How SWIFT Payment Works for Transferring Funds

Because of the international payment network, today it is easy to transfer money from one bank to the next anywhere around the globe. But how is it possible? The SWIFT payment system is behind most international money and security transfers. In 2021 more than 11,000 global member institutions sent an average of 42 million transaction messages per day through the network. If you wonder what SWIFT is and how SWIFT payment works, keep on reading. 

How SWIFT Payment Works for transferring funds
How SWIFT Payment Works

SWIFT Full Form and meaning

Society for Worldwide Interbank Financial Telecommunication is the full form of SWIFT. SWIFT is a messaging network that banks and other financial institutions use to communicate information, such as money transfer instructions. It is used by thousands of banks and financial institutions worldwide to communicate safe and secure financial transactions. 

What is SWIFT payment system

SWIFT payment, also referred to as international wire payment, is a way of sending money using the SWIFT international payment network. The SWIFT payment network is used to send and receive electronic payments worldwide. The SWIFT payment network doesn’t hold or transfer funds. Instead it facilitates secure, efficient communication between member institutions using SWIFT codes. It is used to transfer money overseas.   

Key features of SWIFT payment network

  • SWIFT is a member-owned cooperative that facilitates safe and standardized financial transactions for its members.
  • With the SWIFT messaging system, financial institutions ensure that everything goes smoothly. 
  • The SWIFT payment network allows people and businesses to conduct electronic or card payments even if they have an account with a different bank than the payee. 
  • SWIFT assigns every financial organization a unique ID code that not only identifies the bank name but the country, city and branch. 

What is a SWIFT code?

When you send money using SWIFT, the process is referred to as a ‘payment order’ between two member institutions rather than funds transfer. The payment order is executed using a SWIFT code. SWIFT assigns each member institution a unique code made of 8 or 11 characters. 

SWIFT code is also known as:

  • Bank identifier code (BIC)
  • ISO9362

Example of SWIFT code

Let’s understand how the SWIFT code is assigned with this example of State Bank of India, located in New Delhi. It has the eleven-character SWIFT code SBININBB104.

  • First four characters: Bank code (SBIN for State Bank of India)
  • Next two characters: The country code (IN for the country India)
  • Next two characters: The location/ city code (Branch Location)
  • Last 3 characters: Branch code

Using a SWIFT Code

You can use this code to send money to India from overseas. For example, you can visit a branch of JPMorgan Chase in New York to send money to your father in New Delhi through SBI Bank. You need to provide your father’s bank account number and SWIFT code that represents not only the State Bank of India, but also the exact branch in India. 

JPMorgan Chase will then send a payment transfer SWIFT message to SBI over the secure SWIFT network. Once the State Bank of India receives the message about the upcoming payment, it will clear and credit the funds to your father and JPMorgan will debit your account. 

How SWIFT Payment works

The SWIFT payment system only communicates transaction orders between institutions using SWIFT codes. SWIFT doesn’t hold any funds or securities. It is the SWIFT network that standardized the IBAN (International Bank Account Number) and BIC (Bank Identifier Code). The idea behind the SWIFT was to create a way for member institutions to communicate faster and more securely among themselves, especially in relation to processing international payments. 

SWIFT simply acts as a messenger between banks. It sends the message enclosing payment instructions from the issuing bank to the remitting bank. All banks engaged in a SWIFT transfer move money from one account to another based on the underlying network of Nostro and Vostro accounts. SWIFT requires different interventions, which makes the transaction slow. 

Sending money with SWIFT

Let’s take an example to understand how the SWIFT payment works to send money. Arun wants to send $500 from his bank account in the USA to his mother’s bank account in Mumbai in India. The process of sending money will depend on the relationship between the two banks:

When banks have an established relationship 

If the banks engaged in transactions share an established relationship i.e. they have commercial accounts with each other. In this case, the process would look like as under:

  • Arun’s bank will send a SWIFT message or payment instructions to his mother’s bank in India, usually in minutes.
  • Arun’s account will be debited with $500.
  • Arun’s bank will credit the commercial bank account with his mother’s bank. 
  • His mother’s bank will transfer a credit to her personal account in India.

Since the banks have an established relationship, it’s reasonably easy and fast to transfer the funds.

When the banks don’t have an established relationship

If the two banks don’t have commercial accounts with each other, an intermediary bank will be used to facilitate the transfer. The intermediary bank or institution is the place where the issuing bank and remitting banks have commercial accounts.  

Arun’s bank will send a SWIFT message to his mother’s bank, and they will find an intermediary bank or financial institution. For example, WISE is the intermediary institution. The process of transferring funds will look like this:

  • Arun’s bank will debit his personal account with $500.
  • His bank will instruct WISE to debit their commercial account with $500 and credit the commercial account of his mother’s bank.
  • WISE deducts a fee for acting as an intermediary, say $5, from the transferred amount and credits Arun’s mother’s bank in India with $495. 
  • His mother’s bank will then send a credit of $495 to her personal account.

As there are extra steps behind the scene, this process takes time, usually 3 to 5, business days and fee is applicable. 

When two banks don’t hold commercial accounts with an intermediary or correspondent bank, more than one intermediary is required to be involved. Which may add to processing time and fees.

Who uses SWIFT payments

While in the beginning SWIFT network was created to facilitate communication about treasury and correspondent transactions only, it has gradually expanded to provide services to the following players:

  • Banks
  • Non-banking financial institutions
  • Foreign exchange money brokers
  • Brokers and trading houses
  • Mutual Funds Houses
  • Securities dealers
  • Clearing houses
  • Depositories
  • Exchanges
  • Corporate business houses
  • Treasury market participants
  • Corporate business houses

Services SWIFT offers

The SWIFT system offers many services that help individuals and businesses to execute transactions seamlessly. Listed below are some of the services SWIFT system offers:

  • Applications for various financial transactions
  • Business intelligence
  • Compliance services
  • Messaging connectivity and software solutions

Remember, you need to weigh in all the factors to select the best time for sending money online. SBNRI has made online money transfer to India easier for you by evaluating every factor and creating the perfect channel for all your remittances to India. 

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