Important Update
In this digital world, people often transact electronically. As such, you can send gifts and payments from one country to another via the Internet. However, the existence of fraud necessitates the need for reliable and safe transaction gateways. At the moment, SWIFT is considered the best access for making the wired transfer. In this article, you will learn all about SWIFT and how it works.
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. As the name implies, this system operates as a financial messaging system, which allows financial institutions to exchange financial messages and information securely. In general, SWIFT payments occur via intermediary banks. As such, payment is sent with SWIFT codes between banks in an accurate, quick, and secure gateway.
Since its creation, the daily average transactions done on the platform have been increasing. Now, this platform averages about 40 million financial transactions every day. In addition, these payments can be made by businesses and individuals via card or electronic payments. To achieve this, the payer and payee must use different banks.
For SWIFT, banks used TELEX for international transactions and wire transfers. The disadvantages of TELEX are it was slow, lacked sophistication, and had security issues. For these reasons and more, the banking systems required a more reliable messaging system. In addition, the TELEX system lacked a standard code, which allowed for different conventions by financial institutions. As such, the old system creates significant confusion. Due to the problem of TELEX, SWIFT was created in 1973, in Brussels. The emergence of SWIFT gave financial institutions a unifying messaging system for the transmission of information about international transactions and payments. At the initial stage, 6 international banks constituted the SWIFT cooperate society, which has since expanded to cover the world.
To understand SWIFT, you must comprehend the SWIFT code. SWIFT code allows people and businesses to exchange payment orders via their banks. Therefore, money is not sent through SWIFT. Instead, this platform serves as a payment order gateway between financial institutions. Furthermore, SWIFT provides the pathway for the standardization of BIC (bank identifier codes) and IBAN (international bank account numbers).
The BIC and IBAN can be used to instantaneously identify bank and account details. As such, a typical SWIFT code is made of 11 or 8 characters, which contain SWIFT ID, BIC, and ISO9362. For example, the SWIFT code of Bank of America is BOFAUS3N. BOFA is the bank code, while the US is the country code. In this case, 3N stands for the bank location. Hence, this code arrangement is usually used for all SWIFT codes.
Since its creation, SWIFT allowed for a secure, fast, and reliable means of communication. As such, there is nothing like SWIFT money. Instead, this messaging platform encloses payment instructions from one bank to another. On the other hand, financial institutions involved in SWIFT transfers use Vostro and Nostro accounts network to move funds. These accounts are usually created with the mandate of facilitating SWIFT payments.
Below are the steps involved in performing a SWIFT transaction.
In general, the completion of this process comes at a cost. Therefore, it is advised you only send a considerable amount of money using SWIFT.
For record keeping, the sending and receiving banks keep a mirror ledger via the Vostro and Nostro accounts. A Vostro account refers to the account name used by a bank for opening their books. On the other hand, Nostro refers to the account used for holding money. As such, banks with a direct commercial relationship should have Vostro and Nostro accounts, which allow for instantaneous SWIFT transfers. In the absence of such a relationship, SWIFT is at liberty to find the best way of establishing communication between the two financial institutions. When this happens, an intermediary financial institution is required to enable payment. The more intermediary banks involved in a SWIFT transaction, the more expensive it may likely be.
In the past, SWIFT was limited to communication involving correspondent transactions and treasury. Now, this payment message platform involves several players. These stakeholders include the following.
SWIFT has enjoyed an undeniable monopoly for several years as the only reliable platform for sending real-time information about financial transactions. However, the financial sanctions implemented by Western powers via SWIFT have made several countries consider alternatives. As such, CHIPS (Clearing House Interbank Payment Systems) is gaining traction among developing nations. Likewise, Ripple and Fedwire offer decent alternatives to SWIFT. Nonetheless, SWIFT continues to remain the leading player in this market due to its coverage. At the moment SWIFT offers its clients unifying transaction codes for most payment types. In addition, this technology is continuously adapting new trends in fintech, which makes it flexible, reliable, and functional for facilitating payments.
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