Criticisms of Globalization: Growing Income Inequality
More Losers than Winners The previous articles in this module covered the topic of globalization in depth. Some of the points of discussion were about how globalization has succeeded in lifting millions of people out of poverty. While accepting this fact, it is also the case that globalization has created income inequality which when coupled […]
Availability Bias in Behavioural Investing
All of us have seen movies or have read novels wherein there are several witnesses who are describing the same crime scene. However, each of them describes the scene in different ways. This is because their experiences are colored with their own thought processes. This makes different people look at the same situation in different […]
Characteristics and Capabilities of Successful Change Agents
Change agents act as the champions or change catalysts. The change agents may play the role of a consultant who assists the client in strategically identifying and implementing solutions for overcoming organizational problems. They play the role of a facilitator and train the client on new skills, changes in the processes, vision, mission and organizational […]
Interest Rates and Their Effect on Small Businesses
Predicting future interest rate movements is not only important for traders who invest in financial markets. Instead, it is also important for regular business people. It is important for small businesses because the increase and decrease in demand is related to interest rates which the central bank sets. The problem is that most central banks […]
What are Trade Wars and How Do They Affect Economies, Businesses, and Individuals?
In recent months, there has been much coverage in the business press as well as the general press about Trade Wars between the United States and China as well as between the United States and the European Union and Canada and Mexico. The immediate trigger or the event for these trade wars has been the […]
We live in a technological age today and hence are afforded many conveniences which people in the prior generations did not have. For instance, today, if we want to transfer money to a person or an entity in a different part of the globe, it can be accomplished with a few clicks and within a few seconds.
This was not always the case. Earlier communication between banks was happening using the Telex system. This means that banks had to describe each transaction in words and then send them to a different bank. Then, the other bank would interpret these instructions and perform the necessary task. Needless to say that this entire process was lengthy, expensive, and prone to manual errors.
With the passage of time, international trade increased. Hence, cross border payments became more and more common. Over time, a need was felt to expedite cross border payments. This was when the SWIFT network came into existence. Today, SWIFT is one of the central pillars on which the global financial system stands. It is instrumental in completing millions of transactions that take place every day.
This article will explain what the SWIFT network is and also how it adds value to the global financial system.
Contrary to popular belief, the SWIFT network is not a payment network. This means that the network does not transmit cash or currency in any form. Instead, the network only transmits messages. Therefore, when one bank sends a SWIFT message to another bank, it is just instructing the bank to pay the beneficiary on their behalf. The actual exchange of hands takes place between banks separately. However, since customers get paid after a SWIFT message is sent, they often consume SWIFT messages with actual payments.
The first step towards understanding SWIFT is understanding that it is nothing more than a standardized messaging system. Therefore, the information which was sent in full-length sentences using Telex earlier can now be sent in codes electronically. For instance, each bank branch has a unique SWIFT code. Therefore, if a bank has to send money to a different branch, they need to specify the unique SWIFT code. Since each bank has a unique code, the chance of an error is practically reduced to zero!
Also, there are various types of standardized formats for every transaction. Payment orders have a predefined format, and so do bank statements. Therefore, the receiving bank can easily identify the instruction being sent just by reading the type of file which is being sent. Also, each of these formats has predefined nodes for information that might be required by another bank. Hence, if the file being sent has incomplete or incorrect information, it will be pointed out by the system.
SWIFT payments are faster and more convenient since all banks form the part of one single network. This means that if one bank wants to connect with a hundred other banks, they do not have to create a hundred different interfaces. Instead, they can create just one interface and transfer the payment details to SWIFT. SWIFT can then use the information in the file to locate the recipient bank and provide them with the necessary information.
Hence, since SWIFT is a network and all banks connect to it, information can be transmitted faster, cheaper, and without the need for building expensive interfaces.
SWIFT is actually a non-profit organization. The SWIFT was created as a co-operative society between several banks who were tired of using ineffective methods of sending payments. Its purpose is not to make money. This is because if SWIFT was a for-profit organization, it would add up to the transaction costs. These high transaction costs would make the concept of SWIFT unviable. The SWIFT network is widely used because apart from being convenient, it is also highly cost-effective.
However, it needs to be understood that SWIFT does charge money to its users to send messages. This charge is based on the type and the length of the message. Banks that generate a high volume of messages every day are given a discount and charged a lower rate per message. This is because once the infrastructure is set up, SWIFT does not have to spend additional money to spend more messages. Hence, they encourage banks to send more and more messages by giving them volume discounts.
SWIFT also provides certain add on services and automated solutions for a price. This helps create ancillary revenue streams for SWIFT without adding to transaction costs.
SWIFT based messaging is difficult to install at first. There is a significant upfront cost for banks to create systems that are compliant with SWIFT messages. The new software has to be developed, and new hardware needs to be purchased. However, once this upfront cost is incurred, there is very little subsequent cost involved.
Nowadays, banks are creating highly automated payment systems by leveraging the capabilities provided by SWIFT. This automation can also prove to be expensive. The bottom line is that the SWIFT network is more useful for banks that have large sums of money that they can afford to invest upfront.
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