SWIFT - Financial Messaging system.

Welcome to another edition of " World of Financial Markets " Wish you a happy Sunday and a great day ahead . Todays topic is focused on SWIFT messaging service . Lately there was alot of talks and news going around relating to SWIFT due to Russia and Ukraine ongoing crises. More specific to banning Russian banks from SWIFT as a means of economic sanctions . Alot of us heard about SWIFT but very few know about it in a detailed way . Let me jot down few things for you today . Before doing that , let me ask you :

Do you transfer money online to your friends ?

Nowadays majority of the people are using UPI which make transfer of money very easy but before UPI came into operation we always used to ask the Bank account number, Bank Account name and the IFSC code of the payee bank to send money. Again, alot of us dint know how the IFSC functioned but then we knew our bank requires that details before adding the person as a Payee in our account .

If you are working in the Investment banking and financial service company, I am sure you would have also come across the word SWIFT relating to transfer of financial messages across organizations . . So what it is ? why its used and why its important, lets find out !!

What is SWIFT ( Society for Worldwide Interbank Financial Telecommunication ) ?

SWIFT was founded in Brussels, Belgium in the year 1973 and its first financial message was send across in the year 1977. As of now , SWIFT is used by over 11,000 banking and securities organizations in more than 200 countries across the world. To put it simply, over 11,000 origination have setup themselves on the platform to transfer money between one another in an most efficient, standardized and secured way by paying a one time fees and charges for each messaging send across using the SWIFT platform. .

Who controls or governs SWIFT ?

SWIFT is a cooperative organization not owned by single entity . Its jointly governed by Central banks of G 10 nations, comprising of majorly European and USA central banks with oversight by the National Bank of Belgium

How the money was transferred before SWIFT payment system ?

Before SWIFT came into place, most of the international payments occurred using TELEX machines, which were similar to fax machines. These machines were capable of transmitting and printing out messages over telephone lines. When it comes to TELEX, there was no standardization , it was slow and not that efficient as it was prone to technical glitches sometimes which was the reason few large investment bank came together for the formation of SWIFT which allowed a more safe, secured and faster way to communication among each other .

How many messages are send across by SWIFT daily ?

As per public records, approximately more than 42 million messages are send across daily by SWIFT across organizations .

SWIFT working in a simpler terms :

If you want to send text message to your friend, you need for sending email you need your friend mobile number , similarly to send an email, you need their email id. If you had to send money in India before UPI like Google Pay, Paytm came into place, we always use to ask the Account number, Account full name and IFSC code of the payee bank. To conclude, to send anything you require unique details of the receiver where it should be delivered. This unique details is provided by the platform they are using, similarly SWIFT also provides SWIFT code to each organization that gets registered with them . The difference is when it comes to Mobile phones and Emails its a free plain text whereas in a SWIFT a standardized format the messages needs to be send across to successfully be send and received

What are SWIFT codes?

SWIFT assigns each financial organization a unique code, also called as BIC code ( Business Identifier Code ) that has either 8 characters or 11 characters. These characters are used to identify the bank/institute name , country , location and branch . First 4 for bank/institute name, next 2 for country code, next 2 for location and last 3 for branches if there are multiple branches in that locations. .Last 3 characters are optional lot of banks. If you are in India and wants to transfer money in India , you require an IFSC code of the bank which serves the same purpose that Swift does for international transactions.

Who all uses SWIFT ?

Swift is used by a lot of institution be it Banks, Exchanges, Fund Houses, Securities Dealer/broker, etc. SWIFT is used to send Information related to Financial securities traded in the markets, Exchange of securities be it even Treasuries, trade matching all can be done by SWIFT . Highly used is payment swift for exchanging money in same and different currencies.

Standardization of SWIFT massages ?

SWIFT has made some standardized format in which details should be transmitted to the other organization. Each organization must ensure they have infrastructure in place and also ensure they transmit the information in standardized format. SWIFT has designed swift format codes for each of type financial message such as MT 202 , MT 103, MT 566, MT 568. If you want to send payment , dividend information and many more, there is swift format for all of them. One doesn't need to remember all of them , only the one used for your process you are into .

What is the difference between BIC/SWIFT code and IBAN ?

BIC/Swift code only identifies the bank details such as bank code, country code, location code and branch code but not the Account number and name of the holder whereas IBAN identifies all of in a single unique code . IBAN is mostly used for banks registered in Europe

Nostro and Vostro Accounts ?

Nostro/Vostro accounts is the Cash account each bank has with each other for debiting and crediting their respective bank accounts when funds transfer done by their clients and depositors on their behalf .

How to find bank IFSC code or SWIFT code ?

You can check with your respective bank for details or you can also check in your bank statement, cheque book or website. You can also check on google too if required .

Which all countries are banned from using the SWIFT ?

Iran and Russia . As of date, not all Russian banks are banned , only few of them . Last what I know of is 7 Russian banks were banned from using SWIFT.

What is alternative to SWIFT ?

Each country can have their own system for financial messaging system. For instance , Russia has their own system known as SPFS , China has their own system that is CIPS. Problem with this there aren't enough user using this or setup on these platforms , like Russia SPFS has only 400 users as per public records and China CIPS sends only 13,000 messages a day whereas SWIFT has more than 11,000 organization in over 200 countries sending 42 million financial messages daily.

What is the difference between Intermediary and Correspondent bank ?

The term can be used interchangeably . The main role of Intermediary and Correspondent bank is facilate transaction between the paying bank and receiving bank . For instance , i need to send money in INR to my friend in USA . To help this transaction successfully completed , my domestic bank may look for an intermediary bank who has relation with the USA bank of my friend if they don't have a direct relation. It helps the movement of funds from Payer to receiver .

Is SWIFT replaceable ?

With the new technology being developed on a regular basis such as blockchain , metaverse , the famous one , its important for the SWIFT to keep upgrading themselves to ensure it doesn't meet the same fate as TELEX . The amount origination using SWIFT globally as of current date and million of messages send across daily on it , its very difficult to replace SWIFT but then its not impossible. It will good number of time to do that , additionally, considering the efficiency it provides when its come to secured and fast , why would any like to move to another platform .

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