Introduction to SWIFT payments and how does it work?

This is the era of technology and finance and when we transfer money overseas we hear the term SWIFT (Society for Worldwide Interbank Financial Telecommunications). SWIFT is basically a messaging network that enables banks and other financial institutions to send and receive information about their financial transactions.

SWIFT is an organization that was founded in 1970 to help financial institutions when they are dealing with international transactions. Let see how the SWIFT network globally works.

How does the SWIFT network work?

Banks around the globe need a secure system to transfer money from one country to another.

SWIFT network allows more than 10000 financial institutions to send and receive information about their money. 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. SWIFT code includes

• First four characters consists of the institute code
• Next two characters of the country code
• Next two characters of the location city code
• Last three characters are optional, but organizations use it to assign codes

SWIFT does not transfer actual funds from one place to another. Instead, it sends messages requesting payments between institutions in different nations.

History of Swift

When SWIFT was not operating, Telex was the only available means of message confirmation for international funds transfer. Telex had 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. Instead of using codes Telex required users to write full descriptions of each transaction. This led to many human errors.

To solve these problems, the SWIFT system was formed in 1974. Seven major international banks formed a cooperative society to operate a global network that would transfer financial messages in a secure and timely manner.

SWIFT Users

SWIFT founders designed the network to facilitate communication about Treasury and corporate services.But with the passage of time SWIFT network provide services to the following institutions also which include:

• Banks
• Brokerage Institutes and Trading Houses
• Securities Dealers
• Asset Management Companies
• Clearing Houses
• Depositories
• CSDs
• Corporate Business Houses
• Treasury Market Participants and Service Providers
• Foreign Exchange and Money Brokers

SWIFT payments:

SWIFT is basically not a payment system nor a settlement system, but systemically important systems depend on it for their daily messaging, so that SWIFT as a critical service provider to these systems is itself of systemic importance. For these reasons, the central banks agreed to make SWIFT subject to cooperative central bank oversight by jointly interacting with SWIFT and formulating joint recommendations, central banks aim to increase the efficiency of SWIFT system.

SWIFT products and services:

SWIFT provides turn-key solutions for members, consisting of linkage clients to facilitate connectivity to the SWIFT network and CBTs or “computer based terminals” which members use to manage the delivery and receipt of their messages.

SWIFT means several things in the financial world:

1. A secure network for transmitting messages between financial institutions;
2. A set of syntax standards for financial messages (for transmission over SWIFTNet or any other network)
3. A set of connection software and services allowing financial institutions to transmit messages over SWIFT network.

SWIFT has access to so much data, they made a natural transition into offering services built around reporting for businesses. Many of these services analyze an institution’s SWIFT traffic in an informative way that allows stakeholders to make important decisions. On a higher level, SWIFT also takes more general data and interprets it to identify greater market trends.

SWIFT also provides a range of interfaces, providing seamless links between users internal systems and the SWIFT Environment according to its customer needs.

Financial crime compliance services

SWIFT provide financial crime service to its valuable clients by addressing complexity and cost related to complying with sanctions and Know Your Customer (KYC) requirements. Small to mid-sized institutions use its managed service to screen financial transactions, while larger institutions gain third-party assurance that their sanctions environments are performing properly.

Expectations from SWIFT

Risk identification and management

SWIFT is expected to identify and manage operational and financial risks to its critical services and ensure that its risks management are effective.

Information security:

SWIFT is expected to implement appropriate policies and procedures, and devote sufficient resources to ensure the confidentiality and integrity of information and the availability of its services. SWIFT should provide timely access to all information they judge relevant regarding the following :

• Information security policy or framework, and any processes and procedures for monitoring compliance
• Capacity planning
• Change management practices

Technology planning:

SWIFT is expected to have in place robust methods to plan for the entire lifecycle of the use of technologies and the selection of technological standard. These include

• It strategic plans and processes for maintaining and updating those plans.
• Assessments of new technologies being evaluated for introduction into the SWIFT environment.

Communication with users:

SWIFT is expected to be transparent to its users and provide them information that is sufficient to enable users to understand well their role and responsibilities in managing risks related to their use of SWIFT. It includes

• Techniques SWIFT uses to be informed by users of operational risks on the user side that could potentially affect its own operations, or, alternatively, techniques SWIFT uses to prevent any such user impact on its operations.
• Identified weaknesses (absent or non-performing controls) if users need such information to manage risks related to their use of SWIFT.

The Bottom line

SWIFT covers a large community of users and provides excellent services but it has also faced some new challenges to its security requirements that should be safer. The need for automation for SWIFT message creation, processing, and transmission is growing. However, this comes at a cost and operational overhead. SWIFT also provides business intelligence services to its clients and SWIFT will no doubt rules in the world market because of its innovative structure.