What is the SWIFT payment system?

Among the financial sanctions imposed by Western countries on Russia is the exclusion of several Russian banks from the SWIFT payment system, which facilitates smooth and rapid money transfers across nations.
 
Without access to SWIFT, Russian banks will find it harder to communicate with international peers which will slow down trade and make transactions costlier.
 
According to a US White House official, if one of the banks cut off from SWIFT wants to make a payment with a bank outside of Russia, it will likely need to use a phone or fax machine.
 
Russian companies and individuals will find it harder to pay for imports and receive cash for exports, borrow or invest overseas.
 
Let’s learn more about SWIFT and what it does.
 
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is the world’s leading provider of secure financial messaging services.
 
It facilitates trillions of dollars of cross-border payments between 11,000 financial institutions in more than 200 countries. Each member has its own SWIFT code. Every day, more than 40 million financial messages are exchanged securely using the SWIFT platform.
 
Headquartered in Belgium, SWIFT is a global member-owned cooperative that was founded in 1973 by 239 banks from 15 countries. It went live with its messaging services in 1977, replacing the Telex technology that was then widely used by banks to communicate instructions related to cross-border transfers.
 
The SWIFT Standards group maintains several important message standards.
 
The use of standardised messages and reference data ensures that information exchanged between institutions is unambiguous and machine-friendly, facilitating automation, cost reduction and risk mitigation. Through SWIFT, banks, custodians, investment institutions, central banks, market infrastructures and corporate clients can connect with one another to exchange structured electronic messages for common business processes like making payments or settling trades.
 
SWIFT is a cooperative society under Belgian law and is owned and controlled by its shareholders, representing approximately 3,500 financial institutions across the world. The shareholders elect a board of 25 independent directors representing banks across the world. This board governs the company and oversees ist management. The executive committee is a group of full-time employees headed by the chief executive officer.
 
Each nation’s usage of SWIFT’s messaging service determines both SWIFT shareholding allocations and the number of board directors that each nation is entitled to.
 
SWIFT is overseen by the central banks of G-10 countries, as well as the European Central Bank, with the National Bank of Belgium as the lead overseer.
 
It is important to note that SWIFT is only a messaging service provider. It has no control over the underlying financial transactions that are mentioned by its financial institutional customers in their messages. While SWIFT complies fully with all applicable sanctions laws, the responsibility for ensuring that individual financial transactions comply with sanctions laws rests with the financial institutions handling them, and their competent authorities.
 
In March 2012, as international sanctions tightened against Iran over its disputed nuclear programme, SWIFT was prohibited from providing financial messaging services to European Union-sanctioned Iranian banks. SWIFT, since it is incorporated under Belgian law, had to comply with this regulation as confirmed by its home country government and disconnect these Iranian banks. In January 2016, many of the affected banks were removed from the sanction list by the EU and were subsequently reconnected to SWIFT.
 
In 2014, Russia developed its own alternative to SWIFT. It is called the System for Transfer of Financial Messages, or SPFS. But this system has struggled to establish itself in international transactions.
 
Similarly, China launched the Cross-Border Interbank Payment System in 2015 to internationalise the use of the yuan. It allows global banks to clear cross-border yuan transactions directly onshore.
 
CIPS still largely relies on SWIFT for cross-border financial messaging, but it has the potential to have and independently operate its own direct communication line among financial organisations.
 
About 1,280 financial institutions from 103 countries and regions are connected to the CIPS, which processed more than $12 trillion in 2021.

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