As the world evolves, countries are on the lookout for secure and safe ways that allow them to transfer money from one bank to another. International transactions are often backed by the need to work with a financial intermediary to double-check that everything runs smoothly and the way it should be. This is where the SWIFT payment system, or the Society for Worldwide Interbank Financial Telecommunications, comes into play. But, what is the SWIFT payment system? This is how the SWIFT system works.
What is SWIFT?
Essentially, SWIFT payments are transactions that utilize the SWIFT payment system to receive or send electronic payments. Therefore, payments made through the SWIFT payment system are also known as international wire transactions, making perfect sense.
However, if you think that the SWIFT payment system actually transfers funds, it doesn’t. Instead, SWIFT transports payment orders between different banks using the SWIFT codes. So, using the SWIFT payment system, you can seamlessly transfer money swiftly, securely, and without a worry in the world.
Individuals and organizations can use the SWIFT payment system to collect and transmit foreign money by employing digital or credit card payments. Even if the client or supplier requires a different bank than the payee, this may be accomplished. The network serves as a platform for solid financial communications. In some ways, it’s little more than a middleman between banks.
Facts about SWIFT
Over 11,000 SWIFT member institutions sent roughly 33.6 million transactions per day across the channel in 2019. As a result, the financial service establishes a worldwide degree of connectedness, accelerating global trade and bringing the nations closer.
How the SWIFT system works
The SWIFT payment system was initially engineered to pave ways for a bank to communicate and safely transfer funds between them. You can think of SWIFT like a messenger or a middle man between the banks. The SWIFT payment system transmits messages encapsulating payment instructions from issuing banks to the remitting banks.
All of the banks bundled in the SWIFT payment system rely on underlying networks like Nostro and Vostro to help them transfer funds. This covers banks that have only sprung up recently to use the SWIFT system for transactions. Because both banks retain a record of money placed into the account, the Nostro and Vostro accounts have mirrored ledgers.
Nostro is the name of the account used by the bank to open it in their accounts, whereas Vostro is the name of the account used by the bank to hold money.
SWIFT transfers are direct and quick when both banks have a commercial connection with Nostro and Vostro accounts. However, when a bank does not have this link, the SWIFT network must identify the best way to transmit the message. A third party, often known as an intermediate bank, is necessary for this instance.
Swift payments are e-payments made through the network. Swift provides each bank an 8 or 11 character code known as a bank identification. It is much like the IFSC code used for domestic interbank payments, with Swift being used for foreign transactions. For example, if someone in China wishes to send money to someone in the United States, they will require the recipient’s bank account information and the destination bank’s Swift code. In addition, the Swift code notifies the US bank of the transfer in real-time, making it easier to clear.
Understanding SWIFT codes
When you utilize SWIFT, you are not really moving money. Instead, think of it as a “payment order” across two banks. This is accomplished through the use of a SWIFT code.
The SWIFT network was responsible for standardizing the IBAN (International Bank Account Numbers) and BIC formats (Bank Identifier Codes). The BIC system is owned and managed by SWIFT. This means it can instantly recognize a bank and deliver a safe transfer.
A SWIFT code is made up of 8 or 11 characters. Across the globe, SWIFT codes are also known as BIC, SWIFT IDs, and ISO9362.
Who uses the SWIFT payment system?
Initially, the SWIFT payment system was engineered to only ease down communications about treasure and corresponding transactions. However, later SWIFT rapidly gained traction and is today used by:
- Clearing systems,
- Security broker-dealers,
- Money brokers,
- Foreign exchange channels,
- Treasury market participants,
- And many other financial institutions,
SWIFT payment systems are the future of international transactions; knowing how the SWIFT system works is necessary for the modern era. So if you think your company is using the SWIFT payment system, it’s time you get up to speed with it!