The Complete Guide to SWIFT Payments and Financial Messaging

In my previous article, I have covered various types of Core Banking Payment System. In this article, I'll dive deeper into the SWIFT Payment System to explore its specifics and significance.

Welcome to your go-to guide on SWIFT payments and financial messaging. Whether you're new to the topic or looking to refresh your knowledge, with this article I have tried to cover same.

Introduction to SWIFT :

Definition: The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a messaging network that financial institutions use to securely transmit information and instructions. Established in 1973, SWIFT has become a cornerstone of the global financial system, providing a standardized method for sending and receiving international payment instructions and other financial messages.

SWIFT Payment :

Explanation: A SWIFT payment refers to an international money transfer sent via the SWIFT network. It's a secure, standardized way for banks to communicate payment instructions, ensuring that funds move quickly and accurately across borders.

The SWIFT payment system is a kind of social network, where users are all financial institutions. Each user has got unique Swift Code. This network allows banks to send secure, standardized payment instructions and financial messages. It ensures fast, reliable, and secure communication for international transactions.

Below lines from Financial Times are so real due to the stats present for Swift Payment Message processing.

• Over 11000 Financial Institution across 200 countries are member of SWIFT .
• Each member has its own unique Swift Code.
• In December 2022, SWIFT recorded an average of 44.8 million FIN messages (payments and securities transactions) per day, which was a 6.6% increase from the same period in . This translates to approximately 523.14 transactions per second.

SWIFT Code:

Details: Also known as Business Identifier Codes (BIC), SWIFT codes are unique identifiers for financial institutions. These codes help ensure that money is sent to the correct institution during international transactions. A SWIFT code typically consists of 8-11 characters, representing the bank, country, location, and branch.

Below is the list of some of the Swift Code for reference :

Payment Process:

Transaction Flow:

1. Initiation: The sender provides their bank with the necessary details, including the recipient's bank SWIFT code, account number, and amount.
2. Message Transmission: The sender's bank creates a SWIFT message (e.g., MT103 for single customer credit transfers) and sends it to the recipient's bank via the SWIFT network.
3. Verification and Validation: The recipient's bank verifies the message and processes the payment.
4. Settlement: The funds are transferred, and both banks update their respective accounts.
5. Confirmation: The recipient's bank confirms receipt of the funds to the sender's bank.

Payment Duration:

Timing: Typically, SWIFT payments take 1-5 business days, depending on the banks involved and the countries' regulations.

Making a SWIFT Transaction:

Steps: Gather required information: recipient’s name, bank name, SWIFT code, account number, and amount.

• Visit your bank’s branch or use online banking.
• Provide the details and authorize the transaction.
• Pay the associated fees.
• Receive confirmation of the transaction.

Lets understand some Real-World Example

Case Study 1: Simple SWIFT Payment Transfer Between Two Banks

Scenario: A customer at Bank of America in the United States needs to transfer $10,000 to a recipient at Barclays in the United Kingdom. Both banks have a direct relationship with each other, so no correspondent bank is involved.

Steps:

• Initiation: The customer at Bank of America logs into their online banking portal and initiates an international transfer, entering the recipient's details, including the IBAN and SWIFT/BIC code of Barclays.
• Validation: Bank of America validates the transaction details, ensuring all information is correct and the customer has sufficient funds.
• Message Creation: Bank of America creates a SWIFT MT103 message (customer transfer) with the transaction details.
• SWIFT Network: The SWIFT MT103 message is sent through the SWIFT network directly to Barclays.
• Receipt and Processing: Barclays receives the SWIFT message, validates the transaction details, and credits the recipient's account with $10,000.
• Confirmation: Barclays sends a confirmation message back to Bank of America, confirming that the funds have been credited to the recipient's account.

Outcome: The transaction is completed within a few hours, and both the sender and recipient receive notifications from their respective banks.

Case Study 2: SWIFT Payment Transfer Involving a Correspondent Bank

Scenario: A customer at ANZ Bank in Australia needs to transfer $ 50,000 to a recipient at Deutsche Bank in Germany. ANZ Bank does not have a direct relationship with Deutsche Bank, so a correspondent bank (HSBC in the UK) is involved.

