The war between Russia and Ukraine crossed a year mark in February 2023 and there have been multiple changes in global politics. Among many sanctions levied on Russia, one of the most significant ones is it being put out of the SWIFT network earlier at the start of the war. This sanction is still in effect and was aimed at crippling the Russian economy thereby their ability to continue with the war. So what is this SWIFT payment system and why is it so important? Given here are the answers to these questions and more.
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What is SWIFT?
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. It is a global financial messaging network that is used by banks and financial institutions. The purpose of this network is to securely exchange electronic messages and financial transactions with one another. The SWIFT network enables banks to communicate and exchange financial information. This information can include payment instructions, trade confirmations, and securities transactions with other banks and financial institutions around the globe. Such information can be transferred or shared in a standardized and secure manner.
The messages that are transmitted through the SWIFT network are done through a highly secure and reliable network. The network uses encrypted data transmission and authentication methods in order to protect the confidentiality and integrity of the messages being sent. Other financial services offered by SWIFT include compliance and security tools, market data, and messaging standards. The SWIFT network is a critical component of the global financial system. This system is responsible for facilitating trillions of dollars in financial transactions every day.
How does the SWIFT system work?
The SWIFT network does not actually send or transfer money between different parties in multiple countries but rather enables banks and financial institutions in sending and receiving financial messages in a standardized and secure manner. This system is also known as the SWIFTNet and members of the network can access this system through the internet, permanent leased lines, or through a cloud network.
The starting point for the transfer of funds through the SWIFT network is the unique code assigned to each member. This code is an 8 to 11 digit alphanumeric code (similar to an IFSC code) known as the Business Identifier Code (BIC).
The code essentially acts as an address for the receiving party to deliver SWIFT messages enabling the fund transfers from the sender entity. A bank or financial institution creates a message using a standardized SWIFT message format. This message includes key details like the sender and recipient’s identity, transaction amount, and payment details. This message is then authenticated and encrypted using secure digital certificates and encryption keys in order to maintain the confidentiality and integrity of the message.
Such encrypted message is sent through the secured SWIFT network gateway to the recipient’s bank or financial institution where it is decrypted and authenticated after due verification of the transaction as well as the sender’s details. The message is finally archived in the SWIFT system for record-keeping and audit purposes.
Why is the SWIFT system important?
The SWIFT System is crucial in today’s world of globalisation for several reasons. These reasons are highlighted hereunder.
- Security of transactions
The SWIFT network uses high data encryption techniques for the security and authenticity of transactions between the sender and the receiver. This secured network is crucial in maintaining the confidentiality and integrity of financial messages and transactions
- Standardisation of transactions
With the increasing globalisation, SWIFT acts as a standardised payment gateway that connects banks and financial institutions of different countries through a standardised process removing routine hassles in the form of language barriers, currency differences, and geographical location.
- Efficiency
The process of transfer of funds through the SWIFT network is done efficiently through the standardised process. SWIFT network ensures that the funds are transferred in a timely manner at minimal costs between its members
- Global network
SWIFT network has been crucial in bringing the world to a single platform for the efficient and timely transfer of funds in a secure manner. This network is instrumental in bringing the benefits of globalisation and international trade to many countries across the world.
- Ease of compliance
Global trade is full of complexities and requires optimum security tools for enabling it. SWIFT network through its standardisation brings optimum compliance with regulatory requirements enabling the smooth transfer of funds and combating financial crimes across the globe.
Conclusion
SWIFT network is one of the largest networks across the globe facilitating global trade. This network uses strict compliance measures and authentication to secure digital transactions. This network can be accessed by member parties to send, receive and access encrypted messages from time to time. Members of the SWIFT network are required to adhere to strict operational and security standards. There are more than 11,000 financial institutions that are members of the SWIFT network and are also part shareholders of this member-owned cooperative.
FAQs
SWIFT sanctions are the restrictions and limitations levied on members (entities or individuals) of the network. These sanctions can be in the form of blocking financial transactions, limiting access to the network, etc. These sanctions are used to prevent certain entities from executing certain activities or being part of terrorist activities, or unwarranted aggression on other members, etc.
SWIFT users include banks, brokerage firms, corporations, government entities, international organisations, etc.
Qualifying financial institutions are required to pay one-time joining fees to become members of the SWIFT network. Additionally, they have to also pay annual fees that vary based on the class of shares owned by them.
The SWIFT network was established in 1973 and has more than 11,000 financial institutions in more than 200 countries and territories.
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