How the SWIFT System Works

SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters. The code is interchangeably called the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code.

It is broken down as follows:

• The first four characters: the institute code
• Next two characters: the country code
• Next two characters: the location/city code
• The last three characters: optional, but organizations use them to assign codes to individual branches.

Prior to SWIFT, Telex was the only available means of message confirmation for international funds transfers. Telex was hampered by low speed, security concerns, and a free message format. Telex senders had to describe every transaction in sentences that were then interpreted and executed by the receiver. This led to many human errors.

To circumvent these problems, the SWIFT system was formed in 1973. Six major international banks formed a cooperative society to operate a global network that would transfer financial messages in a secure and timely manner.

Although there are other message services like Fedwire, Ripple, and Clearing House Interbank Payments System (CHIPS), SWIFT continues to retain its dominant position in the market. Its success is attributed to how it continually adds new message codes to transmit different financial transactions.

While SWIFT primarily started for simple payment instructions, it now sends messages for a wide variety of actions, including security transactions, treasury transactions, trade transactions, and system transactions.

Initially, SWIFT founders designed the network to facilitate communication about Treasury and correspondent transactions only. The robustness of the message format design allowed huge scalability through which SWIFT gradually expanded to provide services to the following:

• Banks
• Brokerage Institutes and Trading Houses
• Securities Dealers
• Asset Management Companies
• Clearing Houses
• Depositories
• Exchanges
• Corporate Business Houses
• Treasury Market Participants and Service Providers
• Foreign Exchange and Money Brokers

The SWIFT system offers many services that assist businesses and individuals to complete seamless and accurate business transactions. Some of the services offered are listed below.

• Applications for processing clearing and settlement instructions for payments, securities, forex, and derivatives transactions.
• Business Intelligence and compliance services.
• Messaging, Connectivity, and Software Solutions.

• SWIFT is a cooperative society owned by its members. All members pay a one-time joining fee plus annual support charges which vary by member class.
• SWIFT also charges users for each message based on message type and length. These charges also vary depending upon the bank’s usage volume; different charge tiers exist for banks that generate different volumes of messages.
• SWIFT has launched additional services. These are backed by the long history of data maintained by SWIFT. These include business intelligence, reference data, and compliance services and offer other income streams for SWIFT.

The majority of SWIFT clients have huge transactional volumes for which manual entry of instructions is not practical. The need for automation for SWIFT message creation, processing, and transmission is growing. However, this comes at a cost and increased operational overhead.

Although SWIFT has been successful in providing software for automation, that too comes at a cost. SWIFT may need to tap into these problem areas for the majority of its client base. Automated solutions within this space may bring in a new stream of income for SWIFT and keep clients engaged in the long run.

SWIFT has retained its dominant position in the global processing of transactional messages. It has recently forayed into other areas, such as offering reporting utilities and data for business intelligence, which indicates its willingness to remain innovative. In the short- to mid-term, SWIFT seems poised to continue dominating the market.