What Is a SWIFT Payment and How Does It Work?

When your company is ready to grow internationally, you’ll need dependable ways to pay your remote global team members. One excellent option is to make payments through the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

SWIFT transactions are safe, fast, and reliable. They help you streamline and expedite payroll, pay your employees on time, and stay compliant with the law. This guide will help you understand what SWIFT is used for, how SWIFT payment works, and how it can help your company grow.

What is SWIFT in banking?

SWIFT is a member-owned global cooperative that provides secure, private financial transactions for its members. Banks and other financial institutions can use SWIFT to expedite payments by sending transaction information rapidly, securely, and accurately.

SWIFT is primarily a service for communications. It acts as a messenger between banks rather than participating in financial transactions directly. It does not accept or receive funds or provide options for maintaining accounts. Instead, it gives banks a secure and effective network to communicate with one another about transactions.

Through SWIFT, for example, businesses and sole proprietors can accept card or bank payments, even if the customer uses a different bank. The SWIFT network facilitates transactions between different locations while keeping personal and financial data secure.

Numerous banks and countries use the SWIFT network for payments and wire transfers. More than 11,000 institutions are SWIFT members, and they have sent a collective 8.4 billion messages through FIN, SWIFT’s core service for financial communications. SWIFT’s members span more than 200 countries and territories. More than half of the world’s high-value cross-border transactions go through SWIFT.

A brief history before SWIFT

Before SWIFT, banks used a different international messaging service known as telex. This service used a switched network of teleprinters, similar to a telephone network. A customer on a telex machine could send messages to anyone else on another telex machine, anywhere in the world.

Telex was useful in facilitating international funds transfers, but it had its limitations. It was slow, and it lacked the sophisticated security protocols SWIFT has today. However, its main drawback was its free message format.

SWIFT uses consistently formatted codes. Every code used to identify an institution has the same structure, so people using the network can understand each message at first glance. If something in the code is unfamiliar — perhaps the person doesn’t recognize the city code, for instance — looking it up is easy.

Telex, on the other hand, lacked a unified, standardized code system. Instead of using codes, anyone who wanted to send a message about a transaction had to describe the transaction in detail. The message recipient then had to interpret that information and process the transaction accordingly. Ambiguities easily gave rise to errors and delays.

Telex’s many disadvantages prompted several international banks to band together to create SWIFT in Brussels, Belgium, in 1973.

Who uses the SWIFT network?

Who uses the SWIFT network?

SWIFT started with a membership of 239 banks from 15 different countries. However, all types of financial institutions can become members of the SWIFT network — it is not exclusive to banks. SWIFT now numbers thousands of members from many different parts of the financial sector:

  • Banks
  • Securities dealers
  • Brokerages
  • Trading houses
  • Depositories
  • Clearinghouses
  • Asset management agencies
  • Treasure market participants
  • Exchange brokers

All of these entities need fast, accurate, and dependable ways to transfer money internationally. SWIFT makes those transfers possible. When members use SWIFT, almost half of their transactions (about 48 percent) are payments. Another 48 percent involve securities. The rest involve other markets like trade and treasuries.

How do SWIFT payments work?

Imagine a company with a bank account at a Wells Fargo branch in Sacramento, California, sending a payment to a supplier with a Deutsche Bank account in Berlin, Germany. All the company needs to do is provide its bank with the SWIFT code for the supplier’s Berlin bank, along with the supplier’s account number. The company will also need to pay a small fee.

This information allows Wells Fargo to send the payment securely over the SWIFT network to Deutsche Bank. When Deutsche Bank receives a notification of the impending payment, it credits the money to the supplier’s account.

The payment generally takes only a few days to reach its destination. However, longer waiting periods may occur if multiple intermediary banks are necessary or major differences between the two countries cause delays.

In general, an international SWIFT payment will run smoothly if the two financial institutions already have a commercial relationship. If they do not, the transaction can still proceed. In that case, SWIFT must find an intermediary bank that has preexisting relationships with the two institutions. If no single intermediary exists, SWIFT must use a chain of intermediaries to get the message from one institution to the other. This process generally requires higher fees.

What is a SWIFT code?

Each SWIFT member receives a unique code, known as a SWIFT code. SWIFT banking codes are also sometimes called Bank Identifier Codes or Business Identifier Codes (BICs). The code identifies the bank name, its city, and country, and sometimes the branch. All SWIFT codes have eight or 11 characters.

Each group of digits in a SWIFT code specifies particular information:

  • First four characters: These characters designate the financial institution. They indicate the bank, though not the branch, the code belongs to.
  • Following two characters: The next two characters are the country code. For example, BE is the country code for Belgium, CA is the country code for Canada, and SG is the country code for Singapore.
  • Following two characters: The next two characters provide the city or location. The city code for Milan is MM, and 3N and 3D are two ways to signify New York.
  • Last three characters: The last grouping is optional. It is the reason some SWIFT codes have eight characters, and some have 11. These three characters provide information about an individual bank branch.

In its entirety, for example, a SWIFT code for the bank AMP Capital Investors Limited in Australia might look like AMCIAU2X, where AMCI signifies the bank, AU is the country code, and 2X indicates the city of Sydney.

Is a SWIFT code the same as an IBAN?

Is a SWIFT code the same as an IBAN?

Many financial customers are familiar with international bank account numbers (IBANs). These are not the same as SWIFT codes. Both can be alphanumeric, but IBANs are strings of numbers with a two-character country code at the beginning, whereas SWIFT codes contain entirely or mostly letters. A SWIFT code contains only eight or 11 characters, whereas an IBAN can have up to 39 characters.

The two also differ in the information they convey. A SWIFT code identifies an individual bank or branch. An IBAN, on the other hand, identifies an account within that bank or branch.

