What is SWIFT? The banking system and payment network

6 minutes
Finance
What is SWIFT? The banking system and payment network
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Singapore SMEs increasingly recognise global trade as a critical step for growth. Bringing your company to global markets offers access to a broader customer base and new revenue streams. Working with offshore teams or overseas suppliers also creates cost-efficiencies and competitive advantage in the Singapore market. 

However, cross-border commerce also means navigating the complexities of international transactions.As the frequency of your international transactions increase, it helps to have a working understanding of SWIFT payments. SWIFT, the global standard for secure financial communication, facilitates most cross-border payments and ensures that transactions are smooth, secure, and traceable. 

In this article, we’ll show you how SWIFT payments work, its strengths and drawbacks, and a reliable, cost-effective way to send and receive cross-border payments.

What are SWIFT Payments?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a financial messaging system which facilitates the movement of money globally. If you’ve ever received or sent money overseas, chances are you’ve used SWIFT. SWIFT doesn't actually transfer or hold money, it's a messaging network used by financial institutions when processing international money transfers.

For the past 50 years, the SWIFT network has provided the infrastructure that underpins the international movement of money. But in recent years, businesses and individuals have been looking to new technology to enable faster and more cost-efficient global payments. In this article, we’ll delve into what SWIFT is, how SWIFT payments work and what the new alternatives are. 

SWIFT is used by a range of businesses and individuals who wish to transfer money overseas. These include banks, securities dealers, asset management companies, clearinghouses, depositories, foreign exchange brokers and more. 

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. 

A brief history of SWIFT

Founded in Brussels in the 1970s, SWIFT established a series of common processes to standardise international payments.

Prior to SWIFT, banks relied on the TELEX system to process global transfers. TELEX used a wire system, similar to traditional telegraphs, to transmit text-based messages between banks, notifying of a money transfer. That’s why some people still use the term ‘wire transfer’. Unfortunately, the TELEX system was slow and vulnerable to security breaches and human errors. 

SWIFT provided financial institutions with a private network to transmit financial data worldwide. They also introduced a standardised system of codes to identify financial institutions. This meant they could offer their members complete security and accuracy when processing global transfers. Since its inception, SWIFT has grown to include over 11,000 financial institutions spanning 212 countries across the world, providing a secure method for banks to transfer currency between countries.

How is SWIFT governed? 

Although SWIFT itself is neutral, its lead regulator is the Bank of Belgium and it operates under Belgian law. SWIFT is also overseen by 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.  

SWIFT is also owned and controlled by its 2,400 global shareholders, who elect its Board of Directors. The SWIFT Board of Directors includes 25 representatives from banks around the world. SWIFT also employs an internal Executive Committee. 

What is 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. 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 ten 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.  

What is a SWIFT Code?

A SWIFT code is an 8 or 11 character code which is used to identify a specific bank when making an international money transfer via the SWIFT network. You can find your bank's SWIFT code on your statements, your bank's mobile app or website. If you're having trouble locating your SWIFT code, you can go into your bank branch and request it. You may also see SWIFT codes referred to as a “SWIFT ID” or “BIC codes” — people use the terms interchangeably.

A SWIFT code consists of 8-11 characters. These characters are used to identify the bank that is sending the message and the bank that is receiving it:

  • A 4-letter bank code 

  • A 2-letter country code 

  • A 2-digit location code 

  • A 3-digit branch code (optional)

How to make a SWIFT payment

To make a SWIFT payment in branch or using online banking, you will need: 

  • The full business name if sending to a business, or the first and last name of the recipient if sending to an individual. 

  • The full address of the recipient (if sending to a business, this will be the business address).

  • The international bank account number (IBAN) of the recipient.

  • The name and address of the recipient bank.

  • The recipient bank’s SWIFT code.

Your bank will then send a SWIFT message to the receiving bank, communicating your request to transfer money. The recipient’s bank will receive the SWIFT communication and credit the receiving bank account. This process will take 1-4 business days. 

Not all financial institutions are part of the SWIFT network, so it’s important to confirm that your bank and your recipient’s bank are SWIFT members before making a transfer. 

What are SWIFT’s payment fees?

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 will go between intermediary banks before reaching their final destination, and each bank will charge a handling fee for their service. Your bank may charge a flat rate to cover these fees, or they may charge you a variable fee. Given the international nature of the SWIFT payment network, there is no set table of fees so it pays to check first. 

