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SWIFT Payments: A Complete Guide to the SWIFT Payment Network

SWIFT Payments: A Complete Guide to the SWIFT Payment Network

The Society for Worldwide Interbank Financial Telecommunication, otherwise known as the SWIFT Network, is an international money transfer network established in the 1970s. Its purpose is to help banks in different countries communicate faster and process international transactions quickly. There are currently over 10,000 financial institutions in the network.

SWIFT operates in over 200 countries, making it by far the largest international payment network in the world. It is owned by its members, who each pay a one-time entry fee and annual dues. They also charge fees to their end users, which we’ll get into in more detail below. The fee structures for participating member institutions vary.

Before getting into the details of how the SWIFT Network works, it’s important to understand that it is essentially a communication platform. The network itself doesn’t process transactions like the ACH network in the United States. Member institutions use it to send messages to other member institutions. These messages are instructions, not actual transactions.

History of the SWIFT network

The Society for Worldwide Interbank Financial Telecommunication was established in Brussels on May 3, 1973, but the first SWIFT messages weren’t sent until 1977, after operating procedures and liability rules had been established. The inaugural CEO for SWIFT was Carl Reuterskiold, a former vice president of international banking at American Express.

With the establishment of automated clearing houses in Great Britain (BACS) in the late 1960s and the ACH in the United States in the early 70s, SWIFT was a response to business demand for a faster and more secure international banking network. The original membership was 239 banks in fifteen countries. The first US operating center opened in 1979 in Virginia.

The SWIFT network has been through several upgrades and developments since their inception. Foremost among these was a transition from a bilateral key exchange (BKE) system to a Relationship Management Application (RMA) that was completed in 2008. The change upgraded security and ensured faster delivery of internal communications.

How the SWIFT network operates

Think of SWIFT as an electronic messenger between banks. The sender of the message and the recipient each have accounts set up for the other. For instance, Bank of America will open an account with Deutsche Bank, depositing funds to cover any SWIFT payment requests. Deutsche Bank will in turn open an account at Bank of America.

The account that is holding the money is called a “Nostro” account by the bank depositing the money. The recipient institution calls that same account a “Vostro” account and keeps a matching ledger. Each member institution has their own Nostro account. The SWIFT network is used to send messages to transfer money.

International wire transfers are not required for this process because the funds to cover SWIFT payments have already been deposited in the recipient bank. Completing the transfer request is simply a matter of moving funds from one Nostro to another, then distributing them to the end recipient. This makes SWIFT significantly different from ACH.

Example #1: Two party SWIFT transaction

For the sake of simplicity, let’s call this a transaction between a US bank and a UK bank. The trade relationship between the two countries was estimated at $273 billion in 2019, so this is a common occurrence. Initiated by a SWIFT communication, the following occurs:

  1. Bank US debits client’s bank account

  2. Bank US credits their Bank UK Nostro account

  3. Bank UK debits Bank US Nostro account

  4. Bank UK credits end-user (customer) account

Bank UK will register the transaction in their Vostro account ledger, which should match the corresponding Nostro ledger kept by Bank US. This provides both instructions and a set of checks and balances to ensure that the account is balanced correctly.

Example #2: Three party SWIFT transaction

In cases where the two institutions are not SWIFT members, the SWIFT network can still be used if a third party that is a member is brought in. There are additional fees charged for this, of course. Here’s what a scenario like that looks like:

  1. Bank US debits client’s bank account

  2. Bank US credits Nostro account opened at Deutsche Bank (our third party)

  3. Deutsche Bank debits new Bank US Nostro account

  4. Deutsche deducts a fee for its services

  5. Bank UK debits Deutsche Bank’s Nostro account (minus the fee)

  6. Bank UK credits end-user (customer) account

In this case, the Vostro account ledger is kept by Deutsche Bank. Bank US, by opening a Nostro account at Deutsche Bank, now has the option of doing additional business with other SWIFT Network members. This is basically how the network has grown over the years.

SWIFT network payments and fees

The SWIFT Network is owned by its members and sustains itself through annual dues. There are also fees for each message sent through the network. These fees vary by institutional volume, so we’re unable to post an exact fee schedule here. Member institutions may also charge their clients for use of the SWIFT network when conducting business internationally.

In addition to standard dues and fees, SWIFT also makes money on business intelligence, as a reference source, and on fees they charge for compliance. In 2017, they launched Global Payments Innovation (GPI), which is a global tracking system for cross-border payments. Over 3700 institutions have already adopted GPI, processing more than $300 billion a day.

The launch of SWIFT GPI did more than just add another revenue stream for the SWIFT network. It increases fee transparency for member institutions and enables end-to-end payment tracking, complete with payment confirmation on the end user side. The technology is a direct response to global demand for increased pricing transparency, speed, and transactional security.

Benefits to using the SWIFT network

SWIFT payments are a secure alternative to international wire transfers that are significantly more cost effective. By utilizing the Nostro/Vostro dual ledger system, the network provides member institutions the system of checks and balances required to ensure proper accounting standards are met. The system is duplicatable throughout the world.

Since SWIFT is a messaging system and not a payment processor, the network is able to handle a higher volume of traffic during regular business hours. As an international entity, they do business in every time zone, so trans-continental transfers can be facilitated virtually any time. This is particularly useful for US/European and US/Asian business relationships.

With the launch of GPI in 2017, the SWIFT Network addressed the worldwide concern for transparency and fraud prevention in international money transfers. This also helps both business owners and world governments in tracking illegal fund transfers and it provides an additional revenue source for SWIFT that will help keep them operating.

Drawbacks to using the SWIFT network

The biggest drawback to the SWIFT Network also happens to be its greatest asset. The network is global, has over 10,000 member institutions, and essentially has no rival. That’s a lot of power for one organization to have, giving them huge influence on global finance issues. There are ethical and regulatory guidelines in place, but the monopoly is concerning in some areas.

Fees are lower than what you’ll see with international wire transfers, but they’re still not cheap. Add the cost of messaging to any transaction fees the processing banks will charge, and the expense could be a strain on smaller businesses. With no other viable option available to them, they are forced to pay these fees and have no real voice in how they’re calculated.

Neither of these issues override the benefits of the SWIFT Network, but it would be remiss of us not to include them in this guide. Expensive fees and concerns over business monopoly are common issues with business owners, but not serious obstacles to conducting business. At the end of the day, the SWIFT Network is an essential service for international finance.

Brewing conflicts with rogue state banks

In 2012, the European Union issued sanctions on the country of Iran over their refusal to disband their nuclear weapons program. Those sanctions, which were matched by the US, included an oil embargo and prohibitions against any financial or insurance transactions related to the “import, purchase, or transport” of crude oil or petroleum products.

The EU and US sanctions forced SWIFT to shut down network access to Iranian banks. The action disrupted world financial markets. Today, there’s conversation that SWIFT should do the same with Russia and China, both of whom are working on developing their own “SWIFT-like” networks for transactional communications. That would be a major problem.

According to the World Bank Group, the GDP of Iran is $628 billion. Russia’s GDP is $1.7 trillion. China’s GDP comes in at a whopping $14.34 trillion and they’re the second largest economy in the world, second only to the United States. The market disruption that would follow a sanction on either of these global powers could do significant harm to international commerce.

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