What is SWIFT?

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SWIFT forms the bedrock for international financial transactions. International transactions refer to the movement of money beyond the country’s borders. The international transactions can range from payment instruction from a bank and Forex transactions to transactions requiring processing, settlement of securities etc.

SWIFT: an information highway that connects banks

SWIFT is short for Society for Worldwide Interbank Financial Telecommunications system. SWIFT is an information highway that connects banks located in different countries. The highway facilitates communication between them, and banks use the SWIFT network to send payment instructions or other information in a code.

The bank to which the information is sent decodes the information and executes the instruction behind the code.

VOSTRO/NOSTRO account

Banks carry out international transactions with the help of the Vostro/Nostro account. When a bank deposits money in an account that it maintains in another bank for executing international transactions, the account is known Vostro/Nostro account.

The Bank depositing the money in the account that it maintains in another bank calls the account Nostro account, and the bank that hosts the account calls the account Vostro account.

An example of an international transaction:

A person having an account with Bank of America wants to transfer money to a friend who has an account at the UniCredit Banca branch in Venice. The Bank of America customer can go to the bank with his friend’s account number and SWIFT code of the UniCredit Banca Venice branch, and the money will be transferred.

Bank of America will debit the transfer amount from the customer’s account and send a message using the SWIFT network to the UniCredit Venice branch directing the Venice bank to credit the friend’s account with the transfer amount asked by the Bank of America customer.

The Unicredit Banca branch will debit the transfer amount from Bank of America’s Vostro account and credit it to the friend’s account.

When banks don’t have Nostro/Vostro accounts?

In this case, both banks have a direct commercial relationship i.e. they have a Nostro/Vostro account. When banks don’t have a direct commercial relationship, they use an intermediary bank to transfer the amount. In both cases, banks use SWIFT messages to communicate.

SWIFT coding system

The SWIFT system assigns a code to the bank in its network. The code consists of eight or eleven characters. The code refers to the location of the bank. For example,

The UniCredit Banca bank has eight character SWIFT code UNCRITMM

  • The first four characters: the institute code (UNCR for UniCredit Banca)
  • Next two characters: the country code (IT for the country Italy)
  • Next two characters: the location/city code (MM for Milan)
  • The last three characters are optional, but organizations use them to assign codes to individual branches.

Remember SWIFT is a networking and messaging system that banks rely on. SWIFT doesn’t hold any assets, securities, or transfer any assets or securities.

SWIFT system is way ahead of its alternatives

The bank, which is kicked out of the SWIFT system, cannot or will find it difficult to transact internationally. It may revert to the old system, but it has limitations and is not as secure as SWIFT.

Further, it can’t match the transaction volume that can happen through SWIFT. If you are not in the SWIFT network, you will find it difficult to invest abroad.

Some alternatives to SWIFT are Fedwire, Ripple, and Clearing House Interbank Payments System (CHIPS), but they are not as popular as SWIFT.

Reasons why SWIFT is popular

Why? First, SWIFT continually expands its services. It started as sending payment instructions but now has grown to include international transactions like Forex, treasury, security settlement, processing and clearance.

Second, it’s a safe and secure network.

Swift is like a global post office for banks; It provides a secure messaging system for several banks to execute international transactions.