What is SWIFT and its purpose?

SWIFT (The Society for Worldwide Interbank Financial Telecommunication) serves as a global messaging system facilitating transaction orders among financial institutions worldwide. Before its inception, banks relied on the TELEX system, which was slow and cumbersome. Established in 1973, SWIFT revolutionized financial communications by introducing efficient code-based transaction processing.

The SWIFT network, headquartered in Brussels, Belgium, operates through SWIFT codes, enabling standardized communication among institutions. These codes, known as SWIFT codes or BIC (Bank Identifier Code) codes, assign a unique eight or 11-character code to each financial organization, facilitating secure transaction orders.

Unlike regular wages, SWIFT doesn't physically transfer money but communicates transaction orders between institutions. It facilitates standardized formats like IBAN (International Bank Account Number) and BIC for actual funds transfers. However, while SWIFT codes identify banks, IBAN identifies both banks and specific accounts.

The transfer process varies based on the relationship between banks. If banks have an established relationship, the transfer is direct. Otherwise, an intermediary bank facilitates the transaction, adding time and fees. In cases involving different currencies, additional steps for foreign exchange occur, contributing to increased costs and processing time.

SWIFT operates as a cooperative, governed by a board of directors and overseen by G-10 country central banks and the European Central Bank. It complies with EU regulations, including sanctions, due to its Belgian legal framework.

In summary, SWIFT streamlines global financial transactions but involves complexities and costs, especially in cross-border transfers with different currencies, emphasizing the importance of understanding its workings for efficient financial management.