What is the SWIFT banking and payment system? How it works in 3 steps.

Key takeaways:

• SWIFT is a telecommunication platform, known as the Society for Worldwide Interbank Financial Telecommunication, that facilitates international transfers between banks and other financial institutions. It doesn't move funds itself, nor does it hold money or manage bank accounts.

• This 50-year-old messaging service, often referred to as the SWIFT system, revolutionized traditional wire transfers for efficient currency exchange and international financial transactions by transmitting transactional messages and payment instructions securely between member institutions.

• SWIFT is a trusted system for multinational enterprises, but its typical turnaround time of one to five business days, along with associated fees, has made modern solutions more attractive.

Multinational enterprises (MNEs) in the US alone employ more than 44.3 million workers operating across countries, continents, and currencies.¹ Covering payroll, office expenses, and partnerships globally requires quick, efficient currency exchanges to settle invoices and receive payments.

Crystal-clear communication is essential at this scale, which is why the standardized SWIFT banking system has become so popular.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a financial messaging system, often referred to as the SWIFT system, that facilitates the global movement of money by transmitting messages and establishing secure network connections between financial institutions. If you’ve ever received or sent money overseas, chances are you’ve used SWIFT’s global network. SWIFT's global network connects over 11,000 member institutions, including banks and other financial institutions, enabling international financial transactions for clients worldwide.

SWIFT does not transfer funds or hold money on behalf of its users. Instead, it facilitates the secure transmission of transactional messages and payment instructions between member institutions, allowing financial institutions to communicate about financial transactions without directly moving funds.

For example, suppose a client in Canada wants to send money to a supplier in Germany. In that case, their bank uses the SWIFT network to send a payment instruction message to the supplier’s bank, identified by its unique SWIFT code (also known as a Bank Identifier Code or SWIFT ID). The supplier’s bank then processes the transaction based on the received instructions.

It’s a tried and trusted system, but businesses and individuals have been looking to new technology to enable faster and more cost-efficient global payments in recent years. In this article, we’ll delve into what SWIFT is, how SWIFT transfers work, and explore new SWIFT alternatives for businesses.

Historically, SWIFT was initially created to support correspondent transactions and replace the Telex system, which was considered error-prone and inefficient for transmitting financial messages. The first message sent over the SWIFT network marked a significant milestone in secure international banking communications.

SWIFT is overseen by central banks, including the European Central Bank and various national banks, and operates as a member-owned cooperative governed by its member institutions.

What are SWIFT payments, and how do they work?

SWIFT doesn’t actually transfer money – it facilitates the secure exchange of payment instructions and messages between banks. So, while we call them SWIFT transfers, that’s not entirely accurate. When you make a SWIFT payment, your bank is still the one transferring money to the recipient’s bank, while SWIFT transmits the necessary information to process the financial transaction.

When clients are sending money internationally via SWIFT, the network creates a payment order for international wires that may pass through one or more intermediary (correspondent) banks before reaching the recipient. Each financial institution on the SWIFT network has a unique SWIFT code, also known as a Bank Identifier Code (BIC), which enables SWIFT to identify the financial institutions involved and route messages securely.

The SWIFT network serves as an information transport network, carrying payment messages from the sender’s bank to the recipient’s bank. The recipient’s bank will receive transactional messages through the SWIFT network to complete the process. So, you’ll need an account with a bank that operates internationally and has a SWIFT code to make a payment, as well as a few additional details.

1. Gather the needed banking information

As with any transfer, you need some key financial information for all of the parties involved. This is the information SWIFT uses to facilitate the money transfer between international banks.

To complete a SWIFT payment, you'll need:

• All of your personal information, including name, address, and bank identification.

• The recipient's full name, either the business's name or an individual legal name.

• The recipient's address (use a business address if the recipient is a business).

• The recipient bank's name and address.

• The recipient bank's SWIFT code.

A SWIFT code consists of eight to 11 characters. These characters are used to identify the bank that is sending the message and the bank that is receiving it. SWIFT codes are also known as Bank Identifier Codes (BIC).

Each element of a SWIFT code represents a piece of information:

• A 4-letter bank code

• A 2-letter country code

• A 2-digit location code

• A 3-digit branch code (SWIFT codes don't always include this)

Note: SWIFT codes aren't the same as International Bank Account Numbers (IBAN). IBANs and SWIFT codes are often confused because both are needed to send an international payment. The difference between an IBAN and a SWIFT code is that unique IBANs identify an individual bank account, whilst SWIFT codes identify a bank.

