What exactly is SWIFT?
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a bank code and member-owned cooperative essential for sending international or cross-border payments as it provides transaction security. This makes it a vital part of the financial side of global businesses.
The SWIFT network is a messaging infrastructure, not a payments system. The network doesn’t actually transfer the money – it communicates transaction orders between institutions using SWIFT codes.
In addition to customer and bank funds transfers, SWIFT is used to transmit foreign exchange confirmations in a third-party foreign exchange deal, debit and credit entry confirmations, statements, collections, and documentary credits.
Cross-border payments that involve sending large amounts of money can be complex, so the process needs to be secure and foolproof, and the same applies when receiving international payments.
A bank needs to be a SWIFT member to receive the SWIFT code and be part of the network. Then, for any transaction made by banks or financial institutions on an international level, they will use their unique SWIFT code, which acts as an international digital language.
The concept makes for a faster, more hassle-free process. The SWIFT system is electronic and uses a cloud platform to quickly transmit codes to and from banks.
The SWIFT network primarily started for simple payment instructions, although it now sends different message types for a wide variety of actions, including security transactions, treasury transactions, trade transactions, and system transactions.
In Swift’s latest report, from January 2022, data showed 44.5% of SWIFT traffic is still for payment-based messages, while 50.6% represents security transactions, and the remaining traffic flows to Treasury, trade, and system transactions.
SWIFT categories
The table below shows the different categories and the message type descriptions:
Category 1 message type, is Customer Payments and Cheques, with the type designation MT 1xx.
Category 2 message type is Financial Institution Transfers, with the type designation MT 2xx.
Category 3 message type is Treasury Markets, Foreign Exchange, Money Markets, and Derivatives, with the type designation MT 3xx.
Category 4 message types, Collections and Cash Letters, with the type designation MT 4xx.
Category 5 message types, Securities Markets, with the type designation MT 5xx.
Category 6 message types, Treasury Markets, Precious Metals, with the type designation MT 6xx.
Category 7 message types, Treasury Markets, Syndication, with the type designation MT 7xx. Example message 707 information: To advise the receiver of the terms and conditions of a third bank’s documentary credit.
Category 8 message types, Travellers Cheques, with the type designation MT 8xx.
Category 9 message types, Cash Management and Customer Status, with the type designation MT 9xx.
The list of all the SWIFT message types is pretty long. Some SWIFT messages that are not part of the standards anymore have been kept for reference in case you ever come across and want to understand the meaning. However, for the sake of this article and being straightforward and saving you the Bla Bla Bla, I will share what is relevant to your business in the international trade…
SWIFT Category 1 Messages – Customer Payments and Cheques.
SWIFT Category 2 Messages – Financial Institution Transfers.
SWIFT Category 4 Messages – Collections and Cash Letters.
SWIFT Category 7 Messages – Documentary Credits and Guarantees / Standby Letters of Credit.
SWIFT Category 9 Messages – Cash Management and Customer Status.
The migration from SWIFT MT to ISO 20022
The migration from SWIFT MT to ISO 20022 is driven by the changing landscape of the payments industry, influenced by regulatory pressures, competition from new players, and customer expectations of instant, transparent, and seamless payments. To address these challenges, a modern and standardized language, ISO 20022, is being adopted.
Banks and financial institutions worldwide are transitioning their payment systems from SWIFT to ISO 20022, a highly structured and data-rich financial messaging standard. This transition primarily affects SWIFT cross-border payments and cash management messages (CBPR+). However, SWIFT will continue to support domestic payment market infrastructures (PMIs) that adopt ISO 20022.
The migration from SWIFT MT to ISO 20022 payment messages comes with many benefits for banks, financial institutions, corporations, businesses, and individuals.
ISO 20022 offers a modern, standardized language for rich data exchange, enhancing analytics, tracking, and reconciliation. It reduces fragmentation, improves interoperability, and benefits services like instant payments and Open Banking. This transition brings efficiency and an improved customer experience.
