What is a SWIFT payment and how does it work?

When your business is ready to expand internationally, you’ll need reliable ways to pay your global remote team members. A great option is to make payments through the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

SWIFT transactions are safe, fast, and reliable. They help you streamline and expedite payroll, pay your employees on time, and stay compliant with the law. This guide will help you understand what SWIFT is for, how SWIFT payment works, and how it can help your business grow.

What is SWIFT in banking?

SWIFT is a global member-owned cooperative that offers secure and private financial transactions to its members. Banks and other financial institutions can use SWIFT to speed up payments by sending transaction information quickly, securely, and accurately.

SWIFT is above all a communication service. It acts as a messenger between banks rather than participating directly in financial transactions. It does not accept or receive funds or offer options for managing accounts. Instead, it provides banks with a secure and efficient network to communicate with each other about transactions.

Thanks to SWIFT, for example, businesses and sole proprietors can accept card or bank payments, even if the customer is using another bank. The SWIFT network facilitates transactions between different locations while ensuring the security of personal and financial data.

Many banks and countries use the SWIFT network for electronic payments and transfers. More than 11,000 institutions are members of SWIFT, and they sent a collective 8.4 billion messages through FIN, SWIFT’s main service for financial communications. SWIFT members cover more than 200 countries and territories. More than half of the world’s high-value cross-border transactions go through SWIFT.

A brief history before SWIFT

Before SWIFT, banks used a different international courier service called telex. This service used a dial-up network of teleprinters, similar to a telephone network. A customer on one telex could send messages to anyone else on another telex, anywhere in the world.

The telex was useful in facilitating international money transfers, but it had its limitations. It was slow and lacked the sophisticated security protocols that SWIFT has today. However, its main drawback was its free message format.

SWIFT uses consistently formatted codes. Each code used to identify an institution has the same structure, so people using the network can understand each message at a glance. If something in the code is unfamiliar – maybe the person doesn’t recognize the city code, for example – it’s easy to look it up.

Telex, on the other hand, lacked a unified and standardized code system. Instead of using codes, anyone wishing to send a message regarding a transaction had to describe the transaction in detail. The recipient of the message then had to interpret this information and process the transaction accordingly. Ambiguities easily caused errors and delays.

The many drawbacks of Telex caused several international banks to join together to create SWIFT in Brussels, Belgium in 1973.

Who uses the SWIFT network?

SWIFT started with a membership of 239 banks from 15 different countries. However, all types of financial institutions can become members of the SWIFT network — it is not exclusive to banks. SWIFT now has thousands of members from many different sectors of the financial industry:

• Banks
• Securities dealers
• Courtages
• Trading houses
• Custodians
• Clearing Centers
• Asset management agencies
• Treasure Market Players
• Stockbrokers

All of these entities need fast, accurate, and reliable ways to transfer money internationally. SWIFT makes these transfers possible. When members use SWIFT, nearly half of their transactions (48 percent) are payments. Another 48 percent involve titles. The rest involves other markets like commerce and treasuries.

How do SWIFT payments work?

Imagine a business with a bank account at a Wells Fargo branch in Sacramento, California, sending payment to a vendor with a Deutsche Bank account in Berlin, Germany. The company only has to provide its bank with the SWIFT code of the supplier’s Berlin bank, as well as the supplier’s account number. The company will also have to pay a small fee.

This information allows Wells Fargo to send the payment securely via the SWIFT network to Deutsche Bank. When Deutsche Bank receives notification of the impending payment, it credits the money to the supplier’s account.

The payment usually only takes a few days to reach its destination. However, longer wait times may occur if multiple intermediary banks are required or if major differences between the two countries cause delays.

In general, an international SWIFT payment will go smoothly if the two financial institutions already have a business relationship. If they don’t, the transaction can still proceed. In this case, SWIFT must find an intermediary bank that has pre-existing relationships with both institutions. If there is no single intermediary, SWIFT must use a chain of intermediaries to convey the message from one institution to another. This process usually requires higher fees.

What is a SWIFT code?

Each SWIFT member receives a unique code, called SWIFT code. SWIFT bank codes are also sometimes referred to as bank identifier codes or business identifier codes (BIC). The code identifies the name of the bank, its city, and country, and sometimes the branch. All SWIFT codes have eight or 11 characters.

Each group of numbers in a SWIFT code specifies specific information:

• First four characters: These characters designate the financial institution. They indicate the bank, but not the branch, to which the code belongs.
• The suite of two characters: The next two characters are the country code. For example, BE is the country code for Belgium, CA is the country code for Canada, and SG is the country code for Singapore.
• The suite of two characters: The next two characters indicate the city or place. The city code for Milan is MM, and 3N and 3D are two ways to signify New York.
• Last three characters: The last grouping is optional. This is the reason why some SWIFT codes have eight characters, and some have 11. These three characters provide information about an individual bank branch.

In full, for example, a SWIFT code for AMP Capital Investors Limited bank in Australia might look like AMCIAU2X, where AMCI stands for the bank, AU is the country code, and 2X indicates the city of Sydney.

Is a SWIFT code the same as an IBAN?

