchain poses a tangible threat to cross-border funds transfer systems.
And none of those systems is more threatened than SWIFT, a consortium of banks that manages a bulk of global transactions. But SWIFT has recently forayed into newer areas offering reporting utilities and data for business intelligence, which indicates its willingness to remain innovative. In the short- to mid-term, SWIFT seems poised to continue dominating the market.
The writer is a banker
