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SWIFT and the payments roadblock for SME exporters

If you have transferred money to an overseas bank account lately, chances are it was processed by SWIFT.

The Society for Worldwide Interbank Financial Telecommunications’ FIN messaging standard has already facilitated an estimated 1.5bn such transactions so far this year, and carries the bulk of the $155tr per year being sent between countries.

Whilst, as a background technology, many consumers may never know they have used SWIFT, they may well recognise it for its shortcomings.

To start with, making payments through SWIFT requires linking banks up through a series of complex BIC codes. And FIN transactions are slow to conclude and can be error-strewn. This system makes it all too likely that customers can lose money just by wrongly inputting a single character.

From my discussions with many customers, it seems like about 5% of transactions are going missing. Banks will often investigate wayward payments, but cases are often resolved after only weeks.

The biggest problem, however, is that SWIFT depends on a third, intermediary bank to receive and pass on the funds. This means additional processing and wait times.

The issue is age. Founded in 1973, SWIFT is a 43-year-old anachronism, and it’s showing its age. SWIFT was formed for an era that virtually pre-dates the internet, and which certainly came before the mobile messaging apps that most of us now use.

If you think of SWIFT’s FIN standard as an instant messaging app for banks, it would be conversing privately with someone via WhatsApp - but only via a third participant. SWIFT calls this a “correspondent’ bank. But modern customers can call it barmy.

Our modern telecommunications services have evolved rapidly in the last four decades. So surely SWIFT can do the same, right? Well, not so fast. Governed by the banks themselves, SWIFT has little incentive to upgrade. Those banks make about $45bn in monthly revenue from cross-border payments. Does that sound like a system with a problem to you? No. That’s why the banks see little reason to push for change.

And why would they? Banks bill customers an average $20 to $40 per SWIFT transaction for the privilege. In other words, inefficiency is lucrative. Banks have a track record of failing to drive change in customers’ favour, and cross-border payments is just one area in which they do so.

In fairness, however, banks’ intransigence is just one reason SWIFT is a juggernaut that is sat in the fast lane of international finance. The other is the regulatory environment.

In most sectors, when market inertia is disadvantaging customers, regulators intervene to require change, to ensure that markets usher in reforms that allow consumers to benefit from the latest opportunities.

Unfortunately, in international finance, there is no such regulator, no consumer champion. Explicitly because it exists to facilitate payments across jurisdictions, SWIFT operates in a kind of regulatory hinterland, with no overseeing body to push it forward.

That makes it very different from operators in national markets. In the UK, for example, the Financial Conduct Authority has driven change that has given consumers standards like Faster Payments, in which domestic inter-bank payments are reconciled immediately. Sweden and Singapore have implemented similar systems. In the European Union broadly, the new SEPA framework has significantly improved the transfer of cashless payments across borders within the continent. The lack of equivalent action applied to SWIFT and FIN means inertia persists.

There may be one route to reform, but it won’t be pretty. Seizing the opportunity wrought by this failure, numerous new currency-trading vendors are entering the market to offer their own alternatives. But this is leading to a fragmented ecosystem that also risks leaving the same kind of inefficiencies in place.

The optimum solution may lay in turning the SWIFT system on its head - rather than by creating a global standard, leveraging multiple disparate national ones. A system that harnesses the new, smoother systems implemented at the national level, in multiple countries, could also thread them together in a new-look global pseudo-network by locating its own banks in nation states where friendly transfer regimes have been created.

Then, under one roof, these funds could more easily flow across borders and between banks.

If SWIFT can’t put the foot on the accelerator, it’s time it pulled over. Customers won’t stand the roadblock for much longer.


Comments: (3)

Bob Lyddon
Bob Lyddon - Lyddon Consulting Services - Thames Ditton 28 October, 2016, 19:22Be the first to give this comment the thumbs up 0 likes

Sorry I don't agree with most of what you have written here. The FCA did not exist when Faster Payments was launched. BIC codes are less complex than email addresses; they usually only have 8 characters rather than 12-20, and they follow a more predictable pattern of [4 bank]+[2 country]+[2]. Banks link themselves, using RMA; the customer does not have to do it and it only needs doing once per pairing of banks, not for every payment. Many FIN transactions conclude in near real-time; otherwise they could not be used for CLS. Regarding SEPA, a meaningful proportion of cross-border SEPA trafiic is transmitted over SWIFTNet FileAct and indeed SEPA has "significantly improved the transfer of cashless payments across borders within the continent", which, though, represent only 2% of traffic. But SEPA has done very little for the 98% domestic part, where the service level has remained static or gone down: most of the domestic traffic is not transmitted over SWIFT. It is true that "Sweden and Singapore have implemented similar systems" to FPS and I believe Vocalink is heavily involved there, but SWIFT is heaviliy involved in one you have not mentioned - Australia. Lastly, as a generality, the roadblock for SMEs in exporting is not paying: it's usually the importer that does that.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 29 October, 2016, 17:31Be the first to give this comment the thumbs up 0 likes

While WhatsApp is relatively new, web-based instant messaging tools like ICQ have been around since the late 1990s. If there are so many things wrong with SWIFT, any idea why nobody else has managed to disrupt it even 20 years after availability of open IM technologies?

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 29 October, 2016, 17:44Be the first to give this comment the thumbs up 0 likes


From my experience with sales and implementation of FPS at a Top 5 UK Bank, FPS was indeed mandated by a regulator - OFT - just not FCA.

AFAIK, 8 character BIC only identifies a Bank. To transfer funds to a specific account requires mention of a Branch where the account is held. This adds 3 more characters to BIC. Ergo, an actual fund transfer uses a 11 character BIC e.g. HDFCINBBPNE for my account. Notwithstanding that, I agree that BIC isn't as complicated as it's made out to be. SWIFT typically handles B2B and FI-to-FI payments of $M ticket size. When I make payments of that size, I'd actually prefer to use a meticulous system like IBAN and BIC - despite their longer lengths - than a casual and error-prone addressing method like name and risk letting my payment get lose in the "cyberabyss".