2. Request a transfer and consider fees

After you’ve gathered the recipient bank’s SWIFT number and other identification details, the process is similar to any other bank transfer. You can contact your bank in person or online to initiate the transfer.

But make sure you understand how SWIFT payment fees work before you submit the payment. Given the international nature of the SWIFT payment network, there is no set table of fees, so it pays to check first.

There are two sets of fees you can expect to pay when making a SWIFT payment.

• Transaction fees: SWIFT communications don’t always travel directly between banks. Sometimes, they go between intermediary banks before reaching their final destination, and each bank charges a handling fee for their service. These intermediary steps are part of correspondent transactions facilitated by SWIFT, which was initially designed to support communication about treasury and correspondent transactions. Secure network connections between banks are essential for the reliable transmission of SWIFT messages across these intermediaries. Your bank may charge a flat-rate or variable fee.

• Foreign exchange fees: Transfers involving currency exchanges charge a foreign exchange (FX) fee. The FX rate offered depends on the interbank rate (the rate that banks pay when exchanging currencies with other banks), and the FX fees that the bank charges its customers. Banks can charge up to 3.5% in FX fees on top of the interbank FX rate, so there may be a cheaper way to send your money.

It’s important to check how fees are charged to ensure your recipient gets the correct amount of money. Banks allow you to choose whether fees are paid by you, your recipient, or split between the two of you. You should agree which option is best for you and your recipient before making the payment.

Airwallex offers businesses a more cost-efficient way to make international money transfers and handle global finances. We don’t charge transaction fees on international payments, and our FX rates are significantly lower than those of high street banks.

3. Confirm the recipient country and currency

Once you've arranged the transfer with your bank, they'll ask you to confirm the recipient country and desired currency. Remember that you'll have to pay FX rates if the recipient's currency is different from yours.

At this point, your bank and the recipient bank will arrange the transfer via SWIFT messages. The transfer may clear between one to five business days.

History of SWIFT and why it’s important

Founded in Brussels in the 1970s, SWIFT was created to replace the error-prone Telex system, which banks previously used to communicate instructions for global transfers. Telex was cumbersome and often led to mistakes, making it unsuitable for the growing needs of international banking.

A small group of banks initially supported SWIFT to facilitate communication about treasury and correspondent transactions. The sending of the first message over the SWIFT network marked a significant milestone in worldwide interbank financial telecommunication, setting the stage for a new era in secure and efficient financial messaging.

SWIFT provided financial institutions with a standardized and secure messaging network to transmit financial messages worldwide. SWIFT assigns unique codes, known as SWIFT codes or BICs (Bank Identifier Codes), to each institution, establishing an industry standard for identifying member institutions within its global network. These codes are essential for secure messaging and international transactions.

SWIFT's infrastructure relies on messaging hubs and advanced software to maintain secure network connections, ensuring reliable and scalable communication between member institutions. For example, when Bank A in one country needs to send funds to Bank B in another, SWIFT transmits a message containing the payment instructions, using the assigned codes to identify each institution and routing the message through its messaging hubs and software for processing.

Since its inception, SWIFT has grown to include over 11,000 financial institutions spanning 200+ countries and territories, facilitating the secure exchange of financial messages used to initiate and coordinate international transfers and other financial operations.

SWIFT services

SWIFT supports businesses and financial institutions with a range of services beyond its core financial messaging capabilities. Businesses can also use SWIFT for:

• Market infrastructure support, helping participants comply with evolving industry standards and financial regulations.

• Financial crime compliance and cybersecurity tools, including services for Know Your Customer (KYC), sanctions screening, and anti-money laundering (AML) compliance. SWIFT also provides reference data and business intelligence to support regulatory obligations.

• Software solutions that enable clients to automate workflows, improve operational efficiency, and securely transmit transactional messages across the SWIFT network.

• Corporate treasury support, including tools for cash management, liquidity tracking, and financial risk management to operate in a global context.

• Dashboards and reporting tools provide clients with real-time visibility into their messaging activity, trade flows, and transaction monitoring, enabling more informed decisions and operational oversight.

