Bond Lady’s Corner: Is “Swift Code” Confusing the Global Financial System?


Is “Swift Code” Confusing The Global Financial System?

Sanctions will limit the procedures for transfers from one bank to another without this code

Ahmed Mostafa is a journalist specializing in international affairs
Sunday 20 February 2022 17:29

The “Swift Code” system is gaining popularity among the world’s banks (AFP)

If you go to the bank with your bank account to transfer funds, either within the same country or abroad, you will be asked for a “SWIFT” number.

That is the relationship of individuals and companies to this global system.

The countries that do not participate in the “SWIFT” system simply cannot deal financially with the outside.

This is the basis for the fact that international and US sanctions on Iran made it unable to trade or financially deal with abroad because it was banned from the “SWIFT” regime.

This is what the United States and the West threaten Russia with if it invades Ukraine , as banning Russia from the “Swift” system will mean its inability to export its oil, gas and other products or to deal financially with the world.

What is the SWIFT system, does it have alternatives, and what is its impact on the global financial system and the transactions of individuals, businesses and countries?

SWIFT stands for Society for International Interbank Telecommunications, an encrypted electronic system exclusively used by members to exchange messages for financial transactions and services between banks and financial institutions around the world.

The system does not maintain any financial assets and has no capital other than its annual operating budget, which comes from members’ subscriptions and simple fees.

The system is a closed computer program developed for the benefit of the founders more than half a century ago and is constantly being developed.

The system allocates a code consisting of between 8 and 11 characters, and perhaps letters and numbers that represent an exclusive identification for each bank or financial institution participating in it with its country, and perhaps also its branch in this or that country.

History of “Swift”

Before the SWIFT system, banks and financial institutions used telex in their correspondence regarding their dealings with each other and with their customers.

But the latter had many drawbacks, including very slowness and complete insecurity, as its dealers had to use detailed messages about each transaction.

He also had many problems due to human errors in encoding or decoding messages due to their length and many details.

According to the London School of Economics, the code system was not used in the Telex system either, which distinguished the “Swift” system.

Regarding the history of “Swift”, the university says, “Supporting a common network of transactions took institutional form when 6 banks in the European Financial Association in Luxembourg and Paris at the end of the 1960s established the letter-exchange project.”

In 1973, 239 banks in 15 countries participated in the launch of the “SWIFT” system, and in 1977 the number of subscribers reached 518 banks in 22 countries.

The system began as a network with quick messages about payments, that is, money transfers in bank accounts.

Then it developed continuously to include almost all financial transactions of different banks and financial institutions, whether between them or from the accounts of individuals and companies in them, in addition to providing other services.

There are currently more than 11,000 subscribers to the system from around the world.

Swift continues to grow annually, and in 2020, it handled about 35 million messages per day.

The volume increased in 2021 to reach 42.5 million messages per day, an increase of 9.8 percent over the previous year.

At first, the SWIFT system served mainly currency and treasury departments, but then expanded to include banks, brokerage and trading companies, asset management companies, financial discount institutions and departments, currency companies, corporate transaction institutions, the currency market and treasury, foreign exchanges and stockbroking..

The Importance Of “Swift”

Although it is not the only system for exchanging transaction messages between banks and financial institutions, the “SWIFT” system is completely dominant so far and it is difficult for any country or institution not to be involved in it as long as it deals financially with another.

There are other financial message exchange systems such as Fedwire, the Federal Reserve Network, Ripple and CHIPS, the interbank discount management payment system.

However, the use of these systems remains limited compared to the “Swift” system.

Half of the operations that take place through “Swift” are still related to payments and remittances, and the proportion of “Swift” daily messages is about 50 percent.

And 47 percent of transactions through the system are related to insurance and credit guarantees.

The rest is for services and other transactions such as currency exchange, trade transactions and system related matters.

It can be said that, currently, a financial transaction cannot take place around the world without the use of the “SWIFT” code, and therefore no country can be outside the system, otherwise it will not be able to trade, borrow, invest and other financial transactions in the international financial system.

As a result of the long history of transaction messages around the world, the system has a huge archive of information and data that it is impossible for any subscriber (even if it is a country and not just a bank or financial company) to deal with it on paper or even handle its storage and operation manually.

The operation of the system is financed mainly from the subscriptions of its members, as the member pays a one-time subscription fee in the beginning, in addition to an annual fee to support the continuation of the system.

Subscribers are classified according to their share in the system, and fees are calculated based on the volume of their transactions that use it.

Swift also receives a small fee for each transaction, which is also determined according to the volume of transactions of the participating bank or institution and its use of the system.

With the increase in the volume of the system’s information and data for a long historical period, “Swift” developed to provide services to its members such as information, financial data and analyzes, as well as the service of estimating the subscriber’s status and his commitment to the rules and regulations.

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Source: Dinar Recaps


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