Table of Contents
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a secure communication network for financial institutions to communicate and facilitate cross-border transactions and payments.
The SWIFT system is a critical piece of infrastructure for the international banking system because it allows financial institutions to talk to one another securely. Without access to the SWIFT messaging network, banks are essentially shut out of the global financial system because they cannot speak to banks in other countries to agree on transaction and payment terms.
Key Points
• SWIFT is a messaging network that allows banks and other financial institutions to communicate securely when making cross-border payments and transfers between international bank accounts.
• The system uses a standardized system of codes to transmit information between banks during transactions.
• Each 8- or 11-character code is unique and identifies the bank, country, city, and branch.
• SWIFT was developed in 1973 to replace the human error-prone Telex system.
• Based in Belgium, SWIFT is governed by a board of directors and overseen by the G10 countries’ central banks.
What Is SWIFT?
SWIFT doesn’t hold assets or move money around. Instead, it is a messaging system for banks and other financial institutions. When banks need to conduct business across borders with other financial companies, the SWIFT system allows them to communicate with one another in a secure and standardized manner to ensure reliable transaction terms.
The SWIFT messaging system relies on a standardized system of codes to transmit information and payment instructions. These codes are interchangeably called Bank Identifier Codes (BIC), SWIFT codes, SWIFT IDs, or ISO 9362 codes. Each member of the SWIFT network is assigned a BIC/SWIFT code, providing an efficient transfer of information during transactions.
SWIFT codes are used so banks and financial institutions can communicate reliably. For example, a bank in the United States wants to make sure it is messaging the right bank in France to set up payment instructions before transferring money.
Since SWIFT doesn’t send money, it requires banks to take additional steps to transfer funds globally after communicating with their counterparty. This makes the whole process relatively slow and adds costs to the transfers. The advent of blockchain technology may alleviate these time lags and additional costs as the technology is adopted more broadly.
Format of BIC/SWIFT Code
These codes are unique and have 8 or 11 characters, identifying the bank, country, city, and branch:
• Bank code (0-9 or A-Z): 4 characters representing the bank
• Country code (A-Z): 2 letters representing the country of the bank
• Location code (0-9 or A-Z): 2 characters of letters or numbers for the location of the bank
• Branch code (0-9 or A-Z): 3 digits specifying a particular branch (optional)
For example, Wells Fargo, with a branch in Philadelphia, has the 11-character SWIFT code PNBPUS33PHL. The first four characters reflect the institute code (PNBP for Wells Fargo), the next two are the country code (US), the following two characters specify the location/city code (33), and the last three characters indicate the individual branch (PHL). The last three characters are optional — if the bank is the head office, the code ends with XXX.
| More SWIFT Code Examples | |||
|---|---|---|---|
| Bank Name | Barclays Bank Plc | Toronto-Dominion Bank | MUFG Bank, Ltd. |
| SWIFT Code | BARCGB22 | TDOMCATTTOR | BOTKJPJT |
| Bank Code | BARC | TDOM | BOTK |
| Country Code | GB (United Kingdom) | CA (Canada) | JP (Japan) |
| Location Code | 22 (London) | TT (Toronto) | JT (Tokyo) |
| Branch Code | XXX or not assigned (indicates head office) | TOR | XXX or not assigned (indicates head office) |
History of SWIFT
Telex was an early electronic communications system used in the post-World War II period, allowing businesses to send written messages across the globe. Before SWIFT, financial institutions used Telex to communicate with one another to ensure the successful transfer of international payments. However, Telex was slow, lacked security, and was prone to human error because it didn’t run on a standardized system.
To alleviate the problems of Telex, 239 banks from 15 countries joined forces in 1973 to develop a communications network that would provide safe, secure, and standardized messaging for cross-border payments. These banks formed the Society for Worldwide Interbank Financial Telecommunication and went live with the SWIFT messaging service in 1977. Soon, SWIFT was widely adopted and became the gold standard for cross-border messaging in the global financial system.
More than 11,000 financial institutions in over 200 countries use the SWIFT system to communicate, allowing millions of people worldwide to safely make international payments without worry. It processes tens of millions of messages per day, too.
Who Controls SWIFT?
Based in Belgium, SWIFT is a member-owned cooperative, meaning that member institutions have stakes in SWIFT and the right to nominate directors to its governing board. This governing board is made up of 25 people from across the globe and overseen by the G10 countries’ central banks (Bank of Canada, Deutsche Bundesbank, Banque de France, Banca d’Italia, Bank of Japan, National Bank of Belgium, De Nederlandsche Bank, Sveriges Riksbank, Swiss National Bank, Bank of England, US Federal Reserve System).
Traditionally, SWIFT acts as a neutral party, so it doesn’t make any decisions on sanctions. However, because it operates under Belgian law and European Union regulations, SWIFT will adhere to sanctions imposed by the EU if necessary. This resulted in banks from Iran being kicked off the SWIFT system in 2012 because of the country’s nuclear weapons program. Additionally, in early 2022, several Russian institutions were kicked off SWIFT after the country invaded Ukraine.
The Future of SWIFT
Because of SWIFT’s significant role in the global financial system, some believe that blockchain technology could circumvent the need to use the network. Proponents of decentralized finance believe that these new technologies could increase global payments’ speed, security, and transparency. Just as SWIFT replaced Telex as the standard for messaging in the global financial system, some think that blockchain technology could do the same.
The Takeaway
SWIFT is a critical part of the global financial system. Without the secure messaging services of SWIFT, banks and other financial institutions would struggle to complete transactions and make payments in overseas business. However, the SWIFT system is relatively slow and costly for financial institutions. Even with the safe and secure messaging of SWIFT, cross-border payments and transfers between financial institutions can still take several days to complete.
In a world that desires high-speed money transfers, this lag in transaction time can be burdensome to banks and other financial institutions. As new challengers in the global financial system, such as blockchain technology, break through and become a more mainstream part of the financial payments system, they could put pressure on the ubiquity of the SWIFT system and the overall global payments system.
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FAQ
Which US banks use SWIFT?
Most major U.S. banks use the SWIFT network to facilitate international payments. While some smaller local credit unions or banks may not be part of the SWIFT system, they usually route international payments through larger intermediary banks.
How does SWIFT banking work?
SWIFT is a secure, global messaging network used by over 11,000 financial institutions across 200 countries. It does not physically move money but rather acts as a standardized communications system that instructs banks on how and where to transfer funds internationally.
Is SWIFT the same as a routing number?
No, a routing number and a SWIFT code are not the same thing. A routing number is a 9-digit numerical code used exclusively for domestic transfers. A SWIFT code is an 8- to 11-character alphanumeric code used for international payments and transfers to identify a specific bank anywhere in the world.
Are SWIFT payments safe?
Yes, SWIFT employs strict security measures, including rigorous encryption, institutional vetting, and message verification, making payments highly secure. However, due to the system’s reliance on human interaction, the primary risks usually involve data-entry errors or scams rather than system failures.
How long does a SWIFT payment take?
Typically, a SWIFT payment takes one to five business days to arrive. The exact time it takes will depend on the currencies, time zones, and how many intermediary banks are required to make the transfer.
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