Ultimately, this is just a preview of the full list of SWIFT products and services.³

The geopolitical relevance of SWIFT

Because the SWIFT network is the most common way for banks around the world to transfer money globally, it also plays a significant role on the geopolitical stage. Although SWIFT itself is neutral, cutting financial institutions off from the SWIFT network has become a key way for the European Union (EU) to sanction countries that have broken international law.

In 2012, EU sanctions against Iran meant that SWIFT disconnected from sanctioned Iranian banks. And in February 2022, SWIFT severed 10 Russian and Belarusian banks from their systems on instruction from the EU after Russia’s invasion of Ukraine. Alternative payment systems, including Airwallex, also blocked payments to and from Russian banks in accordance with EU sanctions.

Sanctions are designed to put economic pressure on countries that have broken international law, as they prevent those countries from receiving payments from other countries. Economic sanctions often involve disconnecting banks from the SWIFT network, which restricts their ability to conduct international financial transactions and increases economic pressure.

SWIFT’s lead regulator is the Bank of Belgium, and it operates under Belgian law. However, the G-10 central banks, and other banks from major economies, including the People’s Bank of China, the Monetary Authority of Singapore, and the South African Reserve Bank, also oversee SWIFT. The European Central Bank and the National Bank of Belgium play a key role in SWIFT's governance and oversight.

Who uses SWIFT

SWIFT is used by a range of businesses and individuals who wish to transfer money overseas. This includes:

• Banks

• Cross border businesses

• International employers

• Global franchises

• Securities dealers

• Asset management companies

• Clearing houses

• Depositories

• Foreign exchange brokers

There are other messaging networks that can be used for transferring money globally, such as Fedwire, Ripple, and Clearing House Interbank Payments System (CHIPS). But SWIFT remains the most widely used network for transferring money globally.

However, many businesses now look to faster and more cost-efficient ways to send and receive money overseas in an increasingly global world.

An Airwallex multi-currency business account is one such solution, offering businesses same-day transfers, market-leading rates, and world-class security, as well as the ability to trade in multiple currencies from a single platform.

SWIFT network considerations

The SWIFT payment network has a lot of advantages. It's secure, transparent and reliable. However, it also has a couple of disadvantages to consider.

• Delayed payments: SWIFT transfers can take up to five days or more to process because they may rely on the cooperation of multiple financial institutions. If you're a business that needs to pay staff and suppliers on time, business transfer delays can cause significant problems. No one wants to receive their paycheck five days late!

• Hidden fees: Different financial providers charge different fees when processing SWIFT transfers, which means it can be difficult to determine the final cost of a SWIFT transaction. So, you and your recipient may be subject to hidden payment fees. In the worst case, this might mean your recipient receives less money than they're expecting, which can cause friction between businesses and the people they need to pay.

If these are concerns for you, there are several modern day solutions to help you complete international transactions quickly and with less fees.

SWIFT Frequently Asked Questions

Who owns the SWIFT banking system?

SWIFT is owned and controlled by more than 2,400 global shareholders – primarily financial institutions – who elect its Board of Directors. The Board comprises 25 representatives from banks and financial institutions worldwide. SWIFT also employs an internal Executive Committee.

Do all banks use SWIFT?

Most international banks have a SWIFT code, but not all do. Some smaller banks and credit unions may not connect directly to the SWIFT network or may use intermediary banks for international transfers. It's always best to confirm whether both your bank and the recipient’s bank support SWIFT payments.

How many banks are connected to the SWIFT network?

More than 11,000 financial institutions across over 200 countries and territories are connected to the SWIFT network to support global financial messaging and cross-border transactions.

Discover modern alternatives to SWIFT transfers

The SWIFT payments network was revolutionary for its time, but it’s now over 50 years old. Today, businesses seeking fast and cost-efficient ways to send and receive international payments are increasingly turning to modern alternatives like Airwallex.

With Airwallex, you can send payments to over 200 countries in more than 60 currencies. More than 90% of these transfers are processed via local payment rails (instead of SWIFT), with around 95% of funds arriving on the same day.

Learn more about our fast, cost-effective FX and transfers here. 

Sources:

1. https://www.bea.gov/news/2024/activities-us-multinational-enterprises-2022

2. https://www.elon.edu/u/imagining/time-capsule/150-years/back-1830-1860/

3. https://www.swift.com/our-solutions/a-to-z