Many financial customers are familiar with International Bank Account Numbers (IBANs). They are not the same as SWIFT codes. Both can be alphanumeric, but IBANs are strings of numbers with a two-character country code at the start, while SWIFT codes contain all or mostly letters. A SWIFT code only contains eight or 11 characters, while an IBAN can have up to 39 characters.

The two also differ in the information they convey. A SWIFT code identifies an individual bank or branch. An IBAN, on the other hand, identifies an account within that bank or branch.

The structure of an IBAN works like this:

• First two or three letters: The first two or three characters are the country code. For example, GB stands for United Kingdom, SE stands for Sweden, and KW stands for Kuwait. GBR, SWE, and KWT may also refer to these countries.
• Next two numbers: The two digits following the country code are the check digits. Financial institutions use these numbers to determine if the IBAN is in the correct format.
• Three to five alphanumeric characters: The remaining characters form the Basic Bank Account Number (BBAN). BBANs vary from country to country. However, they usually contain a bank code and a branch code and provide information about a specific customer account.

For example, an IBAN for France might look like this: FR7630006000011234567890189. A Qatar IBAN could be QA54QNBA000000000000693123456.

Keep in mind that not all countries have adopted the IBAN standard. Most of Europe, where IBANs are an essential part of the Single Euro Payments Area (SEPA), has adopted the full IBAN standard. However, many countries outside of Europe have not done so. Some countries have adopted a partial IBAN standard as part of an experimental process.

What are the costs associated with SWIFT?

Institutions that become members and owners of the SWIFT network must pay membership fees. SWIFT divides its members into three tiers based on shares held. Each tier pays a different annual support fee. Additionally, all members must pay a one-time membership fee.

SWIFT also charges its members a small fee for each message sent. Like membership fees, these rates are broken down into tiers that depend on the volume of messages sent by institutions. Messaging costs also vary depending on the length and type of SWIFT message. For international transactions, fees may increase when intermediary banks are involved.

SWIFT offers several other fee-based services in addition to transaction messaging:

• Business intelligence: SWIFT offers business intelligence solutions such as reporting utilities and dashboards. Member institutions can use these tools to monitor messages, reports, trade flows, and other activities in real time.
• Compliance solutions: SWIFT’s compliance services include reports and utilities, such as anti-money laundering and know-your-customer. They help members comply with financial crime.
• Applications: SWIFT membership provides access to many applications, such as banking market infrastructure for interbank payment instructions, securities market infrastructure, and instruction matching for foreign exchange and currency transactions. Treasury.

Are SWIFT payments secure?

SWIFT payments are highly secure — this functionality is one of the main advantages of the SWIFT system. Let’s see how SWIFT guarantees safe and secure international payments.

SWIFT maintains robust security protocols through its Customer Security Control Framework (CSCF). The CSCF contains mandatory and recommended security controls for SWIFT users. The scalable design of these controls allows them to combat ever-changing cybersecurity threats.

These strict security controls have three main objectives: securing the transactional environment, knowing and limiting access, and detecting and responding to threats. Here are some of the actions that SWIFT asks all users to take to achieve these goals:

1. Restrict internet access
2. Separate critical systems from the standard IT environment
3. Minimize vulnerabilities to attacks
4. Physically secure the environment
5. Prevent compromising official credentials
6. Manage identities and grant privileges only when needed
7. Use transactions or system records to detect suspicious activity
8. Plan for information sharing and effective incident response

SWIFT also offers an optional service called SWIFT Payment Controls as part of its customer security program. This service allows companies to reduce their risk of fraud. It helps businesses detect and prevent high-risk payments where fraud is most likely to occur.

Are there alternatives to SWIFT?

SWIFT communication accounts for about half of all major international financial transactions — so who is responsible for the other half? Several fintech companies and other modern competitors have recently entered the scene in an attempt to make cross-border payments even faster and easier:

• Revolution: Revolut is a London-based fintech company. It offers international banking services and supports SWIFT and SEPA transfers, automatically choosing the transaction that best suits the consumer and the bank. It serves 500,000 business customers in over 35 countries.
• Sage: Wise, formerly known as TransferWise, started as a basic international money transfer service. It has since added options for business accounts, multi-currency accounts, and debit cards, and it has grown to serve over 10 million people in over 55 different currencies. Wise can send or receive certain currencies using SWIFT payments for a fee.
• Currency Cloud: Currencycloud is a global payment platform that started in East London and has since grown into an international presence. It has evolved into a large-scale software-as-a-service (SaaS) solution to help businesses manage international payments more efficiently. This has processed $75 billion in payments to more than 180 countries around the world.

These are just a few of the main alternatives to SWIFT banking services – several other competitors are also on the way. The future will likely bring more as payments become increasingly digitized and international.

Can you use SWIFT to pay international employees?

SWIFT is a common method of payment for international employees. It’s much faster and more convenient than options like international money orders.

SWIFT is a great option for scenarios involving two different banking systems that might struggle with direct transfers. It is also ideal for situations where your business does not have an established entity in a country and cannot use local banks.

How do you pay international remote employees?

International payroll can be complicated, even with the help of services like SWIFT. Your business needs to guarantee on-time payments to its remote employees, even if they are thousands of miles away. You also need to ensure compliance with the laws of the countries where you operate to avoid costly penalties and maintain a positive reputation.