Foreign exchange fees

If your transfer involves exchanging currencies, you will be charged a foreign exchange (FX) fee. The FX rate you are offered depends on the interbank rate (this is 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 it’s worth checking what your bank's fees are before making a payment. There may be a cheaper way to send your money. 

When making a SWIFT payment, 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 payments. We do not charge transaction fees on international payments, and our FX rates are significantly lower than high street banks.

The drawbacks of using the SWIFT network

The SWIFT payment network has a lot of advantages. It’s secure, transparent and reliable. However, it also has a couple of major drawbacks.

Delayed payments

Because SWIFT payments rely on the cooperation of multiple financial institutions, SWIFT payments can take up to five days to process. What’s more, there’s no way to know how long your payment will take to clear. 

Payment delays can pose significant challenges for B2B firms, where trust and timely fulfillment are paramount. The unpredictable arrival of SWIFT payments increases the likelihood of lost opportunities and hinders a business's ability to act quickly on market demands.  

Hidden fees 

Different financial providers charge different fees when processing SWIFT payments, which means it can be difficult to determine what the final cost of a SWIFT transaction will be. This means you and your recipient may be subject to surprise 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.

Airwallex: a speedy, cost-effective alternative to SWIFT

For businesses seeking an alternative to SWIFT, the Airwallex Business Account offers a simple, speedy approach to cross-border payments. Transfer money like a local to 110+ countries through Airwallex’s partnership with local payment networks, allowing your international payments to skip the SWIFT network. The result? Significantly lower fees and rapid clearing times, often within just one business day.  

With the Airwallex Global Accounts, you can create local currency accounts that come with dedicated account numbers and local bank and branch codes. Transacting with these lets you skip SWIFT fees and send or receive USD, GBP, and 10 other currencies as quickly as 1 business day. Here are more ways your business can benefit from Airwallex:

  • Market-leading foreign exchange rates, no matter what the transaction size. Maximise the value of every dollar you send or receive. 

  • Save time on financial processes by creating workflows for bill payments, batch transfers, and expense approvals

  • Automate reconciliation by integrating Airwallex with accounting software like Xero and Quickbooks.

  • Instantly issue Borderless Cards, our multi-currency physical and virtual corporate cards that runs on the Visa network. 

  • Forex risk management that lets you lock in desired exchange rates and get access to conversion services even during weekends and public holidays

Embrace the future of cross-border payments with Airwallex and take your SME to global heights. Create a Business Account today, or contact us for a demo. 

FAQs

Q: What is the difference between IBAN and SWIFT code?

A: IBAN stands for International Bank Account Number. 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 IBANs are used to identify an individual bank account, whilst SWIFT codes are used to identify a bank.

IBANs are always unique and can be up to 34 characters long.  You can find your IBAN on your bank statements or your mobile banking app. If you can’t find it, contact your bank. 

Q: How long do SWIFT payments take?

A: Depending on the complexity of the transfer, SWIFT payments take anywhere between 24 hours and 5 business days to clear. 

Q: What happens if you use the wrong SWIFT code?

A: If you send a payment using a SWIFT code that doesn’t exist, your payment will be returned to you. However, there may be a delay in returning the payment and you might be charged a fee. 

If you send an incorrect payment to a SWIFT code that does exist, the receiving bank should flag that they do not manage your recipient’s account and reverse the payment. 

If you realise that you’ve used the wrong SWIFT code, you should contact your bank immediately and ask them to cancel the transaction. 

Q: What is SWIFTNet?

A: SWIFTNet is the messaging platform that SWIFT member institutions use to transmit messages when processing overseas transfers. Within SWIFTNet there are four services.

FIN: SWIFT’s original messaging service which allows messages to be exchanged between financial institutions, formatted with the traditional SWIFT MT standards. FIN offers store-and-forward messaging. 

InterAct: allows messages to be exchanged between financial institutions, formatted with the new XMLbased SWIFT MX standards. As well as store-and-forward messaging, InterAct supports real-time messaging, and real-time query-and-response. 

FileAct: is used to transfer large batches of messages such as bulk payment files, very large reports, or operational data.

Browse: allows users to securely browse financial websites available on SWIFTNet. 

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