What Is SWIFT? A Complete Guide

SWIFT is an acronym for the Society for Worldwide Interbank Financial Telecommunication. Based in Brussels, Belgium, SWIFT is an electronic messaging service that enables the world's financial institutions to notify each other when they transfer funds to each other for their customers. It calls itself "the global provider of secure financial messaging services."^[1]

SWIFT is not a financial institution and doesn't hold or transfer the funds itself; rather, it is a safe and secure messaging system for banks. They use the network to communicate transaction orders with each other securely, thus facilitating cross-border payments and international commerce.^[1]

Who Is Part Of SWIFT?

The SWIFT network is a neutral cooperative that is governed by a 25-person board of directors and overseen by the central banks of the G-10 countries, including the U.S. Federal Reserve, the Bank of England and the European Central Bank.^[2]

SWIFT operates under Belgian law, so it must comply with European Union regulations, including the imposition of sanctions on member financial institutions. However, it doesn't make decisions on sanctions itself. In the past 10 years, SWIFT has been used to enforce economic sanctions on two countries: Iran in 2012 and Russia in 2022.^[3]

Brief History Of SWIFT

SWIFT was created in 1973, with 239 banks from 15 countries, and went live in 1977. Less than a year later it had processed 10 million messages. It now services more than 11,000 institutions in more than 200 countries and territories and handled more than 8.4 billion messages in its most current year.^[1]

In 1983, it connected central banks for the first time, reinforcing SWIFT's role "as the common link between all parties in the financial industry." In 1987 SWIFT entered the securities market, which extended its messaging services and increased its user base.^[2]

How Does SWIFT Work?

Prior to SWIFT's creation, banks used Telex technology to communicate with each other. However, Telex was slow and cumbersome, mainly due to language and systems barriers between the participating institutions.

Basically, Telex messages needed to be laboriously typed in word for word, in complete sentences, each time. In contrast, SWIFT developed data standards to surmount those obstacles "to permit the seamless, automated transmission, receipt and processing" of messages between users.^[1]

SWIFT Codes

Each SWIFT user is assigned an individual identifier code, consisting of eight or 11 characters, identifying the institution, the country, its location and an optional code for individual branches. Types of codes include a Bank Identifier Code (BIC) and an International Bank Account Number (IBAN), which identifies the bank and a specific account at that bank. In the U.S., banks use SWIFT codes for international payments but ABA routing numbers for domestic transactions.^[1]

SWIFT Use Example

As an example, let's say Bill wants to send money from his bank in London to his friend Sue in New York. Bill's bank will send a message via SWIFT to Sue's bank, at which time Bill's bank will deduct the funds from his bank and the money will be deposited in Sue's account. If both banks have a preexisting commercial account relationship, the messaging process usually only takes a few minutes.

If the banks don't have such a relationship, another bank will need to act as an intermediary, which slows down the process. If Bill's bank and Sue's bank both have a relationship with Bank C, that bank will act as an intermediary between the two. Depending on the complexity of the situation, the process could take a few days to complete. SWIFT charges fees commensurate with the complexity of the transaction.^[3]

Where Is SWIFT In 2022? Russia's Invasion Of Ukraine

SWIFT is a neutral body and doesn't involve itself in who can and can't use the system. However, as it is required to follow EU regulations, it has been used to enforce economic and financial sanctions on rogue states, first in 2012 against Iran for violating restrictions on its nuclear development program. In 2022, as a result of President Vladimir Putin's decision, Russia's largest banks were cut off from SWIFT to penalise the country for its invasion of Ukraine.^[3]

What Is The Impact Of Being Removed From SWIFT?

Being removed from SWIFT has an impact. As a result of its being cut off from SWIFT, Iran lost almost half of its oil export revenue and 30% of its foreign trade, Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs, wrote in a paper for the Carnegie Moscow Center. The situation could be even more dire for Russia, because it would mean its banks would not be able to communicate securely with banks outside Russia, which is dependent on energy sales to western Europe.^[4]

"The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows," Shagina wrote in her paper. Alexei Kudrin, Russia's former finance minister, estimated in 2014, following Russia's annexation of the Crimea, that being cut off from SWIFT would cause its economy to shrink by 5%.^[4]

Following the Ukraine invasion, a coalition comprising the U.S., U.K., Canada, France, Germany, Italy and the European Commission said removing Russian banks from SWIFT "will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally."

A cutoff from SWIFT would also make it difficult for Russia to tap the "$600 billion-plus war chest" Russia began to accumulate after sanctions were imposed upon it after it annexed several parts of eastern Ukraine in 2008 and the Crimea in 2014, a senior Biden administration official said. "You will immediately see a chilling effect fall over the Russian banking sector," the official added. The 10 largest Russian banks that were targeted hold nearly 80% of the Russian banking system's total assets.

Why Did Some Countries Hesitate?

Nikolai Zhuravlev, vice speaker of Russia's upper house of parliament, acknowledged that Russia would not be able to receive foreign currency as a result of not being able to access SWIFT. However, some countries, mainly in Europe, would also not be able to buy and receive oil, gas and other resources from Russia. That's one reason why several countries dependent on energy supplies from Russia were at first reluctant to go along, although they eventually did.^[4]

French Finance Minister Bruno Lemaire called cutting off Russian banks from SWIFT the "financial nuclear option" because it would make it difficult for European investors to recover payments on the nearly US$30 billion in debt owed by Russian businesses and individuals.^[7]

Are There Alternatives To SWIFT?

According to the Russian National SWIFT Association (ROSSWIFT), about 300 banks and financial institutions in the country belong to the SWIFT. This makes it the second-largest group of users outside the U.S. More than half of all credit organisations in Russia also belong to SWIFT.^[8] But are there any alternatives?

SPFS

Russia created its own payment system, SPFS, after the sanctions imposed on it in 2014. However, it handles only a limited number of transactions.^[7]

CIPS

Another possible alternative for Russia is China's Cross-Border Interbank Payment System (CIPS), but that generally only handles transactions in renminbi between foreign companies and China. It also has other shortcomings.^[9]

More than 80% of CIPS transactions rely on SWIFT messages. CIPS also only handles a tiny fraction of the messaging traffic that SWIFT does. In the third quarter of 2021 it handled an average of 13,000 transactions a day, compared to SWIFT's more than 40 million a day.^[10]

In addition, a 2017 U.S. law penalises foreign institutions that try to trade with sanctioned countries, so Chinese banks that try to circumvent the Russian sanctions through CIPS could find themselves under sanction as well, something many of them are not willing to do, especially if it jeopardises their much larger commerce with Western countries.^[10]

Summary

SWIFT is an international electronic messaging service that enables the world's financial institutions to notify each other when they send funds to each other for their customers, thus facilitating cross-border financial transactions, payments and international commerce. SWIFT was created in 1973 and now services more than 11,000 institutions in more than 200 countries and territories, handling more than 8.4 billion messages.

In 2022, Russia's largest banks were prohibited from using SWIFT as part of sanctions against the country following its invasion of Ukraine. The action was expected to make a severe dent in Russia's economy by preventing it from receiving money from countries, mainly in Europe, for natural gas, oil and other exports.