If you've ever sent money to someone in
another country, chances are you’ve used SWIFT - a messaging system used by banks and
other financial institutions all over the world. SWIFT stands for the Society for Worldwide
Interbank Financial Telecommunication, and it’s been around for almost five decades. It’s headquartered in Belgium
and is controlled by the G-10‘s central banks, as well as
the European Central Bank. It was founded with 239 banks in
15 countries, and now connects more than 11,000 member banks in 200-plus
countries and territories around the world. Trillions of dollars’-worth of currency is sent across borders every single
day - and it’s largely thanks to SWIFT. Before SWIFT, the world used
telex – or a telegraphic transfer - to transfer funds internationally. The system was slow, usually taking between
two to four business days to complete a transfer and it involved describing each
transaction with sentences instead of codes. So how does SWIFT work, and what happens if you lose access to this
important part of the international economy? SWIFT is how banks communicate
- securely and quickly. Let’s say I want to send money from
Singapore to my friend Tom in the U.K. My bank is going to require a few details like
Tom’s account number and his bank’s SWIFT code, which is a unique 8–11-character code
that identifies each bank in the network. Once I’ve keyed those in, SWIFT
sends messages between the two banks. Remember, SWIFT is a messaging
platform, not a payments system. If these banks have an account with each other, they authenticate the payment request
and Tom receives his funds transfer. If the banks don’t have a relationship, the
banks would be sent through intermediary banks until the payment request is verified
for Tom to receive his money. Because many institutions do not have accounts
with one another, they rely on intermediaries. And these intermediaries usually
have a presence in the United States, given the dominance of the greenback, which
means they can be policed by U.S. authorities. Alistair Milne, a professor of
financial economics, explains more. It’s really about secure automated payments, so they help banks make
payments to each other in a secure way, but particularly in an automated way so that
everything integrates with the bank’s systems. While SWIFT is overseen by a neutral
organization, its influence has made it a tool for policymakers to impose economic
sanctions on countries that step out of line. In February 2022, several Russian and Belarusian
banks were barred from the SWIFT network, as part of economic sanctions
after Russia’s invasion of Ukraine. It’s become a symbol. So, it says
we can exclude you from Swift, and that's kind of a substantial threat. But really, it’s shorthand for saying
we’re going to exclude you from financial transactions around the world. However, Russia’s not the first country
to be disconnected from the SWIFT system. North Korea and Iran have
also had their banks barred. What that kills is the automation of payments. What SWIFT allows is for all the messaging
to integrate into the bank systems, and so there’s no manual intervention. If I’m sending $100 somewhere around the world, SWIFT will make sure that gets through, and the
true cost of that is probably only a few cents. But if I do it manually, it could easily cost $100 or more to get people to make
the necessary telephone calls. But for the big payments of a million
dollars, the automation, convenient, maybe it helps get things done a bit quicker, but
in the end, it doesn’t matter so much, they can still communicate, and get banks – if the banks
are willing – to make those transactions anyway. SWIFT is a critical part of the
world’s financial infrastructure, but it isn’t the only system
for international transactions. For example, the Russian Central Bank set up the System for Transfer of
Financial Messages or SPFS in 2014. As of February 2021, it had about 400
users - mostly Russian banks and legal entities. 23 of the users were foreign banks. China is also trying to create its system. In 2015, the People’s Bank of China
established the CIPS network – the Cross-Border Interbank Payment System. By 2019, it reached more than 3,000 banks directly
and indirectly, across 167 countries and regions. I think the CIP system can be quite
attractive for Renminbi transactions. So when China is engaged in trade with
particularly, its near neighbours, we don’t know what’s going to happen as a fallout of the Russian
invasion of Ukraine, but it’s certainly possible that a response to Western sanctions, Russia
will be engaging in greater trade with China. And one can certainly see the
payments messaging for all those products and services going through
the Chinese system, rather than SWIFT. How hard or easy is it for a bank
to join alternative networks? It’s hard to see that being used much
outside of those specific countries. Ultimately, you want to deal directly as possible
with the banks you have relationships with, and SWIFT is in a very strong position in being
able to provide that required connectivity. With any sort of legacy technology, you do
have the stickiness that occurs with it. Caroline Malcolm heads policy at
blockchain data platform Chainalysis. I asked her whether cryptocurrency and blockchain
solutions such as Ripple could replace SWIFT. There’s an adoption curve that really happens. You have your crypto native
companies, for example. You’ve got your sort of fin-techs, and then you’ve
got your more traditional financial players. At that end of the spectrum, your
traditional financial players, you are looking at a number of different
issues in terms of how to integrate, how to actually participate in new
payment systems like crypto-based ones. But there’s also a sort of
an education process as well, that has to happen both inside these
institutions, but also with customers. How effective could cryptocurrency be
as a workaround for economic sanctions? There’s a number of reasons why crypto
is probably not your tool of choice. One, just as we have in traditional finance,
crypto has systems in place which allow people to be alerted if they are actually interacting
with a sanctioned entity or individual. Secondly, blockchain, on which crypto is
based, is a permanent, immutable record that is publicly available of all transactions
that have taken place on that blockchain. Should SWIFT be afraid of blockchain technology? I don’t really recognize that view
of SWIFT is ripe for disruption. I know there’re a lot of technology start-ups
who claim that they can grab a big piece of the action, but I think we’ve got to remember the
importance - in payments – of network effects. It’s really very difficult to try and attract
all 11,000 banks on to another system, and especially which actually,
on the whole, works pretty well. And 95% of SWIFT payments throughout the world,
they’re all completed comfortably within 24 hours. That’s not to say that SWIFT is perfect. All this discussion about disruption has been
quite positive because it’s actually accelerated changes in the SWIFT system, including the GPI. GPI stands for Global Payments Innovation. It was launched in 2017 to provide
end-to-end tracking of funds, to increase the speed of payments, and to help
make international payments more transparent. SWIFT doesn’t actually transfer money per se. It’s transferring information like banking orders. What’s interesting about a system based on blockchain is that you will have certain
services which continue to be intermediate, like centralized crypto exchanges, for example,
but it also allows people to hold their own funds, their own different forms of value and allows
you to control that in a very direct way. And I think what we’ve seen in terms of
how the industry evolves, is that that’s something that some people want to do. They
want to have that sort of personal control. Other people still want to keep using
an intermediated service. But the nice thing about this technology is that
it finally gives people that choice. With blockchain technologies still developing,
rerouting the globe’s financial transactions through smaller messaging
networks, remains unlikely for now. However, in the long-term,
these networks could mature, and the way money moves
around the world could change. You don’t detach from a legacy
technology or legacy system like SWIFT overnight. There’s been huge
amounts of investments in that. But there are certain capabilities and
features which blockchain based systems have that can’t be matched by traditional systems. One of the more interesting developments is
what’s known as central bank digital currency. It's certainly possible that in 10-15
years’ time that businesses and individuals will get quite used to exchanging digital
currencies, perhaps directly with each other. Now, in that case, the role of SWIFT
would begin to change. It will still be the messaging to support international payments, but they would have to adapt to take
account of that new type of payment. That’s certainly a possibility for the future.
