In today’s digital world, the transfer of money to an overseas bank has become easier and swifter.
You can just go to the bank and transfer your money around the globe to your loved ones without any interference.
This is done with the help of SWIFT Banking System, the Society for Worldwide Interbank Financial Telecommunications.
In this article we will explore on what is SWIFT Banking System, How does it works, how is it used and the impact of Russia-Ukraine war on SWIFT.
What is SWIFT Banking System
Before the introduction of SWIFT, Worldwide banks used TELEX for doing international transactions.
Due to its slow nature of its payment orders as every transaction was to be described in sentences instead of codes.
Therefore in the year 1973, SWIFT was founded as it uses codes to send financial messages which are more efficient than TELEX.
SWIFT has its headquarters in Brussels, Belgium. The Society for Worldwide Interbank Financial Telecommunications is a communication method used by banks across the world to communicate to communicate money transfers between two banks.
Therefore when there is a commercial relationship i.e. when two banks have commercial accounts with each other and the money is transferred between these two banks, the money is deposited into the account as soon as the SWIFT message is received.
Therefore overseas money transfer takes place through banks’ commercial accounts for which the bank also charges a fee.
If there is no commercial relationship between your bank and the bank that you are transferring money into than an intermediary bank will facilitate the process for which you will be charged an additional fee.
How the SWIFT Banking System Works
SWIFT Banking System was introduced to help bank to communicate faster and in a secured way as it involves international transactions.
The money is exactly not transferred through SWIFT but it communicates the payment orders using SWIFT Code.
Therefore due to SWIFT, IBAN (International Bank Account Number) and BIC (Bank Identifier Code) formats are standardized which are used for actual money transfer.
Every banking institution is given a unique SWIFT code of 8-11 characters which are similar to the IFSC code used for domestic interbank transfers.
This code consists of bank code, the country code, location code and an optional branch code so as to identify individual branches.
If the banks between which the transfer is to be are having commercial accounts with each other then the money is transferred easily as a SWIFT message is send by the transferor bank to the transferee bank and as soon as the message is received the money is deposited in the account of transferee.
But if there are no commercial accounts between the banks then the assistance of intermediary bank is sought to facilitate the transfer.
The intermediary banks is a bank where the other two banks will be having a commercial account which also deduct a small fee for acting as intermediary.
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What Makes SWIFT so Successful
About 11,000 institutions in over 200 countries uses SWIFT Banking System for transferring money across the globe.
It includes countries like the United States, United Kingdom, France, India, China, Singapore and many others.
Therefore SWIFT may be said to be Universally accepted system across the world.
Therefore it has become the most reliable and secured method for transferring money.
- Transparency : SWIFT payment offers transparency as it clearly mentions the amount involved in the transaction , all the details of charges, nature of payment and the route it takes between the banks along with many other details.
- Traceability : As all the details including the route of payment between the banks and also the amount of money involved is clearly stated therefore it is clearly used as recognised proof of payment.
- Consistency : As coding is the language used to communicate, therefore it is easy to decipher whatsoever the country or the language is. It solves one of the major barrier involved in money transfer between countries.
How will this be used by target audience
SWIFT Banking System is mostly used by banking sector across the world to communicate transfer of money to overseas bank.
However SWIFT has been successful in expanding its network in the sectors of Security Dealers, Clearing Houses, Exchanges, Corporate Business Houses, Brokerage Institutes, Asset Management Companies, Depositories, Foreign Exchanges and Money Brokers.
How will SWIFT be affected in the Russia-Ukraine war
SWIFT was developed by American and European banks as they did not want monopoly to control their financial institutions.
This is now controlled by around 2000 financial institutions and is headed by National Bank of Belgium.
Now since Russia has declared war against Ukraine, United States, Canada and European commission has declared that it has restricted Russian banks from SWIFT banking system in order to show protest against Russia and also to deter their ability to operate globally.
Therefore this move will hamper Russian banks’ swift and instant transaction provided by SWIFT Banking System.
Even though Russia has its own payment system but it is only used by very few countries.
Therefore expulsion of Russia from SWIFT will cause a diverse impact in Russia’s global economy as its GDP will shrink by 5%
Final Words
In today’s digital world, the banking transaction between people situated in two countries are easier and faster and it is only due to the development of SWIFT that overseas banking transactions have become reliable and realistic.
Therefore SWIFT has great role to play in a country’s GDP growth. Since Russia has been cutoff from Swift it’s Economy will be drastically Affected.