Steps:

• Initiation: The customer at ANZ Bank logs into their online banking portal and initiates an international transfer, entering the recipient's details, including the IBAN and SWIFT/BIC code of Deutsche Bank.
• Validation: ANZ Bank validates the transaction details, ensuring all information is correct and the customer has sufficient funds.
• Message Creation: ANZ Bank creates a SWIFT MT103 message (customer transfer) with the transaction details.
• Correspondent Bank Identification: Since ANZ Bank does not have a direct relationship with Deutsche Bank, it identifies HSBC (a correspondent bank in the UK) that has relationships with both ANZ Bank and Deutsche Bank.
• SWIFT Network (Part 1): ANZ Bank sends the SWIFT MT103 message to HSBC.
• Intermediary Processing: HSBC receives the SWIFT message, processes it, and creates a new SWIFT MT103 message to be sent to Deutsche Bank.
• SWIFT Network (Part 2): HSBC sends the SWIFT MT103 message to Deutsche Bank.
• Receipt and Processing: Deutsche Bank receives the SWIFT message, validates the transaction details, and credits the recipient's account with $50,000.
• Confirmation: Deutsche Bank sends a confirmation message back to HSBC, which then forwards the confirmation to ANZ Bank.

Outcome: The transaction is completed within 1-2 business days, accounting for the additional processing time at the correspondent bank. Both the sender and recipient receive notifications from their respective banks, with ANZ Bank informing the customer of the successful transfer through the correspondent bank.

The Nostro ,Vostro and Loro Accounts:

Lets understand details of what are these different types of account and how they play a role in Swift Payment workflow.

• Nostro Accounts: "Our account with you" – accounts that a bank holds in a foreign currency in another bank.
• Vostro Accounts: "Your account with us" – accounts that a foreign bank holds in the domestic currency in the bank's country.
• Loro Accounts: "Their account with them" – accounts that a third bank holds on behalf of another bank. Essentially, it's a reference to accounts that another bank holds in its books on behalf of the banks involved.

Usage: These accounts facilitate international transactions by maintaining balances in foreign currencies and ensuring smooth cross-border settlements. Loro accounts are typically used for recording and managing transactions in situations involving multiple correspondent banks, enhancing the efficiency of interbank operations.

Users of SWIFT Payments:

Below is the high-level list of institutions worldwide using SWIFT for secure and reliable international transactions.

• Banks
• Financial institutions
• Corporations
• Securities dealers
• Brokers

Transaction Fees Bearers :

In SWIFT payments, transaction fees can be borne by different parties depending on the agreement between the sender and the receiver. The common types are:

• SHA (Shared): Both sender and receiver share the transaction fees.
• OUR: The sender bears all the fees, ensuring the receiver gets the full amount.
• BEN: The receiver bears all the fees, receiving the net amount after deduction.

Costs: SWIFT transaction fees vary by bank and can include sending fees, intermediary bank fees, and receiving fees. The total cost typically ranges from $15 to $45 per transaction.

Payment Failure and Bank Reconciliation :

When a SWIFT payment fails, it can be due to incorrect details, insufficient funds, or compliance issues. The reconciliation process involves:

• Notification: Both sending and receiving banks notify their respective clients.
• Investigation: Banks investigate the reason for failure.
• Correction and Resubmission: Errors are corrected, and the payment may be resubmitted.
• Refund: If the payment cannot be processed, the funds are refunded to the send

Banks utilize sophisticated reconciliation systems to match transactions and ensure accuracy.

SWIFT's Profit Mechanism :

SWIFT generates revenue through:

• Membership Fees: Annual fees from member banks.
• Transaction Fees: Charges for each message sent over the network.
• Value-Added Services: Providing additional services like reporting, compliance solutions, and cybersecurity.

SWIFT Message Categories:

As mentioned below SWIFT messages are categorized into several types. Below details gives different category its message type , description of message category and approximate number of messages supported in that category

SWIFT Message Structure :

A typical SWIFT message structure includes:

• Message Header: Contains the basic information about the message.
• Application Header: Details about the type and direction of the message.
• User Header: Optional, for user-specific information.
• Text Block: The main content of the message, containing transaction details.
• Trailer: Includes information for processing the message.

SWIFT Governance and Control :

SWIFT is a key part of global banking, and its management ensures it runs smoothly and securely. Let’s look at how SWIFT is governed and controlled.

A Transformative Shift in Financial Messaging -Migration from SWIFT MT to ISO 20022:

The migration from SWIFT MT to ISO 20022 represents a major leap in financial messaging standards. ISO 20022 provides a more flexible, comprehensive, and structured framework compared to traditional SWIFT MT messages.

Key aspects of this transition include:

In summary, SWIFT's role in international payments is both profound and evolving. Its reliable network, combined with its strong governance, supports the seamless transfer of funds across borders. As financial technology advances, SWIFT's continued innovation and oversight will be crucial in maintaining its central role in global finance.

Thanks You !

Hope this article has helped you to understand the intricacies around SWIFT Payment. If you have liked this article , please hit 'like' and leave a comment. I’d love to hear your thoughts!

If you haven't read the previous article, please find the link below for reference.

# Core Banking Handbook Article 3