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SWIFT Payment System: What Is it and How Does it Work?

Read Time: 6 min

If you’re looking to securely send funds across the globe, then SWIFT may be right for you. Used by millions of people every day, SWIFT payments are international money transfers sent by the SWIFT network. Using SWIFT can establish your business’s reputation of sending safe payments. In this guide, we’ll cover everything you need to know about this widely-used service.

Two people trying to transfer funds to each other's bank swift code after searching what is a SWIFT code

What Is SWIFT?

Founded in 1973, SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. In terms of reach and use, SWIFT is the biggest financial messaging system in the world. SWIFT comprises more than 11,000 financial institutions across more than 200 countries. Each day, over 42 million SWIFT transactions take place, making SWIFT the dominant choice for safe, secure international money transfers[1]SWIFT. “SWIFT FIN Traffic & Figures“. Accessed April 17, 2022..

How Does the SWIFT Payment System Work?

SWIFT is a network designed as a secure communication system between banks that allow them to quickly process international payments. The SWIFT payment system does this by carrying payment information from the sender’s bank to the beneficiary’s bank, acting as a communication channel between the two. To do so, it identifies each bank by its unique ID code that corresponds with its bank name, country, city, and branch. The banks then move funds between the accounts according to the payment instructions.

The banks do so by using a network of nostro or vostro accounts. We’ll explain how these accounts work in more detail below but essentially, these accounts allow both banks to record the transaction details in a ledger. All this is possible even when a customer has a different bank than the vendor.

From beginning to end, here’s what the process of a SWIFT transfer entails:

  1. Verify your identity and address with your passport and recent bill.
  2. Send your money to the bank that will transfer your funds.
  3. The bank will send you a quote for the transfer which you can accept or decline.
  4. After accepting the exchange rate, it’s fixed and your money is sent off in the destination’s currency.
  5. Boom, a transfer of funds will go through!

To transfer money using SWIFT, here’s the information you’ll need:

  • Name of the recipient
  • Address of the recipient
  • Name and address of the recipient’s bank
  • SWIFT code of the destination bank
  • IBAN number or account number of the recipient

How long does a SWIFT money transfer take?

SWIFT transfers are relatively fast considering the moving parts involved, however, they aren’t instantaneous. Typically, SWIFT payments reach the destination bank account within 1 to 4 business days. How long a transaction takes will vary depending on the countries, time zones, and banking processes involved. Additionally, payments are also slowed by checks and balances to prevent fraud and laundering.

How much does it cost to use the SWIFT system?

There are fees associated with the SWIFT payment system, which depend on your particular bank and exchange rates. These fees can include transfer fees, correspondent fees, and priority fees. Most of the cost of SWIFT transfers comes from the exchange rates, which can be from 3 to 5 percent.

How does SWIFT work with Nostro and Vostro Accounts?

Nostro and vostro accounts are crucial to the SWIFT ecosystem. Nostro and vostro accounts are terms describing the same bank account. For context, Nostro is Latin for “our” and “vostro” is Latin for “yours.” Nostro would be referring to “our money in your bank” and vostro would be “your money in our bank”.

Nostro and vostro accounts act as facilitators when the payment is being transferred so that each side has a record of it. SWIFT uses nostro and vostro accounts to determine the payment instructions. We’ll provide two examples of situations to illustrate how these accounts work together in the next section.

Example 1: Both banks have Nostro or Vostro accounts

Let’s say that a bank has nostro and vostro accounts for the involved financial institutions. If both institutions are SWIFT members, an intermediary bank is not necessary. For example, say you have a client in the U.S. who banks with their local US bank and would like to pay $10,000 to a foreign account with Bank of India (Bank of India would have a vostro account in this scenario). Both institutions are SWIFT network members so the payment will process using SWIFT’s messaging.

Using the SWIFT network, the US bank will send a message directly to the Bank of India and transfer the funds by debiting the nostro account and crediting the vostro account. Then, the Bank of India will take the funds from the vostro account and transfer them to the receiver’s account with the Bank of India.

