How SWIFT works? (The Society for Worldwide Interbank Financial Telecommunication)
Tracking how money moves internationally from bank to bank thanks to the SWIFT messaging system.
The SWIFT network doesn't actually transfer the money - it communicates transaction orders between institutions using SWIFT codes. Thanks to SWIFT, we have standardized IBAN (International Bank Account Number) and BIC (Bank Identifier Code) formats that are used for actual funds transfer.
SWIFT assigns every financial organization a code which is unique and has 8 or 11 characters. This code is called the SWIFT code, ISO-9362, or the BIC code. It comprises the institution code, the country code, the location code (or city code), and an optional branch code for individual branches.
Keep in mind that the IBAN code and SWIFT code are not the same things - while the SWIFT code only identifies a bank, the IBAN identifies both the bank and a specific account at the bank. The United States doesn't participate in IBAN and instead uses the ABA routing numbers(American Bankers Association (ABA)) for domestic payments and SWIFT codes for international payments.
Since SWIFT doesn't actually send money, it requires different interventions, which makes the whole process slow. It also adds costs to the transfers.
SWIFT uses a system of codes to detail where a transfer is coming from, where it’s going, and how it’ll to get there. These strings of alphanumeric identifiers comprise an institution code, a country code, a location code, and a branch code. So in that way, it’s not dissimilar to the U.S. routing number system.
It’s worth reiterating that, because SWIFT doesn’t actually send money, institutions that use the network also need banking relationship to move funds.
Each financial institution will have a dedicated SWIFT interface (in other words, a computer-based terminal) on-premises. Most banks set up their SWIFT systems so that they’re isolated from the rest of their networks. (Though, again, as we’ll cover later, not all do.)
Users can log in to these terminals to manually enter messages. Messages can also be auto-generated by the institution’s computer system and passed on to the terminal. The terminal then sends the SWIFT message to the regional processors in the sender’s country. The terminals only connect with processors through leased line, dial up, or public data network connections. C24 has an excellent rundown of how everything works here.
From there, the regional processor checks, stores, and forwards the data to its operating center, which passes the message on to the processor in the recipient’s country. That processor delivers the message to the receiver’s terminal, and then sends confirmation. Officials at the respective financial institutions are supposed to audit these to prevent fraud.
Moving money
Actually transferring funds internationally is a bank matter.
Say two customers of the same bank are located in two different countries and want to transfer funds. The customer in country A will ask the bank to transfer funds to the customer in country B. Branch A will then tell its counterpart what to do via SWIFT. And then it’ll wire the funds and make the required book entries in its accounting system. That’s it.
But it’s usually more complicated than that, and it often involves more financial institutions.
For example, if one financial institution doesn’t even have a branch in the beneficiary’s country, it might need to loop other institutions—in this context, called correspondent banks—to complete the transaction. If both banks (conveniently!) maintain accounts at a third institution, they might use that third bank to expedite things. They’d identify the relationship, send a secure message over SWIFT between the banks, and do a book transfer.
Comments
Post a Comment