New payment methods for businesses looking to improve the security of their payments
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the most trusted and widely used network for sending financial messages. The organization is headquartered in Belgium and connects banks and financial institutions around the world so they can communicate about cross-border payments. Statistics from July 2019 show an average of more than 30 million messages sent every day on the SWIFT network, which includes more than 11, 000 registered institutions.
How SWIFT was formed
In the 1960s, teleprinter machines replaced telegrams for business communication and formed the Telex network. Teleprinters were used to send messages about payments between banks. While the Telex network connected banks around the world, it also posed serious problems:
- Several messages needed to be sent back and forth to confirm a transaction
- Authenticating messages was challenging
- Messages were written in free-form without any standardization
- The Telex system was expensive, labor intensive, and prone to errors, especially when messages were being sent between different countries
The increase of international trade in the 1970s highlighted these difficulties. And although typically resistant to change, banks recognized that sharing knowledge between each other would make their own processes more efficient and would draw more customers to their services. SWIFT was formed in 1973 by 239 banks from 15 different countries. Their goal was to standardize this communication. SWIFT released their services in 1977 and provided a:
- Messaging platform for SWIFT payments
- Computer system to validate messages
- Set of message standards for SWIFT payments
- With connection and standardization, SWIFT members could send messages more efficiently and securely
How wires work
SWIFT standardized financial messages by assigning codes to identify banks. A SWIFT code is between 8 and 11 digits long and is sometimes referred to as a BIC code (Bank Identifier Code). For example, the Bank of America SWIFT code is: BOFAUS3NXXX. The code identifies the bank (BOFA), country (US), location (3N), and branch (XXX).
There are over 100 types of SWIFT messages with templates to communicate different types of transactions. The most commonly used is the MT103 (Single Customer Credit Transfer) to send international wire transfers.
For example, let’s say you want to transfer $100 to a friend overseas:
- You provide the bank with the receiver’s information, including their bank’s SWIFT code
- You are required to pay a fee to make the transfer. SmartAsset’s analysis of 30 banks and credit unions found the average cost of sending an international wire transfer is $43 USD
- Your bank sends an MT103 on the SWIFT network containing your bank’s SWIFT code, the SWIFT code of the receiver’s bank, the amount of money being transferred, etc
- Your bank debits your account by $100
- Your bank credits a commercial bank account at an intermediary bank (or at your friend’s bank if they have a direct relationship) by $100. The transfer might need to travel through several intermediary banks. Fees pile up with each stop
- Finally, your friend’s bank will credit their account by $100
- The bank converts your money to the desired currency, but their exchange rate is marked up to increase their own profit
- To receive the wire transfer, your friend will also need to pay a fee (around $8 USD)
Alternatives to wire transfers
For many years, businesses and individuals were reliant on wire transfer services to send money abroad. Thanks to the rise of financial technology (fintech), this is no longer the case.
Moving money using fintech solutions may sound scary to the uninitiated, but it’s important to remember that fintech has been around for a long time. If you’ve ever used a credit card or an ATM, you’ve benefited from fintech innovations.
Today, businesses face a dazzling array of fintech providers offering alternatives to wire transfers. Let’s break down the pros and cons of some popular fintech providers:
Thanks to the fintech revolution, companies are no longer reliant on slow and expensive wire transfers. Veem’s relationship-based global payment platform is trusted by over 150,000 businesses worldwide. Introduce trust and transparency to your business payments; register for a free Veem account today.
Simplify your business payments with Veem.