What Is the SWIFT Banking System?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a secure communication network to financial institutions in order to communicate and facilitate cross-border transactions and payments.

The SWIFT system is a critical piece of infrastructure for the international banking system because it allows financial institutions to talk to one another securely. Without access to the SWIFT messaging network, banks are essentially shut out of the global financial system because they cannot speak to banks in other countries to agree to transaction and payment terms.

What Is SWIFT?

SWIFT doesn’t hold assets or move money around. Instead, it is a messaging system for banks and other financial institutions. When banks need to conduct business across borders with other financial companies, the SWIFT system allows them to communicate to one another in a secure and standardized manner to ensure reliable transaction terms.

The SWIFT messaging system relies on a standardized system of codes to transmit information and payment instructions. These codes are interchangeably called Bank Identifier Codes (BIC), SWIFT codes, SWIFT IDs, or ISO 9362 codes. Each member of the SWIFT network is assigned a BIC/SWIFT code, providing an efficient transfer of information during transactions.

The SWIFT codes are used so banks and financial institutions can communicate reliably. For example, a bank in the United States wants to make sure it is messaging the right bank in France to set up payment instructions before sending money.

Since SWIFT doesn’t send money, it requires banks to take additional steps to send money globally after communicating with their counterparty. This makes the whole process relatively slow and adds costs to the transfers. The advent of blockchain technology may alleviate these time lags and additional costs as the technology is adopted more broadly.

Format of BIC/SWIFT Code

These codes are unique and have 8 or 11 characters, identifying the bank, country, city, and branch.

•   Bank code (0-9 or A-Z): 4 characters representing the bank.

•   Country code (A-Z): 2 letters representing the country of the bank.

•   Location code (0-9 or A-Z): 2 characters of letters or numbers for the location of the bank.

•   Branch Code (0-9 or A-Z): 3 digits specifying a particular branch. This branch code is optional.

For example, Wells Fargo, with a branch in Philadelphia, has the 11-character SWIFT code PNBPUS33PHL. The first four characters reflect the institute code (PNBP for Wells Fargo), the next two are the country code (US), the following two characters specify the location/city code (33), and the last three characters indicate the individual branch (PHL). The last three characters are optional; if the bank is the head office, the code ends with XXX.

History of SWIFT

Telex was an early electronic communications system used in the post-World War II period, allowing businesses to send written messages across the globe. Before SWIFT, financial institutions used Telex to communicate with one another to ensure the successful transfer of international payments. However, Telex was slow, lacked security, and was prone to human error because it didn’t run on a standardized system.

To alleviate the problems of Telex, 239 banks from 15 countries joined forces in 1973 to develop a communications network that would provide safe, secure, and standardized messaging for cross-border payments. These banks formed the Society for Worldwide Interbank Financial Telecommunication and went live with the SWIFT messaging service in 1977. Soon, SWIFT was widely adopted and became the gold standard for cross-border messaging in the global financial system.

More than 11,000 financial institutions in over 200 countries use the SWIFT system to communicate. It processes tens of millions of messages per day, too. 

Who Controls SWIFT?

Based in Belgium, SWIFT is a member-owned cooperative, meaning that member institutions have stakes in SWIFT and the right to nominate directors to its governing board. This governing board is made up of 25 people from across the globe and overseen by the G-10 country central banks (Bank of Canada, Deutsche Bundesbank, European Central Bank, Banque de France, Banca d’Italia, Bank of Japan, De Nederlandsche Bank, Sveriges Riksbank, Swiss National Bank, Bank of England, USA Federal Reserve System), the European Central Bank, and the National Bank of Belgium.

Traditionally, SWIFT acts as a neutral party, so it doesn’t make any decisions on sanctions. However, because it operates under Belgian law and European Union regulations, SWIFT will adhere to sanctions imposed by the EU if necessary. This resulted in banks from Iran being kicked off the SWIFT system in 2012 because of the country’s nuclear weapon program. Additionally, in early 2022, several Russian institutions were kicked off of SWIFT after the country invaded Ukraine.

The Future of SWIFT

Because of SWIFT’s significant role in the global financial system, some believe that blockchain technology could circumvent the need to use the SWIFT network. Proponents of decentralized finance believe that these new technologies could increase global payments’ speed, security, and transparency. Just as SWIFT replaced Telex as the standard for messaging in the global financial system, some think that blockchain technology could do the same.

The Takeaway

SWIFT is a critical part of the global financial system. Without the secure messaging services of SWIFT, banks and other financial institutions would struggle to complete transactions and make payments in overseas business. However, the SWIFT system is relatively slow and costly for financial institutions. Even with the safe and secure messaging of SWIFT, cross-border payments and transfers between financial institutions can still take several days to complete. 

In a world that desires high-speed money transfers, this lag in transaction time can be burdensome to banks and other financial institutions. As new challengers in the global financial system, like blockchain technology, breakthrough and become a more mainstream part of the financial payments system, they could put pressure on the ubiquity of the SWIFT system and the overall global payments system.

Photo credit: iStock/Evgeniy Skripnichenko

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