What is SWIFT? A Primer for Non-Finance Folk
The Russian invasion of Ukraine has been met with sanctions from the West, including exclusion of select Russian banks from the SWIFT financial messaging system. But the concept of SWIFT is unfamiliar to most, and many more know it only at the highest level. As the news in Ukraine continues to unfold, here’s what you need to know about SWIFT, and why it matters.
What is SWIFT?
SWIFT is the Belgian-based Society for Worldwide Interbank Financial Telecommunication. In the simplest terms, it’s the telecommunication system financial institutions around the world use to communicate with one another. Each financial institution has a code that transmits along with the transactional information to create a fast, secure connection anywhere in the world. In short, it’s a big part of what makes moving money around the globe happen.
SWIFT is for any international financial transaction. Banks, brokerages, clearing houses, asset managers, corporate treasurers, and more all use SWIFT. SWIFT is not a financial institution itself – it is the communication mechanism on which the thousands of financial institutions relies.
What is the impact of removing Russian banks?
Without SWIFT, transactions are slower and more manual. The inability to use SWIFT means financial transactions become more expensive.
But the excluded Russian banks could also move to an alternative system. SWIFT is the dominant player, but not the only one. In fact, China has its own system, called Cross-Border International Payments System (CIPS), and will likely generate new business from Russia because of the actions to revoke access to SWIFT. This could bifurcate global banking as some nations will favor CIPS and some will favor SWIFT. How that resolves is anyone’s guess.
For now, it means everything will get a little more expensive.
What does this mean to US financial institutions?
From a risk management perspective, banks must consider financial risk but also reputational risk in how they not only act, but in how they message their actions to their customers. It’s imperative financial institutions monitor the pulse of their consumers and assess the reputational impact of their overall decisions on consumer perspective. Time to ask your customers what they think, how they feel, and what they expect from their financial institutions in this time of financial war.
Do you have more questions?
I’m happy to discuss! Feel free to reach out to me at steve.mosshamer@thinkpiecepartners.com.
There are also great resources to read more about the topic:
https://www.cips.com.cn/en/index/index.html
https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp
https://www.nytimes.com/2022/02/26/us/politics/eu-us-swift-russia.html