What is SWIFT and How Will It Re-shape International Payments?

How damaging will a ban from SWIFT be to Russia? 

01 Jul 2022 - Written by Criterium   |    Continuous Improvement, Financial Services,

In early March, shortly after Russia’s invasion of Ukraine, several key Russian banks were removed from a global payments system known as SWIFT. For insiders, being cut off from the SWIFT system was viewed as a ‘nuclear option’, a clearly significant blow to the country’s financial system. But for many around the world, it was their first introduction to SWIFT, so it was unclear how being cut off from it could be so damaging.  

So, what is SWIFT, why is it so important, and what lies in its future? 

SWIFT: The global finance messaging system 

At its core, SWIFT is a system to relay financial transaction information in a standardized way between institutions. To understand the importance and evolution of SWIFT, it’s important to understand the world of transactions before it.  

Prior to its development in 1973, transaction information was sent via messages, but in free message style. There was no standard way to identify countries, banks, or branches and was highly prone to translation and human error interpreting individual hand-written messages. SWIFT was therefore developed by a set of six international banks to help remove the guesswork from transaction information transfers, to speed up processing times, and to reduce errors.  

To get a sense of the standardized messages being sent via SWIFT, each financial organization is identified using either 8 or 11 characters. 

  • The first four characters: The institute code (ex. UNCR for UniCredit Banca) 
  • The next two characters: the country code (ex. IT for Italy) 
  • The next two characters: the location / city code (ex. MM for Milan) 
  • The optional last three characters: Can be used to identify individual branches 

Any user of the SWIFT system sending or receiving money would know exactly the meaning of UNCRITMM002.  

The SWIFT system itself does not transfer any money, but instead accurately and securely relays the information about a transaction, with the banks then settling and sending the actual money afterwards, often hours or days later.  

With over 11,000 global SWIFT members institutions, an average of 42 million messages are sent everyday via the messaging system to inform institutions of transactions to record which need settling. The global network of messaging allows for banks to communicate the flow of money around the world. For individuals, businesses, and smaller financial institutions which are not a part of the 11,000 global SWIFT connections, they can still access the system via service bureaus. These bureaus themselves are connected to SWIFT and act at an intermediary connection which is a less expensive and easier way to access. This allows companies to easily pay employees working abroad from their headquarters. 

SWIFT is going global to help international businesses 

In 2017, SWIFT launched its Global Payments Initiative (SWIFT gpi) to improve the customer banking experience with international payments. The system not only helps with the speed of transactions (notoriously slow for international payments), but also ensures full transparency on transaction costs, instant access to the status of transactions, and improves operating efficiencies. 

Later this year, a new global standard for financial information known as ISO 20022 will start to be adopted and managed by SWIFT. This open standard will be the next level in supplying consistent, rich, and structured data for every kind of financial business transaction by creating a common language for payments worldwide.  

Both SWIFT gpi and ISO 20022 are key building blocks to enable the next step-change in transactions: real-time international payments. 

What are real-time payments? 

While transactions sent as messages across the SWIFT system happen almost instantly, the actual transfer of funds doesn’t take place for hours or even days after the transactions are sent. As the clearance of standard transactions often still require human authorization and approval, the transfer of funds usually takes place during open business hours for banks. 

This period in between when the transaction message is sent and the funds are sent is lucrative for banks, as interest can be accrued on the funds as they sit in an escrow account waiting to be transferred. But in a digital world where customers expect funds instantly, waiting one to two business days just seems old fashioned. Plus, the lack of transparency and fragmented communication impacts liquidity and risk management for companies. 

As a solution, real-time payments were created as a way to initiate and settle transactions nearly instantaneously and operate 24/7/365. Real-time payments currently exist, but often in discreet geographies.  

Examples of real-time or quasi-real-time payments systems around the world: 

  • The United States has real-time payments which can send money between American financial institutions 
  • Canada has the Interac system, which can transfer payments instantly between Canadian banks 
  • The UK has the Faster Payments system, a quasi-real-time system introduced in 2008 to send money within the UK 

These work as financial institutions within countries are often working under the same federal regulatory system, which has been setup for real-time payments. Sending real-time payments across jurisdictions is another matter.  

The introduction of ISO 20022 and SWIFT gpi, helps pave the way for international real-time payments. It is the first step towards enabling global real-time payments and real-time transaction insights.  

So, how damaging will a ban from SWIFT be to Russia? 

In a sense, it would be like being cut off from the post office prior to the internet. As one of the main forms of information transmission which existed, losing access would be costly and difficult to overcome. But there are alternatives like FedEx, DHL, UPS, and more.  

Like the post office, there are alternatives to SWIFT. Russia has its own equivalent, SPFS (the System for Transfer of Financial Messages). China also has one known as CIPS. But as the world’s businesses continue to interlink, and consumer demand for real-time payments grows, a standardized global information system to connect financial institutions like SWIFT gpi with ISO 20022 is necessary. Ultimately, business and consumers will want to be a part of it and being left off SWIFT could be like being left out of future global transactions.  

Sources: Coupa, Investopedia, The Global Treasurer, TAS Group, Payments Journal