How Does SWIFT Work – A Quick Guide Everyone Must Know

Most of us wire money in and out of the US without giving it a second thought — we go to the bank, provide the needed information, and get back to our day. But, what are the SWIFT/BIC codes the banks want us to provide, and how does SWIFT work so seamlessly?

Keep scrolling to learn more about the system and how it’s used.

What Is SWIFT?

Before we get into more details about the system’s inner workings, let’s briefly go over what SWIFT is. Many don’t know that it’s a messaging network, not a financial institution.

Established in 1973, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a key to secure financial transfers. Today, it connects over 10,000 banks and institutions worldwide.

The only confirmation method for international transfers before the SWIFT system was introduced was Telex — low speed, security issues, and a free message format were just some of the drawbacks.

In addition, it didn’t have a standard set of codes for identifying banks and describing transactions. A transaction had to be described by the senders in a series of phrases that the recipient was supposed to decipher and carry out.

The process slowed the transactions and gave space to numerous human errors.

While there are other messaging systems, like Fedwire or Ripple, SWIFT has maintained its market leadership. Its success may be linked to the security of its platform and a continual introduction of new message codes.

SWIFT payment messages were first used strictly for payment instructions. Today, its usage includes system, trade, and Treasury transactions, as well as security transactions.

According to data from January 2022, 44.5% of all SWIFT traffic are payment-based communications. Security transactions now make 50.6%, and the rest is Treasury, commerce, and system transactions.

How Does the SWIFT System Work?

Financial organizations employ SWIFT’s defined set of codes to securely communicate data and instructions regarding their clients’ transactions. Over the years, SWIFT has become an essential component of the international economy.

Security is the staple of their communication system that is based on elaborate identification codes. A code consisting of 8 to 11 characters serves as a unique identification of each bank in the SWIFT system.

Let’s say you wish to send someone in Paris a wire transfer using SWIFT. You’ll need to specify the amount of money and the SWIFT code for the French bank to make that payment.

Once the recipient bank receives the said information from your bank, it’ll deposit the funds. The account balances are updated to reflect the transfer when the banks settle the payment.

The SWIFT code and its meaning

A bank identifier code (BIC) is a specific combination of characters SWIFT assigns to each financial institution in its network. The SWIFT code and SWIFT ID are other names for the BIC.

For SWIFT to work,  codes are combined with other data, such as bank ID and account numbers,  and used to pinpoint the precise location where transferred funds should be deposited. Codes are used to identify the recipient’s bank.

To understand how the code is allocated and what it means, here’s a simple breakdown:

• Characters 1–4: the institute code,
• Characters 5–6: the country code,
• Characters 7–8: the city code,
• Characters 8–11: optional, but banks usually assign it to individual branches.

How Do I Send Money With SWIFT?

The network was initially created to improve communication on Treasury and correspondent transactions. Due to the enormous scalability of the message format and the rapid tech breakthroughs, SWIFT gradually grew to offer other services.

If you want to send money to a friend in Italy, for example, you can do it by visiting a Bank of America branch in the city of your residence.

They’ll require the bank account number of the friend as well as the specific BIC/SWIFT code for the Italian bank, i.e, the one your friend belongs to.

Then, via the SWIFT network and the Bank of America, a SWIFT code is sent to their bank. After receiving the communication, the Italian bank will clear the funds and credit them to your Italian friend, while the Bank of America debits your account.

Wrapping Up

Hopefully, we provided some answers to help you understand the significance of this technology in the modern world. Millions of people rely on SWIFT to work every day, and with over 2,200 cyberattacks happening around the globe daily, are what makes this network — and its security — essential.