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What Are SWIFT Payments & How Does a SWIFT Payment Work?

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As global commerce evolves, countries have searched for a safe and secure means to get money from one bank to the next.
International transactions (https://tipalti.com/cross-border-payments-guide/) often require a network or intermediary institution to
ensure everything goes smoothly. In Europe, it’s called the Society for Worldwide Interbank Financial Telecommunications, otherwise
known as SWIFT.

What are SWIFT Payments?

SWIFT payments are payment transactions using the SWIFT international payment network. This
network is used to send or receive international electronic payments, which is why SWIFT
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In 2019, more than 11,000 SWIFT member institution (https://www.investopedia.com/articles/personal-finance/050515/how-swift-
system-works.asp)s sent approximately 33.6 million transactions per day through the network. The financial service creates a global
level of connectivity that speeds up international business and brings the world a little closer together.

The SWIFT payment network allows individuals and businesses to accept/send international money via electronic or credit card
payments. This can be done even if the customer or vendor uses a different bank than the payee. The network is a place for secure
financial messaging. In a sense, it’s nothing more than a messenger between banks. 

What is a SWIFT Code?

When you use SWIFT, you are not actually sending a money transfer. Instead, it is referred to
as a “payment order” between two banks. This is done using a SWIFT code. 

It was the SWIFT network that standardized the formats for IBAN (international bank account
numbers) (https://tipalti.com/iban-number/) and BIC ( bank identifier codes). SWIFT owns and
administers the BIC system. This means it can identify a bank in seconds and send a secure
payment quickly.

A unique SWIFT code (https://tipalti.com/swift-code/) is comprised of 8 or 11 characters. Other names for this same code include:

• Bank identifier code (BIC)

• SWIFT ID
• ISO9362

Example of a Swift Code

An example of a SWIFT code is the Italian bank UniCredit Banca in the city of Milan. The code is UNICRITMM. 

The first four characters (UNCR) is the bank code (https://tipalti.com/bank-code/). The next two characters (IT) is the country code for
Italy. Then the next two characters (MM) stand for the bank’s location or city code. The last three characters (which you do not see
here) are optional. They are only used by banks to assign codes to individual branches. 

Using a SWIFT Code

An example of this in action would be when a customer walks into a Bank of America in New York and wants to send money to their
friend in Venice through UniCredit Banca. They need their friend’s bank account number and the unique BIC code that applies not only
to UniCredit Banca, but to the exact branch in Venice. 

Bank of America will then send a SWIFT message to UniCredit Banca over the secure SWIFT network. Once the Italian bank gets the
message, it will clear and credit the money to the Italian friend, while Bank of America debits the customer’s account.

How Does a SWIFT Payment Work?

remitting bank (i.e. the beneficiary/receiver). 

All banks engaged in a SWIFT transfer will move funds from one account to another based on an underlying network of Nostro and
Vostro accounts. This refers to accounts that banks have opened up with each other for the sole purpose of executing SWIFT
transactions. 

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The Nostro and Vostro Accounts

As both banks keep a record of money deposited into the account, this leads to two mirroring sets of ledger known as the Nostro and
Vostro accounts. Nostro refers to the account used by the bank to hold money, whereas Vostro refers to the name of the account used
by the bank opening it in their books. 

When both banks have a commercial relationship with Nostro and Vostro accounts, the SWIFT transfers are direct and immediate.
When banks do not have this type of relationship, the SWIFT network has to determine the best means to pass the message on. In this
case, a third-party is required, also known as an intermediary bank (https://tipalti.com/intermediary-bank/). 

You have to find a middle-man to handle the transaction. Once a correspondent bank that has a commercial relationship between the
two financial institutions is found, the SWIFT transaction can proceed. In this case, additional fees will be incurred from the third-party
services. The more intermediary banks involved in the transaction, the more it will cost you to send. It will also take longer to send the
payment, at a much higher risk, as there are more parties involved. 

Who Uses SWIFT Payments?

In the beginning, SWIFT was created to facilitate communication about treasury and correspondent transactions only. The
functionality of the message format design allowed for large scalability. SWIFT gradually expanded to provide services for:

• Banks
• Clearing systems
• Money brokers and security broker dealers
• Corporates
• Non-bank financial institutions
• Treasury market participants
• Asset management companies • Depositories
• Foreign exchange
• And more…

How Much Does SWIFT Cost?

SWIFT is a cooperative society that is owned by members. These members are categorized into classes based on the share of
ownership. All members pay a one-time fee plus annual charges which vary by member classes.