International Trade Payments (SWIFT) | Trade Samaritan

International Trade Payments (SWIFT)

The volume of world trade payments is gigantic and the volume of SWIFT messages reached an all time high of 5 billion messages in 2013.

Technology has gripped the planet and there is a continual and rapid progress in every industry. From barter exchange to electronic payment, world  trade has evolved and has grown in leaps and bounds.

As per the data published by Department of Economic and Social Affairs, Statistics Division, United Nations, trade merchandise volumes have sky rocketed.

Trade volume has leaped a 285% from 2000 to 2013.

This volume spike is obviously supported by scaleable as well as a robust financial telecommunication systems. Online and electronic payment industry (domestic and international) is reaching a new high every month.

world trade volume

world trade volume

Coming back to trade payments, all our readers are aware that trade payments can be made through several mediums such as a cash, check, draft, credit/debit card, wire, SWIFT etc; in this article we will focus on electronic trade payments

SWIFT

Prior to introduction of SWIFT (Society for Worldwide Inter-Bank Financial Telecommunication), banks and Financial institutions were commonly using TELEX to communicate and exchange financial transactions. Telex had severe drawbacks such as low speed, insecurity and free formats which made it difficult for the users to understand the entire content of the message as well as it was time consuming to type every message. SWIFT as a society was formed when seven major international banks met in 1974 to discuss the limitations of Telex .

Gradually by 1990 TELEX messaging system was entirely replaced with SWIFT messages. Headquartered in Belgium, SWIFT now has more than 10000 members worldwide (more than 200 countries) handles more than 15 million messages daily. Any financial institution who holds a banking license can become a member of SWIFT by paying a joining fee and service charge for each message sent.

In order to understand the architecture of SWIFT let us familiarize ourselves with a few terminologies.

SWIFT does not facilitate funds transfer; but it sends instructions, which must be eventually settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship (commonly known as Corr bank) by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

SWIFT is extremely popular as it offers standardized, encrypted and validated financial messaging service across the world.

SWIFT Addresses

SWIFT addresses indicate the final destination of the message and also assists in identifying various parties within the individual message. The term “SWIFT address” is a subset of Business Identifier Codes (BIC), in other words one does not have to be a user of the SWIFT network to have a BIC and these can therefore be used over other networks such as Telex. Sender and the receiver of messages identify each other by their SWIFT addresses.

System Control Processors

System Control Processors control the worldwide network of SWIFT. These processors perform following functions

  • Session Management
  • Software and database distribution
  • Monitoring all SWIFT hardware and software
  • Failure diagnostics and recovery
  • Dynamic allocation of system resources

There 4 such  processors which are located at Operating Centres, 2 each in the US and Netherlands. There are Processors in each center in order to back up and archive the data.

Slice Processors

Slice Processors are also located at the processing in the US and Netherlands. These processors are responsible for

  • Routing and safe storage of messages & history
  • Safe-store Acknowledgements to Regional Processors
  • Generation of reports
  • Delivery and non delivery messages
  • Processing retrievals and system messages
  • Archiving, billing and statistics

Regional Processors

Regional Processors are located in the same country as the user and are the entry and exit point to SWIFT.  They support Leased line, Router, Dial up or Public Data Network connection. The most common method is primary leased line with dial-up backup. Regional Processors provide sequence number checking and message validation, temporary safe-storage, generation of Positive and Negative Acknowledgements (ACK) and verification of check sums.

Computer based Terminals

A Computer Based Terminal (CBT) is also referred to as SWIFT interface is always located at each user site. These terminals support the connectivity to the local regional processor (explained above) and facilitate both manual entry of messages. It serves as a bridge between originating applications and the user. This interface can be acquired directly from SWIFT or their vendors. Needless to say that the market share is dominated by SWIFT.

At a macro level SWIFT architecture will look like this

SWIFT Architecture

Micro-level Process flow

As stated above, access to the network is via the CBT and Smart Card technology is used to access secure functions. Many functions require dual user and password input. Initially a User will LOGIN to the GPA service (General Purpose Application; facilitates messages between the user and SWIFT only) and receive a GPA Acknowledgement. The User then SELECTS the application or service that they wish to use, for example FIN (Financial Application; facilitates messages between users). The user can then send FIN messages to other users and the Regional Processor will either send back a Positive (ACK) or Negative (NAK) acknowledgement for each message after having safe-stored it. The session then remains open for sending and receiving messages until the User QUITS or LOGS-OUT.

World Currency Volume traded by SWIFT

Here’s a snap shot of top 10 currencies traded through SWIFT messages, this includes Payments, Cheques, FI transfers, Treasury, Collections, Documentary credit, Guarantees, Cash Management and Securities.

As you can see, this Pie chart is a no brainer, US Dollar holds the #1 position way exceeding the cumulative total of #2 to #10.

US dollar is followed by Renminbi (RMB). Until recently EURO was on #2, then China caught up and the #2 position was taken over by RMB.

Japanese Yen is # 4 and rest in the line are Saudi Riyal (SAR), United Arabs Emirates Dihram (AED), Swiss Franc (CHF), British Pound Sterling (GBP), Pakistani Rupee (PKR) and Indonesian Rupiah (IDR) are more or less at par with each other ranging from #5 to #10.

Currency Volume

Upon attaining an all time high of 5 billion financial messages, in January 2014 as an incentive and rebate, SWIFT announced a 10% pay back to all its members and returned approximately $33 million to its members worldwide. And is aiming to achieve economies of scale by 2015 in order to reduce the pricing by 50%.

For further reading on SWIFT read our article on SWIFT Message Type 7xx. Also we will be covering Wire Transfers in our next article and finally we will compare the pros and cons of SWIFT Vs Wire transfers.

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