SWIFT banking system: what is it? How does it work?

SWIFT banking system: what is it? How does it work?

SWIFT is a well-known acronym in the banking world. This acronym is the translation of the name of the private company (Society for Worldwide Interbank Financial Telecommunication) which created this interbank network. The SWIFT network allows more than 11,000 financial institutions that adhere to it, and which are present in 200 countries around the world, to take advantage of a secure platform to carry out transfers of banking transactions such as transfers between banks of different countries. , payment orders, buy and sell orders, currency exchanges, etc. In summary, the SWIFT system, which does not hold funds itself, allows banking institutions to communicate with each other securely.

Who is behind the SWIFT banking system?

The SWIFT banking system takes its name from the Belgian private company “Society for Worldwide Interbank Financial Telecommunication (SWIFT)”, or in French “Société pour les Télécommunications Financières Interbancaires Mondials”, which set up this network.

SWIFT is originally a secure messaging platform (for sending files for example), created in 1973, which has been developed to offer products and services, particularly in connection with banking operations, linked to this email.

Since Russia invaded Ukraine, and especially because of the sanctions applied to Russia by Europe, we hear a lot about the SWIFT banking system. Restrictions and sanctions have been defined by Regulation No. 833/2014 of the European Union of 1 March 2022 which stipulates that the Council of Europe has adopted the decision ” imposing new restrictive measures with regard to the provision of specialized financial messaging services to certain Russian credit institutions and their Russian subsidiaries, which are important for the Russian financial system and are already subject to restrictive measures imposed by the Union or by partner countries“. Consequently, the SWIFT banking system, a platform for the secure exchange of financial transactions between organizations in different countries, is affected by this decision.

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A secure network for transferring international banking transactions

Today, the SWIFT network is mainly used to transmit information to carry out bank transfers (or other types of financial transactions such as buy and sell orders, confirmations of execution of transactions, settlement instructions, payment orders, etc.) in countries that do not adhere to the “Single Euro Payments Area (SEPA)”, i.e. the common means of payment in euros to the 28 countries of the European Union, and which also concerns Iceland, Norway, Liechtenstein, Switzerland, and Monaco.

Today, in more than 200 countries outside Europe, around 11,000 banking organizations, market infrastructures (trading companies, stock brokers, investment management organizations, etc.) and companies are customers of the SWIFT banking system. Thus, the SWIFT banking system is at the origin of 10 billion payment orders per year in the world and therefore plays a key role in the international financial system.

Financial institutions that are customers of the SWIFT banking system are identified in this network by their “Bank Identifier Code”, better known as the “BIC” code, which allows the SWIFT network to very quickly recognize the financial institution (its country, name, and location) involved in a financial transaction on its platform. This is why most banks, and in particular those affiliated with the SWIFT banking system, mention this BIC code which is always associated with an IBAN, ie the “International Bank Account Number”.

To carry out the transfer of a financial transaction in a foreign country via the SWIFT banking system, this SWIFT/BIC code (also simply called SWIFT number) is therefore necessary. This code is made up of 8 to 11 characters: 4 letters which identify the name of the banking institution (the bank code); 2 letters that indicate the code of the country of origin of the organization; 2 letters or 2 numbers for the organization’s country location; and 3 digits corresponding to the registered office of the organization.

See also  Banking administration

The SWIFT banking system: how does it work?

The SWIFT banking system constitutes an intermediary whose role, in banking matters, is to facilitate the transfer of messages concerning payment instructions made between the organizations and institutions that adhere to this secure messaging network.

Consequently, the SWIFT company does not manage the bank accounts of individuals or financial organizations. It also does not hold any funds and does not come into play in the financial transactions it manages, but it simply provides its clients with an exchange platform.

In concrete terms, the SWIFT banking system, which allows two banks, for example, which belong to this exchange network, to carry out banking operations between them, ensures that the recipient is notified that such a transaction is in progress in his favor.

Going through the SWIFT system then triggers the crediting and debiting, for each of the banks, of the sums concerned by this secure transfer.

To secure the transfer of financial transactions through its platform as much as possible, SWIFT has generalized, since 2021, two-factor authentication for all its customers, in the same way as what is done in particular in France for individuals. when validating a payment on the Internet.

SWIFT thus guarantees its customers the security, as well as the confidentiality, of banking and financial transactions carried out via its secure messaging service.

Thus, the SWIFT network aims to be a model in the fight against financial crime, especially since it is subject to the same rules as all financial institutions in this area, even if SWIFT does not manage funds itself.

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