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With ongoing Ukraine and Russia Crisis, there is one term that has become very popular. “SWIFT” payment system. This article will focus to answer what is SWIFT and why it is important to the global economic system.
SWIFT sits in the middle of the global financial system. Without it, it is likely you won’t manage to send funds across countries.
What is SWIFT?
SWIFT is an abbreviation for Society of Worldwide Interbank Financial Telecommunication. It is an institution that serves over 12,000 financial institutions such as banks in moving funds across the world.
SWIFT is located in Belgium under the management of the Belgium National bank
It acts as a messaging system and doesn’t hold any third-party funds. Hence, is a gateway that allows communication between different banks across the world. The system currently processes over 40 million messages daily originating from member institutions.
How Does It Work?
If you have done a cross-border transaction, there is a high chance you have come across the term SWIFT CODE. This is a unique code given to a participating financial institution in the system.
The code enables identification of both the sender and recipient of the funds facilitating successful messaging.
SWIFT and Global Politics
Due to its strategic importance in the global financial system, there have been instances where it has become a tool for global political interests.
A Key example is the removal of Iran banks from using the system in 2012. This is also the case with some Russian banks that have been removed from the system due to the ongoing crisis with Ukraine. Such an action aims to limit cross-border money transfers affecting trade in return.
Advantages of the System.
The first advantage of this system is enabling seamless funds transfers across the globe. It has also created standardization with the code making it easier for the institutions to communicate.
The body in charge of managing and running this system is apolitical making it a neutral entity in a world full of division and interests. This is key if the system is to maintain its market leadership and gain bigger acceptance in return.
Challenges of the SWIFT Payment Messaging System.
There have been complaints by users on the cost and time it takes to complete a transaction messaging through the system.It remains costly in comparison to other payment channels.
It also takes longer to complete a transaction through the system making it inefficient for transactions that need faster settlement.
Some countries have also claimed this system is becoming a political tool after the banning of IRAN from the system despite the neutrality claim.
These challenges reduce the confidence in the system enabling the emergence of competitor messaging systems.
Conclusion of What is SWIFT
Despite the challenges, SWIFT remains the largest financial transaction messaging system across the world. This makes it a key component in the global financial system, a role and position it will likely maintain in the future.
Every time to make cross-border payments, there is a high chance SWIFT is facilitating the transfer.