Swift System – How does Messaging System work?

Swift System – How does Messaging System work?

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is the world’s largest electronic payment messaging system. Though it gets lumped in with electronic funds transfer systems, it doesn’t do any of the funds transfers itself. In fact, it doesn’t even touch money.

At its core, SWIFT is basically just a bank-to-bank messaging system. It supplies a standardized language that institutions use to communicate payment instructions and other info to each other.

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How SWIFT works

Swift System

SWIFT uses a system of codes to detail where a transfer is coming from, where it’s going, and how it’ll to get there. These strings of alphanumeric identifiers comprise an institution code, a country code, a location code, and a branch code. It’s worth reiterating that, because SWIFT doesn’t actually send money, institutions that use the network also need banking relationships to move funds.

Each financial institution will have a dedicated SWIFT interface (in other words, a computer-based terminal) on-premises. Users can log in to these terminals to manually enter messages. Messages can also be auto-generated by the institution’s computer system and passed on to the terminal. The terminal then sends the SWIFT message to the regional processors in the sender’s country. The terminals only connect with processors through the leased line, dial-up, or public data network connections.

From there, the regional processor checks, stores, and forwards the data to its operating center, which passes the message on to the processor in the recipient’s country. That processor delivers the message to the receiver’s terminal, and then sends confirmation. Officials at the respective financial institutions are supposed to audit these to prevent fraud.

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Moving money

Actually, transferring funds internationally is a bank matter.

Say two customers of the same bank are located in two different countries and want to transfer funds. The customer in country A will ask the bank to transfer funds to the customer in country B. Branch A will then tell its counterpart what to do via SWIFT. And then it’ll wire the funds and make the required book entries in its accounting system.

But it’s usually more complicated than that, and it often involves more financial institutions.

For example, if one financial institution doesn’t even have a branch in the beneficiary’s country, it might need to loop other institutions—in this context, called correspondent banks—to complete the transaction. If both banks maintain accounts at a third institution, they might use that third bank to expedite things. They’d identify the relationship, send a secure message over SWIFT between the banks, and do a book transfer.

Making money

SWIFT doesn’t provide these services for free. The cooperative makes money from one-time setups, service and equipment fees, consulting, and it takes a cut each time a message is sent.

What does it mean to a customer?

If your bank is associated with SWIFT then your bank will able to move money from one location to another in a secure manner.

However, you should be aware of some things

  • A swift transfer can be time-consuming sometimes for example 3 days.
  • If you have made the transfer in two different currency than your bank might charge you with not so friendly exchange rate and make a handsome profit on the same.
  • Fees is often levied by intermediary banks also.

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