What is SWIFT?
SWIFT is a messaging network used by financial institutions and countries to securely transmit information and instructions using a standardised code system. Although SWIFT has become an important part of the global financial infrastructure, it is not a financial institution in itself. It does not hold or transfer assets. Rather, its usefulness stems from its ability to facilitate secure, efficient communication among member institutions.
SWIFT assigns each financial institution a unique code of eight or eleven characters. The code is also known as the bank identifier code (BIC), the SWIFT code, the SWIFT ID, or the ISO code.
SWIFT is a cooperative society established in Belgium that is owned and controlled by its shareholders, who represent approximately 3,500 financial institutions worldwide. The shareholders elect a board of 25 independent directors from around the world. This board of directors governs the company and supervises its management.
Why SWIFT replaced Telex?
Prior to SWIFT, the only available method of message confirmation for international funds transfers was telex. Low speed, security concerns, and a free message format all hampered Telex. In other words, unlike SWIFT, Telex did not have a unified system of codes to name banks and describe transactions. Telex senders were required to describe each transaction in sentences, which were then interpreted and carried out by the receiver. This resulted in numerous human errors as well as slower processing time.
To address these issues, the SWIFT system was established in 1973.
The use of standardised messages and reference data ensures that information exchanged between institutions is clear and machine-friendly, allowing for automation, cost reduction, and risk mitigation.
SWIFT is overseen by the G-10 central banks as well as the European Central Bank, with the National Bank of Belgium serving as the lead overseer.
Controversies
Because SWIFT is incorporated under Belgian law, it was required to comply with this regulation as confirmed by the government of its home country and it is being felt that it is under monopolised interest of the western liberal countries who seem to have a major say in its functioning .
Russia created its own SWIFT alternative in 2014. The System for Transfer of Financial Messages, or SPFS, acronym for this system. However, this system has had difficulty establishing itself in international transactions. Similarly, to internationalise the use of the yuan, China launched the Cross-Border Interbank Payment System in 2015.
Owing to the Ukrainian invasion the ongoing crisis, The US and EU have imposed a partial ban on Russia. A SWIFT ban can possibly make exports and imports from and to Russia nearly impossible, forcing Russia to seek alternative means of money transfer.
According to some analysts, this would result in 'autarky,' or an economic system based on self-sufficiency and limited trade. In layman's terms, this would isolate Russia from the majority of the rest of the world, forcing the economy to look inward to sustain itself and the country. Previously, only one country had been disconnected from SWIFT — Iran. As a result, it lost one-third of its foreign trade.