If you've ever sent money to someone in another country, chances are you’ve used
SWIFT - a messaging system used by banks and other financial institutions all over the world.
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication,
and it’s been around for almost five decades.
It’s headquartered in Belgium and is controlled by the G-10‘s
central banks, as well as the European Central Bank.
It was founded with 239 banks in 15 countries, and now connects
more than 11,000 member banks in 200-plus countries and territories around the world.
Trillions of dollars’-worth of currency
is sent across borders every single day - and it’s largely thanks to SWIFT.
Before SWIFT, the world used telex – or a telegraphic
transfer - to transfer funds internationally.
The system was slow, usually taking between two to four business days to complete a
transfer and it involved describing each transaction with sentences instead of codes.
So how does SWIFT work,
and what happens if you lose access to this important part of the international economy?
SWIFT is how banks communicate - securely and quickly.
Let’s say I want to send money from Singapore to my friend Tom in the U.K.
My bank is going to require a few details like Tom’s account number and his bank’s SWIFT code,
which is a unique 8–11-character code that identifies each bank in the network.
Once I’ve keyed those in, SWIFT sends messages between the two banks.
Remember, SWIFT is a messaging platform, not a payments system.
If these banks have an account with each other,
they authenticate the payment request and Tom receives his funds transfer.
If the banks don’t have a relationship, the banks would be sent through intermediary banks
until the payment request is verified for Tom to receive his money.
Because many institutions do not have accounts with one another, they rely on intermediaries.
And these intermediaries usually have a presence in the United States,
given the dominance of the greenback, which means they can be policed by U.S. authorities.
Alistair Milne, a professor of financial economics, explains more.
It’s really about secure
automated payments, so they help banks make payments to each other in a secure way,
but particularly in an automated way so that everything integrates with the bank’s systems.
While SWIFT is overseen by a neutral organization, its influence has made
it a tool for policymakers to impose economic sanctions on countries that step out of line.
In February 2022, several Russian and Belarusian banks were barred from the SWIFT network,
as part of economic sanctions after Russia’s invasion of Ukraine.
It’s become a symbol. So, it says we can exclude you from Swift,
and that's kind of a substantial threat.
But really, it’s shorthand for saying we’re going to exclude you from
financial transactions around the world.
However, Russia’s not the first country to be disconnected from the SWIFT system.
North Korea and Iran have also had their banks barred.
What that kills is the automation of payments.
What SWIFT allows is for all the messaging to integrate into the bank systems,
and so there’s no manual intervention.
If I’m sending $100 somewhere around the world,
SWIFT will make sure that gets through, and the true cost of that is probably only a few cents.
But if I do it manually, it could easily cost $100
or more to get people to make the necessary telephone calls.
But for the big payments of a million dollars, the automation, convenient,
maybe it helps get things done a bit quicker, but in the end, it doesn’t matter so much, they can
still communicate, and get banks – if the banks are willing – to make those transactions anyway.
SWIFT is a critical part of the world’s financial infrastructure,
but it isn’t the only system for international transactions.
For example, the Russian Central Bank
set up the System for Transfer of Financial Messages or SPFS in 2014.
As of February 2021, it had about 400 users - mostly Russian banks and legal
entities. 23 of the users were foreign banks.
China is also trying to create its system.
In 2015, the People’s Bank of China established the CIPS network – the
Cross-Border Interbank Payment System.
By 2019, it reached more than 3,000 banks directly and indirectly, across 167 countries and regions.
I think the CIP system can be quite attractive for Renminbi transactions.
So when China is engaged in trade with particularly, its near neighbours, we don’t know
what’s going to happen as a fallout of the Russian invasion of Ukraine, but it’s certainly possible
that a response to Western sanctions, Russia will be engaging in greater trade with China.
And one can certainly see the payments messaging for all those
products and services going through the Chinese system, rather than SWIFT.
How hard or easy is it for a bank to join alternative networks?
It’s hard to see that being used much outside of those specific countries.
Ultimately, you want to deal directly as possible with the banks you have relationships with, and
SWIFT is in a very strong position in being able to provide that required connectivity.
With any sort of legacy technology, you do have the stickiness that occurs with it.
Caroline Malcolm heads policy at blockchain data platform Chainalysis.
I asked her whether cryptocurrency and blockchain solutions such as Ripple could replace SWIFT.
There’s an adoption curve that really happens.
You have your crypto native companies, for example.
You’ve got your sort of fin-techs, and then you’ve got your more traditional financial players.
At that end of the spectrum, your traditional financial players,
you are looking at a number of different issues in terms of how to integrate,
how to actually participate in new payment systems like crypto-based ones.
But there’s also a sort of an education process as well,
that has to happen both inside these institutions, but also with customers.
How effective could cryptocurrency be as a workaround for economic sanctions?
There’s a number of reasons why crypto is probably not your tool of choice.
One, just as we have in traditional finance, crypto has systems in place which allow people to
be alerted if they are actually interacting with a sanctioned entity or individual.
Secondly, blockchain, on which crypto is based, is a permanent, immutable record that
is publicly available of all transactions that have taken place on that blockchain.
Should SWIFT be afraid of blockchain technology?
I don’t really recognize that view of SWIFT is ripe for disruption.
I know there’re a lot of technology start-ups who claim that they can grab a big piece of the
action, but I think we’ve got to remember the importance - in payments – of network effects.
It’s really very difficult to try and attract all 11,000 banks on to another system,
and especially which actually, on the whole, works pretty well.
And 95% of SWIFT payments throughout the world, they’re all completed comfortably within 24 hours.
That’s not to say that SWIFT is perfect.
All this discussion about disruption has been quite positive because it’s actually accelerated
changes in the SWIFT system, including the GPI.
GPI stands for Global Payments Innovation.
It was launched in 2017 to provide end-to-end tracking of funds,
to increase the speed of payments, and to help make international payments more transparent.
SWIFT doesn’t actually transfer money per se.
It’s transferring information like banking orders.
What’s interesting about a system
based on blockchain is that you will have certain services which continue to be intermediate,
like centralized crypto exchanges, for example, but it also allows people to hold their own funds,
their own different forms of value and allows you to control that in a very direct way.
And I think what we’ve seen in terms of how the industry evolves, is that that’s
something that some people want to do. They want to have that sort of personal control.
Other people still want to keep using an intermediated service. But the nice
thing about this technology is that it finally gives people that choice.
With blockchain technologies still developing, rerouting the globe’s financial transactions
through smaller messaging networks, remains unlikely for now.
However, in the long-term, these networks could mature,
and the way money moves around the world could change.
You don’t detach from a legacy technology or legacy system like
SWIFT overnight. There’s been huge amounts of investments in that.
But there are certain capabilities and features which blockchain based systems
have that can’t be matched by traditional systems.
One of the more interesting developments is what’s known as central bank digital currency.
It's certainly possible that in 10-15 years’ time that businesses and individuals
will get quite used to exchanging digital currencies, perhaps directly with each other.
Now, in that case, the role of SWIFT would begin to change. It will still be
the messaging to support international payments,
but they would have to adapt to take account of that new type of payment.
That’s certainly a possibility for the future.