What is SWIFT and its Role in Global Banking?

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, has evolved from a utilitarian communications tool to a centerpiece of international sanctions. How much do you know about the organization?

SWIFT is a messaging system that connects about 11,000 banks in 200 countries and territories, with almost 4,400 banks in the U.S. on the platform. Not every bank is part of SWIFT but the banks on the network make up a lion’s share of global assets and international transactions, according to Professor James Barth, Lowder Eminent Scholar in Finance at Auburn University in Alabama.

SWIFT is considered a vital piece of infrastructure for international banking.  SWIFT doesn’t actually handle money transfers but transmits requests for transfers from one bank to another.

In fact, often it’s the messages, not the money, that moves across borders, with large banks settling accounts domestically. Professor Barth likens it to countries trading gold when the gold standard was still used. The gold itself often moved from one pile to the next in the basement of the Federal Reserve Bank of New York.

SWIFT’S Inception

In the 1960s, U.S. and European banks were looking for a reliable communications system as they expanded global operations. Domestic payments had become standardized, but international payments were not yet automated. Banks, like First National City Bank (now Citi) had its own proprietary messaging system, but other banks were hesitant to adopt their technology and be “captive" to a correspondent bank.

SWIFT calls itself a cooperative society. Its customers, primarily financial institutions, are also co-owners, with profits subsidizing costs. Not all owners are equal, and representation is based on who most uses the messaging system. This means that U.S. and European countries, whose banks settle most payments, have had more voting power and representation on the SWIFT board of directors.

The central banks from G-10 nations- Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States- along with the European Central Bank have had oversight of SWIFT since 1998. An executive group including the Bank of Japan, the Federal Reserve Board, the Bank of England, the ECB, and the National Bank of Belgium meet with SWIFT’s board and management.

A foreign policy tool?

SWIFT sits in a unique position as a group of private companies that essentially own and operate an essential piece of infrastructure for global finance. Over the years, there have been concerns about the influence national governments yield over the organization’s operations.

In the wake of 9/11, SWIFT supplied data to U.S. authorities to help identify and track down Al-Qaeda terrorists. Some European officials were concerned about data privacy and SWIFT’s American CEO Leonard Schrank’s willingness to cooperate with U.S. authorities. Alan Greenspan, then chairman of the Federal Reserve, also encouraged the continued cooperation between SWIFT and the U.S.

European and U.S. governments have also used SWIFT as a foreign policy tool to achieve foreign policy goals. In 2012, SWIFT disconnected Iranian banks from its networks in response to sanctions imposed by the European Council, in efforts to persuade Iran to negotiate over its nuclear program.   

Most recently, the European Union instructed SWIFT to cut seven Russian banks from its network, including VTB, Russia’s second largest bank, to punish Russia for invading Ukraine. The European Union is also considering similar sanctions against Belarus for its role in the Ukrainian invasion.  

However, Sberbank and Gazprombank, two of Russia’s largest banks, remain on the SWIFT system for now. By allowing some banks to stay connected, Russia continues to get paid for oil and gas exports. Russia provides nearly 40 percent of the European Union’s natural gas and more than 25 percent of its crude oil,  .

“Not every country is able to export energy,” said Professor Barth, adding that its ability to sell oil and gas internationally will likely lessen the effects of the West’s economic sanctions against Russia.

There are less effective alternatives to SWIFT which may now get fresh looks in light of sanctions. Both China and Russia have created their own systems, with 23 foreign banks connected to Russia’s system, and more international banks using China’s platform.  Some analysts fear that nations whose interest don’t fully align with the West may now use these alternative platforms, lessening the U.S. and Western Europe’s power over the world’s financial system.   

“SWIFT accounts for more than 80% of international transactions, so China’s Cross-Border Interbank Payment System and other payment systems are not in a position to replace SWIFT,” said Professor Barth. “Yet, they could grow somewhat in importance over time.”

The European Union is considering more SWIFT-related sanctions. And as the Russia/Ukraine crisis continues, the future of international banking communications is possibly being redefined as well.