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What Is SWIFT and How Does It Work?

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September 28, 2020
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If you are not interested in the details but want to know the basics, please scroll until the end for the short version. :)

What is SWIFT?

SWIFT (The Society of Worldwide Interbank Financial Telecommunication) is a messaging system that runs on a network of financial institutions globally. It is used by thousands of banks worldwide to communicate information on financial transactions in a secure and standardized way.

Since SWIFT doesn't actually send money, it requires different interventions, which makes the whole process slow. It also adds costs to the transfers.

How does SWIFT work?

Let's take an example that will help you understand the situation better.

Bob wants to send $100 form his US bank account to Patrick's bank account in Australia.

There are two scenarios based on the relationship between the two banks.

The banks have an established relationship

If the banks have an established relationship, that means they have commercial accounts with each other. In this case, things are easier and faster, and look something like this:

  • Bob's bank will send a SWIFT message to Patrick's bank which is often received in minutes
  • Bob's bank will debit his personal account by $100 (money coming out)
  • Bob's bank will credit the commercial bank account held with Patrick's bank (money coming in)
  • Patrick's bank will credit his personal account (money coming in)

In this case, the banks have an established relationship, so it's reasonably easy to transfer the funds.

The banks do not have an established relationship

In this case, things get slightly more complicated. Since the two banks don't have commercial accounts with each other, the intermediary bank is used to facilitate the transfer. The intermediary bank is the place where the other two banks have commercial accounts.

Like in the first case, Bob's bank will send a SWIFT message to Patrick's bank, and they will find the right intermediary bank. Let's call the intermediary bank Bank M.

Once that is done, the process will look like this:

  • Bob's bank will debit Bob's personal account by $100 (money coming out)
  • Bob's bank will ask Bank M to debit their commercial account by $100 and credit the commercial account of Patrick's bank
  • Bank M deducts a small fee for acting as an intermediary (let's say $1) from the transferred amount, and credits the commercial account of Patrick's bank by $99
  • Patrick's bank will then credit Patrick's personal account by $99 (money coming in)

Some things are happening behind the scenes, and that's why this process takes time (usually 3-5 business days), and fees apply.

Sometimes, the two banks don't have commercial accounts with an intermediary bank, which means that more than one intermediary bank needs to be involved. As you can imagine, this adds more processing time and, of course, more fees.

What happens when there are different currencies involved?

This scenario adds one more step to the process- the currency exchange. One of the banks will do the exchange and most probably at a less desirable rate. That's why sometimes transfer costs add up to $65.

SWIFT - Short and simple

SWIFT is used to communicate money transfers between two banks. When the two banks have a relationship (commercial accounts with each other), the transfer is done as soon as the SWIFT message has been received. The money form one's personal account is transferred to the other person's account via banks' commercial accounts. The banks take a fee.

If the two banks do not have a relationship, the intermediary bank will be used to facilitate the process. For that, you will be charged an additional fee.

If there are two currencies involved in the transfer, one of the banks will do the currency exchange.

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