SWIFT for Electronic Funds Transfers

Need to transfer money overseas? Today, it is easy to walk into a bank and transfer money anywhere
around the globe, but how does this happen? Behind most international money and security transfers is
the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. SWIFT is a vast
messaging network used by banks and other financial institutions to quickly, accurately, and securely
send and receive information, such as money transfer instructions.

More than 11,000 SWIFT member institutions sent over 35 million transactions per day through the
network in 2020. The organization recorded an average of 42.5 million messages per day on a year-to-
date (YTD) basis in March 2021. Traffic grew by 9.8% compared to the same period of the previous
year.1

In this article, we explore what SWIFT does, how it works, and how it makes money.

Key Takeaways

Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a member-owned

cooperative that provides safe and secure financial transactions for its members.

This payment network allows individuals and businesses to take electronic or card payments even if
the customer or vendor uses a different bank than the payee.

SWIFT works by assigning each member institution a unique ID code that identifies not only the bank
name but country, city, and branch.

Inside a SWIFT Transaction

SWIFT 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. The code is interchangeably called the bank identifier code (BIC), SWIFT code, SWIFT ID, or
ISO 9362 code.2 To understand how the code is assigned, let’s look at Italian bank UniCredit Banca,
headquartered in Milan. It has the 8-character SWIFT code UNCRITMM.3

First four characters: the institute code (UNCR for UniCredit Banca)

Next two characters: the country code (IT for the country Italy)

Next two characters: the location/city code (MM for Milan)

Last three characters: optional, but organizations use it to assign codes to individual branches.
Let's assume a Bank of America (BAC) branch customer in New York wants to send money to their friend
who banks at the UniCredit Banca branch in Venice. The New York customer can walk into their Bank of
America branch with their friend’s account number and UniCredit Banca’s unique SWIFT code for its
Venice branch.

Bank of America will send a payment transfer SWIFT message to the UniCredit Banca branch over the
secure SWIFT network. Once Unicredit Banca receives the SWIFT message about the incoming payment,
it will clear and credit the money to the Italian friend’s 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.4

The World Before SWIFT

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 that were then interpreted and executed
by the receiver. This led to many human errors.5

To circumvent these problems, the SWIFT system was formed in 1973.6 Six major international banks
formed a cooperative society to operate a global network that would transfer financial messages in a
secure and timely manner.7

Why Is SWIFT Dominant?

According to the London School of Economics, "support for a shared network...began to achieve
institutional form...in the late 1960s, when the Société Financière Européenne (SFE, a consortium of six
major banks based in Luxembourg and Paris, initiated a ‘message-switching project.'"8

SWIFT was then founded in 1973 with 239 banks in 15 countries. By 1977, it expanded to 518
institutions in 22 countries.9

Although there are other message services like Fedwire, Ripple, and Clearing House Interbank Payments
System (CHIPS), SWIFT continues to retain its dominant position in the market. Its success is attributed
to how it continually adds new message codes to transmit different financial transactions.

While SWIFT primarily started for simple payment instructions, it now sends messages for a wide variety
of actions, including security transactions, treasury transactions, trade transactions, and system
transactions. Nearly 50% of SWIFT traffic is still for payment-based messages, 47% is for security
transactions, and the remaining traffic flows to Treasury, trade, and system transactions.10

Who Uses SWIFT?

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 following:

Banks

Brokerage Institutes and Trading Houses

Securities Dealers

Asset Management Companies

Clearing Houses

Depositories

Exchanges

Corporate Business Houses

Treasury Market Participants and Service Providers

Foreign Exchange and Money Brokers111213

Services Offered by SWIFT

The SWIFT system offers many services that assist businesses and individuals to complete seamless and
accurate business transactions. Some of the services offered are listed below.

Applications

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 banks, and securities market infrastructure for processing clearing and settlement
instructions for payments, securities, forex, and derivatives transactions.14

Business Intelligence

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.15 The reports
enable filtering based on region, country, message types, and related parameters.

Compliance Services
Aimed at services around financial crime compliance, SWIFT offers reporting and utilities like Know Your
Customer (KYC), Sanctions, and Anti-Money Laundering (AML).14

Messaging, Connectivity, and Software Solutions

The core of the 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.

How Does SWIFT Make Money?

SWIFT is a cooperative society owned by its members.16 Members are categorized into classes based on
share ownership.17 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 bank’s usage volume; different charge tiers exist for banks that generate different
volumes of messages.18

In addition, SWIFT has launched additional 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.14

Challenges for SWIFT

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 increased operational overhead.

Although SWIFT has been successful in providing software for automation, 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 a new stream of income for SWIFT and keep clients engaged in the long
run.

The Bottom Line

SWIFT has retained its dominant position in the global processing of transactional messages. It has
recently forayed into other areas, such as 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.