SWIFT payments: the financial messaging network explained

Financial institutions rely on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to accurately and confidently send and receive information such as fund transfer instructions – but what is the SWIFT payment system and how does it successfully streamline what appears to be a complex process?

What is SWIFT?

The SWIFT payment system was founded in 1973 in response to a discussion on the limitations of the existing TELEX system as a means of securing delivery of payment and confirmation information, primarily in the Treasury and Correspondent banking areas. Its goal was to create a shared worldwide financial messaging service with a common language used for international financial messaging. Today, SWIFT’s services are used and trusted by more than 11,000 financial institutions sending more than 25 million messages per day in more than 200 countries and territories around the world.

How does the SWIFT payment system work?

Having a standardized messaging service means that transactions between financial institutions are recorded in the same way, providing concise and transparent details about money transfers. The SWIFT network does not transfer funds but rather sends payment orders between the accounts of various institutions using BIC (SWIFT) codes. SWIFT in its role as ISO registration authority issues BICs to financial and non-financial institutions and this code is required to facilitate the automated processing of information in the transfer of funds or securities for financial services.

What SWIFT message types are used in the transfer of funds?

You could read SWIFT’s Standards Inventory of Messages to get a detailed understanding of all messaging formats used in financial transactions. From a payments perspective, however, the MT1XX is the most relevant messaging type for personal and corporate clients when making international money transfers. All SWIFT payment transfer messages include the literal “MT” (Message Type). This is followed by a three-digit number that denotes the message category, group, and type.

MT103 for example is a SWIFT payment message type used in cash transfers specifically for cross-border/international wire transfers and is predominately used between Banks and Non-Bank Financial Institutions. MT103 is used to make a single payment and has many options to describe exactly how the payment should be (for example, determining the beneficiary account and sender bank details). An MT202 is used as an additional cover payment message and is sent to an intermediary bank to speed up the payment process for customer credit transfers.

Is SWIFT the only payment messaging service?

Although there are other messaging services available such as Fedwire, Ripple, and CHIPS, SWIFT maintains its dominant market position. It does this by continually investing in innovation and adding new message codes to further facilitate funds transfer and straight-through processing. One recent initiative introduced by SWIFT is the Global Payments Innovation (GPI) which aims to increase the speed, predictability, and transparency of cross-border payments.

How will SWIFT GPI change the way payments are processed?

Business-to-business wire transfers through banks have always been slow and costly despite technological advances which have seen other areas in the payments industry progress. Over 90 leading transaction banks from Europe, Asia Pacific, Africa, and the Americas are already signed up to the SWIFT GPI initiative which is now in operation. The first phase of the SWIFT GPI focuses on B2B payments. The goal is to help corporates to improve supplier relations whilst achieving greater treasury efficiencies by enhancing the payments service:

• Beneficiaries will now receive same-day access to payments instead of waiting periods of several days.

• Businesses will know in advance how much a bank transfer will cost adding further transparency to fees in the transfer process.

• End-to-end payment tracking through a cloud-based service will allow easy tracking of funds from initiation through intermediary banks to the recipient bank account. Message notification that funds have reached the beneficiary account will also be sent to the payer.

Fexco, through its partner banks, uses the SWIFT network to send timely and transparent FX payments for business and personal clients. Open a free account today and start saving on your overseas payments, or call us on Ireland: 1800 246 800 or UK: 0800 840 2887