The structure of an IBAN works like this:

  • First two or three letters: The first two or three characters are the country code. For example, GB stands for the UK, SE stands for Sweden, and KW stands for Kuwait. GBR, SWE, and KWT can also signify those countries.
  • Next two numbers: The two numbers following the country code are the check digits. Financial institutions use these digits to determine whether the IBAN is in the proper format.
  • Three to five alphanumeric characters: The remaining characters form the Basic Bank Account Number (BBAN). BBANs vary from country to country. However, they typically contain a bank code and a branch code and provide information about a specific customer account.

For example, an IBAN from France might look like this: FR7630006000011234567890189. An IBAN from Qatar might be QA54QNBA000000000000693123456.

Bear in mind that not all countries have adopted the IBAN standard. Most of Europe, where IBANs are an essential part of the Single Euro Payments Area (SEPA), has adopted the full IBAN standard. However, many countries outside of Europe have not. Some countries have adopted a partial IBAN standard as part of an experimental process.

What are the costs involved with SWIFT?

The institutions that become members and owners in the SWIFT network must pay membership fees. SWIFT divides its members into three tiers based on the shares owned. Each tier pays different annual support fees. Additionally, all members must pay a one-time joining fee.

SWIFT also charges its members a small fee for each message sent. Like membership fees, these rates come in tiers that depend on the volume of messages institutions send. The messaging costs also vary with the SWIFT message length and type. For international transactions, the fees may increase when intermediary banks are involved.

SWIFT offers several other fee-based services in addition to transaction messaging:

  • Business intelligence: SWIFT offers business intelligence solutions like reporting utilities and dashboards. Member institutions can use these tools to monitor messaging, reporting, trade flow, and other activities in real time.
  • Compliance solutions: SWIFT’s compliance services include reporting and utilities, such as Anti-Money Laundering and Know Your Customer. They assist members with financial crime compliance.
  • Applications: SWIFT membership offers access to numerous applications, such as banking market infrastructure for bank-to-bank payment instructions, securities market infrastructure, and instruction matching for forex and treasury transactions.

Are SWIFT payments secure?

SWIFT payments are highly secure — this feature is one of the primary benefits of the SWIFT system. Let’s take a look at how SWIFT ensures safe and secure international payments.

SWIFT maintains robust security protocols through its Customer Security Controls Framework (CSCF). The CSCF contains both mandatory and recommended security controls for SWIFT users. The evolving design of these controls enables them to combat ever-changing cybersecurity threats.

These strict security controls have three main objectives: to secure the transactional environment, know and limit access, and detect and respond to threats. Here are some of the actions SWIFT requires all users to take to achieve those objectives:

  1. Restrict internet access
  2. Separate critical systems from the standard IT environment
  3. Minimize attack vulnerabilities
  4. Physically secure the environment
  5. Prevent compromising official credentials
  6. Manage identities and grant privileges only as necessary
  7. Use transaction or system records to detect suspicious activity
  8. Plan for information sharing and effective incident response

SWIFT also offers an optional service called SWIFT Payment Controls as part of its Customer Security Programme. This service enables companies to reduce their risk of fraud. It helps companies detect and prevent high-risk payments where fraud is most likely to occur.

Are there alternatives to SWIFT?

Are there alternatives to SWIFT?

SWIFT communication accounts for about half of all major international financial transactions — so who is responsible for the other half? Several fintech companies and other modern competitors have recently come onto the scene to try to make cross-border payments even faster and easier:

  • Revolut: Revolut is a fintech company headquartered in London. It offers international banking services and supports both SWIFT and SEPA transfers, automatically choosing the transaction that works best for the consumer and the bank. It serves 500,000 business customers in more than 35 countries.
  • Wise: Wise, formerly called TransferWise, began as a basic international money transfer service. It has since added options for business accounts, multi-currency accounts, and debit cards, and it has grown to serve more than 10 million people in more than 55 different currencies. Wise can send or receive some currencies using SWIFT payments for a fee.
  • Currencycloud: Currencycloud is a global payments platform that began in east London and has since developed an international presence. It has grown into a full-scale software-as-a-service (SaaS) solution to help companies manage international payments more efficiently. It has processed US$75 billion in payments to more than 180 countries worldwide.

These are just a few of the main alternatives to SWIFT banking — several other competitors are up-and-coming as well. The future will likely bring more of them as payments become increasingly digitized and international.

Can you use SWIFT to pay international employees?

SWIFT is a common method of paying international employees. It is much faster and more convenient than options like international money orders.

SWIFT is an excellent option for scenarios involving two different banking systems that might struggle with direct transfers. It is also ideal for situations where your company does not have an established entity in a country and cannot use the local banks.

How do you pay international employees remotely?

International payroll can be complicated, even with the help of services like SWIFT. Your company needs to ensure timely payments to its remote employees, even if they’re thousands of miles away. You also need to ensure compliance with the laws of the countries where you operate so you can avoid costly penalties and maintain a positive reputation.

If you decide not to establish a local entity, your company may want to partner with a global employment platform like Globalization Partners to simplify the payroll process.

Globalization Partners’ global employment platform helps you address the myriad challenges of international growth. With our automated, AI-driven technology, you can minimize establishment costs, streamline your hiring, and get your company operational in new countries much faster. Using our platform, you can access, view, and approve payments with a few clicks, saving time and remaining compliant with the law.

Run international payroll with Globalization Partners

As you scale your company internationally, make Globalization Partners your trusted ally. With our global employment platform, you’ll be able to bring talented team members onboard quickly, then simplify and expedite their payments.

Request a proposal today, or contact us to learn more about our platform.

Run international payroll with Globalization Partners

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