When making online transfers, you’ve probably noticed that in most cases most bank wires have an addition that they are so-called SWIFT transfers. The features are basic, it takes up to 3 working days to deliver your transfer and in most cases there aren’t any significant additional fees charged. If you have ever wondered what SWIFT is exactly and how it helps to transfer your money between banks in different countries, we will do our best to explain it to you in this article.
What is SWIFT?
SWIFT is short for “Society for Worldwide Interbank Financial Telecommunication”. It’s been established in 1973 in Belgium with the aim of creating standards for worldwide money transactions.
To simplify the main idea behind SWIFT - it’s basically a secure messaging tool for financial institutions. In modern finances, where most of the money doesn’t really change hands physically, but rather digitally, the banks needed a secure way to exchange information about these transfers. Moreover, to avoid potential misunderstandings, they needed unified and standardized practises.
The project explains their core ideas:
“We were established to find a better way for the global financial community to move value – a reliable, safe and secure approach that the community can trust, completely. We have constantly evolved in an ever-changing landscape, without undermining that trust.”
SWIFT itself doesn’t touch your money at any point. It exchanges the information between two banks that you’ve issued a money transfer.
How SWIFT helps banks?
They’ve created a very secure network that connects more than 11,000 financial institutions in more than 200 countries. The platform processes roughly 32 million messages per day.
As it has become an industry standard, whenever you issue any financial-related requests, let it be an international transfers, your bank or other payment processor will use SWIFT to handle it. So who else uses the network?
- money brokers and security broker dealers
- clearing systems
- corporates, non-bank financial institutions and more
You may wonder, how you are affected by the network. Well, most of the bank-related special numbers and codes were introduced and popularized by SWIFT. That’s why you need IBAN or BIC numbers when making a money transfer. And that’s also why international transfers can take only 3 days to handle and not few weeks, as banks can easily recognize and communicate with each other, despite language or countries financial systems differences.
As the network is currently an industry standard for most of the banks all over the world, they in a way hold a huge power over finances of countries. At one point in history, it has been decided that Iran would be disconnected from the network as a result of sanctions. Because of that, other countries couldn’t send money to Iranian banks. There were also attempts to disconnect Russia from the network as a part of the 2014 sanctions.
There were also some security issues, which led to some banks losing millions of dollars. There were even attempts to hack into Central Banks of few countries through the network.
Currently, there are talks about creating an alternative independent system, which can act as a competition for SWIFT, or potentially a new industry standard.
It’s worth noting that there is a very interesting competition for SWIFT network, which is RippleNet. Ripple is a blockchain-based project, which explored the usage of this new type of technology and cryptocurrencies, which could be beneficial for banks. The first advantage they have over current industry standards, is that with the help of blockchain technology, banks can transfer the information much faster and with the highest level of encryption and security. Moreover, the network is very transparent, therefore the customers can also feel more confident. Ripple tries also to introduce a special digital asset, which can help banks handle international transfers more efficiently. They explain that:
“International payments, especially in emerging markets, require businesses to hold pre-funded accounts in destination currencies. It’s a costly endeavor that ties up resources. RippleNet provides an alternative. While any financial institution on the network enjoys reliable, instant and lower-cost transactions, those who use the digital asset XRP to source liquidity can do so in seconds—freeing up capital and guaranteeing the most competitive rates available today.”
With the rapidly developing technologies and recent popularization of cryptocurrencies and blockchain projects, who knows, maybe in the next years, a project like this will become a new industry standard. They already connect over 200 institutions, including online remittance services like MoneyGram or InstaRem, as well as well-established banks like Santander Bank for example.