What is SWIFT Payment System?

Context

• As tensions exacerbate between Washington and Moscow over Ukraine, political commentators say that the United States could, as a last resort, exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), an international network for banks worldwide to facilitate smooth money transactions globally.

• The move could have serious repercussions on how Russian banks carry out international financial transactions.

What is SWIFT?

• SWIFT is a messaging network used by banks and financial institutions globally for quick and faultless exchange of information pertaining to financial transactions.
• The Belgium-headquartered SWIFT connects more than 11,000 banking and securities organisation in over 200 countries and territories.

  

• Each participant on the platform is assigned a unique eight-digit SWIFT code or a bank identification code (BIC).
  • If a person, say, in New York with a Citibank account, wants to send money to someone with an HSBC account in London, the payee would have to submit to his bank the London-based beneficiary’s account number along with the eight-digit SWIFT code of the latter’s bank.
  • Citibank would then send a SWIFT message to HSBC.
  • Once that is received and approved, the money would be credited to the required account.
• SWIFT is merely a platform that sends messages and does not hold any securities or money. It facilitates standardised and reliable communication to facilitate the transaction.
• “SWIFT does not facilitate funds transfer: rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other.
• To exchange banking transactions, each financial institution must have a banking relationship by either being legally organized as a bank or through its affiliation with at least one bank.
• While SWIFT transports financial messages in a secure manner, it does not hold accounts for its members nor performs any form of clearing or settlement.

U.S.-Russia tensions: What are the implications?

• U.S. President had threatened to have the crucial Nord Stream Gas 2 pipeline blocked should Russia continue its invasion of Ukraine.
• The Germany-to-Russia export gas pipeline is awaiting approval from Bundesnetzagentur, the German regulatory office for energy.
• The approval was rejected back in November, and in December, Bundesnetzagentur’s President Jochen Homann stated that the complete certification of the pipeline will not come before the first half of 2022.
• Europe, which depends massively on Russia for gas, was acting in counter to Russia’s actions in Ukraine.
• As a last resort, Washington may look to disconnect Moscow from SWIFT, with an intent to cut off the Russian economy from the global financial system.

What happens if one is excluded from SWIFT?

• If a country is excluded from the most participatory financial facilitating platform, its foreign funding would take a hit, making it entirely reliant on domestic investors. This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
• An alternative system would be cumbersome to build and even more difficult to integrate with an already expansive system.
• SWIFT, first used in 1973, went live in 1977 with 518 institutions from 22 countries, its website states. SWIFT itself had replaced the much slower and far less dynamic Telex.

Are any countries excluded from SWIFT? How is the organisation governed?

• Iranian banks were ousted from the system in 2018 despite resistance from several countries in Europe.
• SWIFT claims to be neutral. Its shareholders, consisting of 3,500 firms across the globe, elect the 25-member board, which is responsible for oversight and management of the company.
• It is regulated by G-10 central banks from Belgium, Canada, France, Germany, Italy, Japan,
• The Netherlands, the United Kingdom, the United States, Switzerland, and Sweden, alongside the European Central Bank. Its lead overseer is the National Bank of Belgium.
• The SWIFT oversight forum was established in 2012.
• The G-10 participants were joined by the central banks of India, Australia, Russia, South Korea, Saudi Arabia, Singapore, South Africa, the Republic of Turkey, and the People’s Republic of China.

Europe, Middle East, and Africa highest contributors to SWIFT

• In 2021, the SWIFT financial messaging platform had recorded an average of 42 million FIN messages per day, as per the data on its website. The full-year figure was an 11.4% growth on a year-over-year basis.
• Europe, the Middle East, and Africa, combined, sent approximately 4.66 billion messages.
• The Americas and the United Kingdom stood second with 4.42 billion interactions, with the Asia Pacific on third with an approximate 1.50 billion messages.

Source: TH

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