Example 2: Both banks do not have Nostro or Vostro accounts

Now, let’s look at a different example. If the US bank and Bank of India do not have an established relationship and there are no nostro or vostro accounts, it will require an intermediary bank that is a SWIFT member. In this case, you would need an intermediary bank that has nostro and vostro accounts with the US bank and also separately has nostro and vostro accounts with the Bank of India. If multiple intermediaries are involved this can cause slower payment transfers, a higher risk of error, and higher fees.

It should be noted that SWIFT solely acts as the messaging system between financial institutions.

What Is a SWIFT code?

A person who was able to define the swift code for their bank and receiving funds at their own bank from a clerk

A SWIFT code identifies each unique member within its network as it communicates back and forth. This code has either 8 or 11 characters and is also known as the SWIFT ID, ISO 9362 code, or bank identifier code BIC).

Let’s break down what each part of the code means.

  • #1-4: Institute code
  • #5-6: Country code
  • #7-8: Location/city code
  • #9-11 (optional characters): Individual branch

The SWIFT network standardizes and manages each SWIFT code. It’s all public information that you can find on your bank’s website for your convenience.

What Businesses Use the SWIFT Network?

Before SWIFT, there was only the telex system for international fund transfer, which was slow and error-prone. Then, SWIFT founders created the network to communicate transactions regarding the Treasury. Now, major international banks and their business partners use SWIFT, including:

  • Banks
  • Exchanges
  • Securities dealers
  • Brokerage institutes or trading houses
  • Corporate business houses
  • Asset management companies
  • Depositories
  • Clearinghouses
  • Treasury market participants and service providers
  • Foreign exchange and money brokers

How Does SWIFT Make Money?

SWIFT is a messaging network that doesn’t actually hold assets itself so how does it make money? SWIFT collects a one-time entry fee and annual support fees from its various members. It also charges end-users a fee for each message that it sends and generates income from its additional service offerings.

Does the SWIFT Financial System Have Other Services?

SWIFT offers a variety of services, including applications, business intelligence, compliance services, and more.

Messaging and connectivity

Efficiently communicating across the world is the heart of SWIFT’s business. It provides software, messaging hubs, and network connections that allow its clients to send and receive transaction information across the world.

Innovative global payment capabilities

As a leader in the global payment sphere, SWIFT dominates in providing the most secure and streamlined international payment transfers. It recently began offering the SWIFT Global Payments Innovations (GPI) service. SWIFT’s GPI service enables a real-time payment tracker that maximizes transparency between you and your customers. This service is an innovative solution with little competition on its scale in the market.

Real-time applications

Using SWIFT connections, users can connect to many different applications. These include instruction matching for treasury and foreign exchange transactions in real-time and securities market infrastructure for processing payments. It also offers bank infrastructure for processing payments between banks.

person at the ATM receiving funds after providing a SWIFT code for a payment transfer

Crime prevention compliance

To help prevent financial crime in accordance with various laws, SWIFT offers services related to Know Your Customer (KYC), anti-money laundering, and sanctions.

Dynamic business intelligence dashboard

A newer feature, SWIFT offers its clients dashboards of their business operations. This allows business leaders to get a live view of activities like trading, messaging, and reporting. Users can filter these reports based on region, country, and message type.

How Does the SWIFT Global Banking System Handle Sanctions?

SWIFT has experienced the effects of sanctions in the past. In 2012, the EU sanctioned Iranian banks and disconnected them from the SWIFT network system. Today, the same has been done to Russia due to the sanctions by the US, UK, EU, and Canada since February 2022. Japan has also announced that it will join these countries in removing certain Russian banks from SWIFT’s system.

Final Thoughts on Using the SWIFT Banking System

SWIFT is an integral part of the global financial infrastructure and a popular international transfer network for a reason. For decades, SWIFT has provided useful international services and since it’s now begun offering other related services, it will likely continue to be used by millions of vendors around the world to accept payments.

Article Sources

  1. SWIFT. “SWIFT FIN Traffic & Figures“. Accessed April 17, 2022.

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